Eliminating the Income Tax and Creating a New Consumption Tax: Bad Law and Worse Policy

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Mischief is well on its way to becoming law in West Virginia. The Republican-controlled Senate Select Committee on Tax Reform is about to propose to the full Senate the passage of SB 335, which would phase out the state income tax and transform the current 6% sales tax into a broader 8% consumption tax. The conceptual basis for the proposed law is that the state provides the marketplace in which sales can take place so that vendors and purchasers who engage in transactions should be required to pay for the privilege of using that marketplace. If that silliness weren’t enough, the Bill’s legislative findings provide the following gem of a non sequitur. “The Legislature further finds that, in the free market system, the best judge of a purchaser’s ability to pay, for the purchase of the goods and services, is the purchaser, and, thus a broad-based consumption tax is firmly based on that principle of sound and fair taxation.” There is nothing sound or fair about this revolutionary change in West Virginia’s tax structure and it should be stopped in its tracks.

The fiscal soundness of SB 335 will be addressed in the next post on this site, upcoming promptly. But it is on the question of fairness where SB 335 fails us badly. Consider the point in the legislative findings that the purchaser is in the best position to know whether he has the ability to pay for a purchase. That may be true in the abstract, but completely misses the point when it comes to a consumption tax. There are many of our fellow citizens who are poor and spend only on the necessities of life – food, clothing, shelter, and the like. For them these purchases are not optional. They are not in a position to ponder whether “ability to pay” might lead them to decline such a purchase. For consumption by low-income citizens there is no magical marketplace of free choice like that existing in the dream world of some legislators.

Contrast this with the choices available to the financially comfortable. The purchaser of school clothes for kids in a well-to-do family has many options and certainly could choose to purchase less expensive clothing. But really, the ability to pay for a purchase is not the question for these consumers. It is their willingness to pay for the purchase plus the tax. And suppose the well-to-do purchaser decides not to make a purchase because of the tax. That would only hurt state tax revenues and thereby the operation of state government. The ideological foolishness of a consumption tax is quite apparent from this. The logical effect of making every business transaction 2% more expensive will be to make those transactions smaller in amount, less frequent, or avoided altogether. One can imagine many purchases being made across the border in states with a lower consumption tax.

One thing is certain – enacting SB 335 will shift a greater tax burden onto West Virginia’s poor and working class and away from wealthier taxpayers. Low income taxpayers, including seniors dependent on social security, are not currently subject to high income tax rates and do not pay much in total income taxes. Higher income taxpayers pay considerably more income tax. Contrast a consumption tax, which doesn’t concern itself with how wealthy you are, only how much you spend and on what things. As mentioned, SB 335 proposes to raise the state consumption tax from 6% to 8%. If it passes, the total tax paid by the low income taxpayer will rise slightly because of the additional 2% tax on his purchases, while the wealthy taxpayer will get a nice overall tax reduction. This is because the additional 2% sales tax paid by the wealthy taxpayer on her purchases is far less than the income tax she would avoid.

Sen. Robert Karnes (R-Upshur, 11), the same legislator who chairs the Senate Select Committee on Tax Reform, has sponsored two bills that are apparently intended to blunt criticism of the fairness of SB 335. One, SB 377, calls for a payment of up to $200 to be made by the state to low income senior citizens who file a yearly claim to receive it. The actual amount of the payment would be based on a declining percentage of the taxpayer’s income above the federal poverty level. SB 378 would create a similar payment, called an “earned income credit,” for low income workers. This is a misnomer because there would be no West Virginia income tax against which to credit it.

The inadequacy of these two sops is obvious. First they do nothing for the low-income unemployed who have no earned income to report. This omission is consistent with the view of many conservatives that if you are poor and unemployed it must be your fault. Second, these “credits” bear no relationship to the amount of additional consumption tax low-income individuals will be forced to pay. For example, a person earning $20,000 who is forced to spend it all to survive will pay an additional consumption tax of 2% on all purchases — a total of $400 in additional tax. Neither of the proposed “credits” could ever be more than $200. Finally, they require the taxpayer to file an additional tax document and wait for approval of the once per year payment. This does nothing to help him make ends meet on a day to day basis.

Even if such a major change to our tax system could solve our budget problems (more on that later), how can it be called fair when it benefits the rich and further burdens the low income residents of the state?

Rep. Alex Mooney Deals a Blow to West Virginia’s Mountain Streams

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Rep. Alex Mooney (WV 2nd) is celebrating the demise of the Interior Department’s Stream Protection Rule. This Rule, made effective in the waning days of President Obama’s tenure, would have created a buffer zone between mountain streams and mine sites and would have protected drinking water in accordance with modern technology. The Rule would have mainly affected mining done by mountaintop removal where mining refuse is pushed into stream valleys. But Rep. Mooney and his Big Coal backers claim that the Rule would have killed over 70,000 jobs in the coal industry. Unfortunately, Rep. Mooney’s grasp of coal economics and employment numbers is feeble, perhaps influenced by his ideological impulse to dance on the grave of the Obama Administration.

The scientific evidence of the harm done by mountaintop removal with valley fills is unassailable. In January 2010, Science Magazine published an article detailing that harm, written and researched by twelve preeminent scientists including one from WVU. They found that burial of headwater streams by valley fills causes permanent loss of ecosystems. Stream biodiversity and water quality suffer. As they emerge from valley fills, mountain streams are saturated with sulfate, calcium, magnesium and other harmful ions. These persist even after mine-site reclamation. Groundwater samples from domestic supply wells have higher levels of mine-derived chemicals than well water from unmined areas. The article, written before Obama’s stream protection Rule, concludes

mine-related contaminants persist in streams well below valley fills, forests are destroyed, headwater streams are lost, and biological diversity is reduced; all of these demonstrate that [mountaintop removal with valley fill] causes significant environmental damage despite regulatory requirements to minimize impacts.

Balanced against this certain environmental harm is Rep. Mooney’s rather hysterical claim that huge numbers of West Virginia coal jobs would have been lost under the Rule. It should surprise no one that Rep. Mooney’s numbers come straight from the National Mining Association. That group’s analysis asserted that as many as 77,000 jobs might be lost nationwide under the worst scenario, but possibly far fewer under more likely scenarios. Those are not all West Virginia jobs, or even Appalachian jobs. And there is good reason to doubt the bona fides of NMA’s numbers because they do not take into account the reclamation and compliance jobs that would be created by the Rule.

Congress required the Office of Surface Mining Reclamation and Enforcement to estimate the proposed Rule’s impact on employment, not just on coal jobs. In a document entitled SPR Myths vs, Facts, it debunks industry claims that between 40,000 and 77,000 jobs would be lost:

The final [Stream Protection Rule] will not have an adverse impact on jobs. The regulatory impact analysis (RIA) for the rule estimates overall that employment will show [an annual average] increase of 156 full time jobs. Where coal production is unprofitable under market conditions, jobs are predicted to decline by an average annual aggregate of 124 fulltime jobs. This will be more than offset by an average annual gain of 280 fulltime jobs needed to comply with the rule where mining remains profitable, such as additional jobs like heavy machine operators for materials placement and water sampling professionals. For purposes of comparison, the Energy Information Administration reports that total coal industry employment in 2015 was equal to 65,971, decreasing 12% from 2014.

In a February 22, 2017 opinion piece, the Morgan Messenger took Senators Capito and Manchin to task for claiming that rolling back the Rule would save state coal jobs. “They don’t do our state any favors by pretending to have turned back the loss of coal jobs,” the Messenger said, noting that coal jobs have been declining for years due to economic factors unrelated to environmental regulations. Rep. Mooney is guilty of the same and more. By accepting and further promoting the coal industry’s false narrative about a “war on coal” he delays the reckoning we in West Virginia must have about replacing coal jobs and severance revenues. He keeps us in the perpetual coal rut. The roll back of the Stream Protection Rule is no cause for him to celebrate.