Death By A Thousand Cuts

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The West Virginia Legislature began its main 2019 session on January, 9, 2019. All bills introduced in 2018 that were not then acted upon were re-introduced on the first day of this session. New legislative proposals have also been introduced early in this session. A review of both categories introduced in the House and Senate shows that there are several serious attempts to deal with the state’s problems.

But it also shows that many legislators are in love with tax exemptions and credits, which benefit one class of taxpayer and disadvantage everyone else. Sometimes these proposals have merit, but taken cumulatively they show the Legislature’s willingness to bleed our government of the revenue required for it to function effectively, drop by drop.

Legislators from both parties have proposed tax exemptions or credits, although Republicans have done so by a margin of roughly three to one. Here are some of the many proposals:

  • To exempt law enforcement officers from the payment of personal property tax (HB 2075);
  • To reduce the federal adjusted gross income figure used in West Virginia tax calculations for volunteer fire department and rescue squad members (HB 2208);
  • To exempt firefighters and volunteer firefighters from the payment of income tax, and real and personal property taxes (HB 2403)
  • To permit honorably discharged veterans to hunt, trap and fish without a license (HB 2030);
  • To exempt all motor vehicles from personal property tax (HB 2094);
  • To exempt the pension benefits of Department of Natural Resources police officers from state income tax (SB 12);
  • To exempt income earned by primary and secondary school teachers from personal income tax (HB 2370); and
  • To establish an income tax credit for practicing physicians who locate to West Virginia (SB 80).

For the last several years, this state has struggled with large budget deficits created because in earlier periods, when coal severance revenues were high, we reduced or eliminated other taxes. Among these were the business franchise tax and a reduction in the corporate income tax. Then the coal market, as it always does, went bust. We are now again operating with a surplus from an improved coal market and revenues from gas pipeline construction. But these sources of revenue are not permanent. Tax exemptions and credits, on the other hand, often become permanent.

Effective government costs money. Nobody likes paying taxes, but many of us like even less the failure of our government to create a successful, modern state that we don’t have to apologize for. Jim Justice is right about one thing – we are all tired of being 50th. Yet our tax choices don’t reflect an understanding of how to change this.

I am certain that cogent supporting arguments can be made by the legislative sponsors of each of the proposed exemptions and credits mentioned above. And it is difficult for opponents to argue that, say, school teachers aren’t worthy of tax relief. That sort of debate, though, is limited to the worthiness of the constituency to be favored.

What is missing is an analysis of the opportunity cost of granting exemptions and credits. What more important thing would we be able to do with the money we propose to confer on teachers or DNR police officers? There is very little of this analysis in the Legislature beyond the legislative fiscal notes, which are little more than a bookkeeping of what a proposal might cost. These fiscal notes are routinely ignored. You can be sure, however, that every nick in the general revenue fund created by a tax exemption or credit is ultimately felt somewhere else in the budgetary process.

This is not to say that tax exemptions and credits can’t be useful in achieving important policy goals, so long as they rationally fit those goals and are not one-off gifts to a particular constituency. Some of the recent legislative proposals fit well and seem worthy of enactment. For example, a refundable state earned income tax credit of 50% of the existing federal earned income credit. (HB 2108). This credit would further supplement the incomes of low and moderate income working adults. Doing that would increase the attractiveness of work and reduce the need for other public benefits like food stamps.

The idea of raising taxes is like the third rail in West Virginia politics. Nobody in the Legislature wants to touch it for fear of being punished by voters. But maybe we can be more careful about “spending” the revenues we do have on tax benefits for narrow constituencies. One way to do this is to resist the temptation to open any more small fiscal wounds in the body politic for the sake of momentary political benefit.

Going through all the bills that have been introduced in the Legislature so far, I came upon another idea. In each of the last two sessions, a bill has been introduced in the Senate proposing a five year sunset period for all tax credits in the Code (SB 23 and SB 48). Now that is a breath of fresh air.

 

The Rich Benefit Bigly From Trump’s Tax Reform

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The Tax Cuts and Jobs Act (TCJA) has added mightily to the already serious income and wealth inequality in America. Yet our state’s Republican representatives in Congress seem oblivious that most people in this state are poor relative to the rest of the country. They have boasted about what amounts to the crumbs on the table that middle and lower income West Virginians gain from this Act. For example, Rep. Alex Mooney, who represents much of the Panhandle in Congress, announced that he voted for “tax cuts for all West Virginians.” Always obsequious when it comes to the White House, Mooney said “President Donald Trump has been a true leader on delivering tax relief for all Americans and I am looking forward to continuing to work with him to create more jobs and to keep our economy growing.” There is no other way to put it — this emphasis on the illusory benefits enjoyed by the broad middle of our society is just willfully deceptive. The true winners under the TCJA are the rich, who will benefit at the expense of the rest of us.

Even the frequently touted tax reductions for lower and middle income taxpayers are not intended to be permanent. These will decline over the next eight years and ultimately expire. Sen. Shelley Moore Capito argued in the December 27, 2017, Spirit of Jefferson that the new law doubles the standard deduction to $24,000 for couples. But she failed to mention that this increase also expires in 2025. Furthermore, she didn’t even try to defend some of the law’s permanent features, which benefit the wealthy. These are the $1.5 trillion tax cuts for corporations, which will do nothing but increase the value of corporate stock in the hands of the wealthy, and the repeal of the Affordable Care Act’s individual mandate. The repeal of the mandate will generate $53 billion in annual savings by 2027, paying for about one-third (about 4.7 percentage points) of the bill’s 14-percentage-point permanent cut in the corporate rate. But it will leave millions more uninsured and raise premium rates for many others.

Here are three additional key ways in which the TCJA benefits the rich at the expense of the rest of us:

Distributing Tax Cuts Disproportionately to the Rich. The Tax Policy Center, a joint effort by the Brookings Institution and the Urban Institute, put it this way: “In general, higher income households receive larger average tax cuts as a percentage of after-tax income, with the largest cuts as a share of income going to taxpayers in the 95th to 99th percentiles of the income distribution.” This result will clearly play out in West Virginia.

Tax Benefits

Doubling the Estate Tax Exemption. The TCJA doubles the exemption from tax on estates valued from $11 million per couple to $22 million per couple. Doubling the exemption reduces the share of estates facing tax from 0.2 percent to 0.07 percent, leaving only 1,800 taxable estates nationwide. It is hard to understand why this tax change was so important — unless satisfying rich donors is considered. The estate tax rate is only 17%, far less than on ordinary income for this group of taxpayers. Still the tax exemption will be worth on average $4.4 million to those upper-end estates who will now be exempt. To put this in perspective, $4.4 million is about what it would cost to give 1,100 Pell grants to low income students.

Creating a Tax Break for “Pass-Through” Income. Although the corporate tax rate is reduced by 14 points, this benefit mainly applies to large corporations.  Many small corporations and limited liability entities account for business income by passing it through to the individual owner. Trust me on this, most of these business owners are not among the struggling taxpayers in this country. The corporate tax rate doesn’t apply to passed-through business income. Instead, the individual tax rate for that taxpayer would apply. It was not enough that the individual tax rates will be reduced, the TCJA also creates a special new tax benefit for pass-through business income. The final TCJA allows small business owners to deduct 20% of their passed-through business income.

I get it that current Republican ideology is interested in directing policy benefits to those in society they call the “makers,” while being far less concerned about everyone else whom they label the “takers.” The TCJA is a perfect example of how this works, even though Republican politicians continue to argue falsely that the beneficiaries of this law are the middle class. To some extent, the horse is out of the barn — this bad tax law passed warts and all. But we cannot let this go. At every opportunity in the run-up to the 2018 mid-term elections and then on to 2020, we need to keep this issue at the front of the debate.

Government by the Rich, for the Rich

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The much maligned Tax Cuts and Jobs Act (TCJA) is regarded by most Americans as a naked effort by the Republican Party to reward its key donors, among them the wealthiest of Americans. Public polling has consistently been negative for this “reform” legislation. The law’s modest temporary tax relief for the middle class is just window dressing. The public has simply disregarded this window dressing and correctly assessed the stink from what has been served up to them.

The TCJA is an enormously complex law, with poorly understood provisions the effect of which won’t be known until well after the law takes effect. Since the tax code has a profound effect on the behavior of individuals and businesses, and hasn’t been revised since 1986, a major revision should be thoroughly debated in the light of day. But to do that would have permitted the TCJA’s ugly flaws to be exposed and for opposition to solidify. So in adopting the TCJA Republicans jettisoned any pretense of democracy.

There were no public hearings. Some of the law’s provisions were added at the very last minute. The Congressional Budget Office had no time to evaluate the Republicans’ flimsy claim that increased business activity spurred by the tax cuts would raise substantial new tax revenues. The Bill was available for review roughly three days before the final Senate vote. The Democrats, who were not opposed to revisions to the corporate tax structure and might have made reasonable suggestions, were shut out of the process. This is how the Republicans govern.

One wonders why a massive tax cut was so important for Republicans in the first place, particularly in the face of negative public polling. The Trump Administration is riding the wave of economic recovery that began well before Trump took office. National unemployment is hovering around 4%, generally regarded as full employment. Corporations are already sitting on $2.3 trillion in cash reserves. They do not need massive tax cuts to free up cash for investment. The answer is that big donors are furious about not receiving the big tax cuts that were promised when the Republicans repealed Obamacare, which they failed to do.

Nobel-prize winning economist Paul Krugman has argued in the New York Times:

A large part of the answer [for why a huge tax cut was so important] is that many Republicans now see themselves and/or their party in such dire straits that they’re no longer even trying to improve their future electoral position; instead, it’s all about grabbing as much for their big donors while they still can. Freedom’s just another word for nothing left to lose; in the GOP’s case, that means the freedom to be the party of, by, and for oligarchs they always wanted to be.

Krugman can be intemperate at times, but he seems to be on to something. At all the key forks in the policy road, the Republicans have rewarded themselves and their rich friends. The TCJA represents a huge redistribution of wealth from the poor and middle class to those in the upper income brackets who hardly need it.

By far the largest impact of the TCJA will be the reduction of corporate tax rates. These reductions will themselves be responsible for nearly $1.5 trillion in reduced tax revenues. The Republican argument is that corporations will use this new cash to increase business capital investment, hire new workers and raise wages. But there is nothing in the TCJA that requires a business to use the tax cuts in this way. Many businesses have said they will use the money for non-productive uses like increased dividends and share repurchases. These uses only serve to increase the value of the corporation’s stock in the hands of those who own it.

Who benefits when the value of corporate stock goes up? Only 52% of the American public owns any stock whatever, even in retirement accounts, and those owners surely won’t be found in the bottom half in wealth and income. President Trump is fond of bragging about how the stock market is breaking records. Can’t you just hear the Champagne corks popping in all the nation’s homeless shelters?

In my next post, I will detail how the rich will directly benefit from the TCJA at the expense of the rest of us. Certainly, this statute ought to be one of the first things on the agenda of any new Democratic majority in Congress to reverse. In fact, instead of just undoing this bad law, the TCRA may unleash the Democrats to make substantial changes to the tax code to benefit affirmatively those whom the Republicans have, for now, shut out.

Delegate Riley Moore and Business Tax Cuts

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On October 19, 2017 Delegate Riley Moore, who represents the Shepherdstown District in the West Virginia House of Delegates, published an opinion piece in the Charleston Daily Mail. The piece urged Congress to pass the Trump “tax reform” bill for the sake of economic growth, particularly in West Virginia. Putting aside that Del. Moore could not have known the details of the Republican tax bill on October 19 because it had not yet been made public, he extolled the virtues of various tax cuts he expected the plan to contain. In particular, Del. Moore is fond of tax cuts for business. His logic is the following. The desirable end result is more economic activity and good jobs for everyone. So far, so good. The means of achieving that desirable end result is to give over a trillion taxpayer dollars to corporations — with no strings attached — and hope that they spend this money in productive ways. What could possibly go wrong with this plan?

Republicans have creative ideas from time to time, and Del. Moore is no exception. He sponsored a bill during the last legislative session that would have created tax credits to stimulate new businesses in West Virginia. But Republicans never want to pay for their creative ideas with new tax revenue. Instead they want to cut into already existing tax revenue that would be available for other useful government work. Tax credits are one way to do this. Tax credits are tax reductions for specific taxpayers who meet the requirements, yet they are still essentially transfers of our public money in exchange for certain taxpayer behavior. Is encouraging this behavior more desirable than some other use for the tax money? The problem is that when these tax credits are proposed it is impossible to identify precisely what government program will be eliminated in exchange, or will suffer for lack of funding. The proponent of the plan doesn’t have to make the case that the tax credit is better than an environmental program, more student loans, or some other worthy project. So the public cannot intelligently answer the question.

Indiscriminate business tax cuts are far worse. Under the Republican world-view, money is best diverted from public uses to private uses. The end result is that government has less and less ability to do what we need it to do. Make no mistake, every dollar that is cut from the taxes of a business is a dollar that we could otherwise use to fund our schools, our healthcare and our public safety. Indiscriminate business tax cuts don’t even pretend to require desirable behaviors from the business like tax credits do. Business tax cuts are just giveaways of our money plain and simple. Today the Wall Street Journal reported that the Trump tax plan in its present House version would permanently reduce the corporate tax rate to 20%, costing $1.5 trillion dollars in lost tax revenue.

Has anyone else noticed that Republicans only seem to be concerned about the deficit and the debt when it is “entitlement” spending programs that are under consideration? True tax reform would shift tax burdens around to be more equitable and streamline administrative procedures. But it would also find new revenues to make up for revenues lost – revenue neutrality. Trump’s tax plan as initially revealed by the House Republican leadership hardly makes an effort to claim revenue neutrality. Paul Ryan and others say that the enormous tax cuts will stimulate growth over the next decade and from this growth new tax revenues will come. No economist will stand up to support this trickle-down baloney. If the so-called “fiscal hawks” in the Republican Party don’t oppose this thinking, then we should all change the channel the next time they complain about spending programs from the Democrats.

Del. Moore’s opinion piece in The Daily Mail also spoke warmly of middle-class tax cuts and on this it is hard to disagree with him. Putting more money in the pockets of those who need a boost is exactly the kind of alternative use for tax revenues that does make sense. It will also boost the economy because middle-class taxpayers will be much more likely to spend their tax cut than the wealthy, who will save any tax cut they get.

But a business is entirely different than a middle-class taxpayer. Sure a business tax cut will free up some money for the business, but what’s to keep that money from being spent on a vacation in the tropics for the owner, or a non-productive use like paying down debt or share repurchases? Writing in the Washington Post, David Lynch notes

Several companies already have indicated that they will use excess funds to pay off debt, increase dividend payments or repurchase their own shares rather than create new jobs or raise wages. On Wall Street, the consensus is that workers will be the last in line behind shareholders, creditors and investment bankers when the extra corporate cash is distributed.

The Republican tax plan contains absolutely no requirement that a business use the tax cut for investments that will create jobs. If Del. Moore wants to have his house painted, you can be sure he doesn’t just send checks to all the painters in town in hopes that one will show up at his house.

If this country is going to give away its tax revenue to corporations for the goals of generating economic activity and creating jobs, there are ways to ensure that the money is employed to these purposes. One need look no further than the way the money from the recent West Virginia road bond referendum will be used. The goals were increased economic activity in the short term and more jobs for West Virginians. There is a linear connection between these goals and the means chosen to achieve them. Projects will begin in the current fiscal year all over the state. The West Virginia Jobs Act requires that contractors receiving these funds employ a workforce of at least 75% West Virginia residents and a proposed amendment introduced at the recent Extraordinary Session of the Legislature would put some teeth into this requirement. Of course, there can always be slips between the cup and lip. But this arrangement creates more confidence that our tax money will be used for the desired purpose than trillion dollar business tax cuts with no strings attached.

Congressman Alex Mooney Fails Economics

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President Trump recently cut a deal with Democrats to raise the debt ceiling and fund the government for three months. Republican leadership had wanted a deal to fund the government for eighteen months so they would not have to revisit the issue before the 2018 mid-term elections. When the components of this deal reached the House for a vote, 90 Republicans voted against raising the debt ceiling, including Rep. Alex Mooney (WV 2d). Mooney issued a statement, saying “I voted against raising the debt limit because our national debt is already too high. West Virginian families have to balance their budgets each month and the federal government should do the same.” Really? Balance the federal budget each month? This statement shows that Mooney misunderstands the issues of public debt and deficit spending, or assumes that his constituents do. It is probably both.

The differences between the federal budget and a household budget are quite substantial. Generally, the spending side of a household budget is limited by the income of the wage earners in the family. If a household routinely spends more than this income, there will be trouble. But governments cannot be limited like this. Instead, they must respond to spending requirements that are unrelated to projected tax revenues for the year. Take, for example, the extraordinary spending needed to finance WW II. And, while a household buys consumables like clothing and restaurant dinners, government buys capital assets like roads, bridges and hospitals that benefit us for decades. When you consider the income side of budgets, governments have the power to raise new revenues through higher taxes and can actually print new money. Households have no such power. This wealth-creation power is what enables governments to borrow at much lower rates than households can.

When a government spends more than it brings in during a particular year, it has a deficit. In 2016, 44 of the top 50 world governments by budget size ran a deficit. The sum of all past deficits is the national debt. The national debt of a particular country can be compared with that of other countries, not by comparing the absolute amounts, but by comparing the ratio of debt to gross domestic product — the value of all goods and services produced during the year. Measured this way, by far the largest debtor nation is Japan. Its debt is over 2.5 times its GDP. The United States is 7th among developed nations. Our “national debt” is slightly higher than our GDP. But this is somewhat misleading because this “national debt” includes the debts of all states and localities as well as the federal debt. Considering only the federal debt, which is what Mooney was talking about, our debt to GDP ratio would be much lower.

Our national debt spikes during historical crises and then subsides as the economy is able to absorb the effects of the debt. According to the analysis of the St. Louis Federal Reserve Bank, our national debt to GDP ratio is now high because of the Great Recession that began in 2008. The federal debt increased largely because falling incomes led to lower tax receipts. Also, unemployment and poverty rose, which increased the cost of social insurance programs such as Medicaid and unemployment insurance. Following the recession, a number of factors, including the implementation of the $840 billion American Recovery and Reinvestment Act, caused the debt-to-GDP ratio to increase at a rapid pace.

An excessively high national debt is not a good thing. High public debt reduces the flexibility the government has during a recession to prop up the economy through increases in spending and tax cuts. And many economists believe that high public debt reduces the long-term growth potential of an economy. This is for two reasons. First, higher debt requires higher debt service, preempting a more productive governmental use of that money. Second, the increased sale of government bonds will absorb more of the available private investment funds, making them unavailable for corporate borrowing. Corporations borrow to invest in capital equipment, and other things that grow the economy.

But Mooney claims that our national debt is too high. Too high by what standard? The primary concern for holders of government debt is that the government will default. Excessive debt makes the risk of default higher. Measured by the reaction of U.S. debt holders, our debt is not “too high.” For that matter, neither is the debt of Japan, over twice as high as ours as measured against GDP. The debt paper of these two countries continues to be viewed as a safe haven in times of market turmoil.

Most Republican discourse about excessive debt ignores one other important fact about the U.S. national debt. Seventeen percent of the federal debt is held by the Federal Reserve Banks and other intergovernmental authorities. The interest paid on those debt instruments is ultimately returned to the Treasury.

Conservative politicians like Congressman Mooney are fond of attacking spending on social programs by arguing that this only increases our debt and that we are leaving a financial mess for our children to clean up. This argument is bogus. For the most part, we owe our national debt to ourselves. In his recent book What We Owe, IMF official Carlo Cottarelli points out that approximately 70% of the U.S. national debt is held by residents of the United States. These U.S. residents have lent money to the government. In the future, everyone will be taxed for the purpose of repaying the children of today’s Americans who have lent the money. All this money — the money spent by the government that was lent and the money that will repay these debts — has or will circulate in the U.S. economy.

While we should keep an eye on the level of our national debt, it is not now “too high” by any objective measure. The key to reducing debt is increasing the rate of economic growth in this country. If our rate of growth could once again reach 3% per year, nobody would be talking about the national debt. That is why the upcoming debate on tax reform is where the focus of Congress should be. Tax reform — not big tax cuts for the rich — has more potential for generating economic growth than anything else on the table.

West Virginia’s Budget Disgrace

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The soap opera in Charleston appears to be over. After failing to come together on any meaningful changes for increasing revenues or reforming the tax structure, the Legislature adopted a “bare-bones” budget that cuts more deeply than ever into valuable state programs. This was a default to the lowest common denominator and a failure of statesmanship. It defers many important questions for a later Legislature. One Delegate said that the budget was the result of “complete and utter dysfunction.” The process wasted everyone’s time and money.

While there is blame to go around, this result was the product of opposing positions taken by members of the same political party. Senate Republicans insisted that there would be cuts to personal income taxes or nothing. House Republicans insisted on broadening the sales tax base and were suspicious of income tax cuts in a deficit environment. Week after week neither side moved. The Democrats were impotent on the sidelines and the Governor lurched from one folksy hyperbole to the next, offering some bone-headed proposals of his own. The whole process was a disgrace.

The Legislature gathered in general session knowing in advance that revenues in the state’s General Revenue Fund were projected to fall short of the spending level from last fiscal year. The shortfall was roughly $500 million. There has been agreement on both sides of the aisle that tax reform will be necessary for West Virginia to stabilize and increase revenues and avoid volatility in our budgeting.

But for many Republicans, particularly a Senate faction led by Robert Karnes (R, Upshur), tax “reform” meant radical reductions to the personal income tax, the largest single source of state revenue. Karnes and his crowd actually think that cutting income tax for wealthy “job creators” will raise revenues.  By allowing these people to keep more of what they make, reasons Karnes, they will leap into action, juicing up business and the economy. This widely debunked nonsense was exposed most recently by the Kansas experience where substantial income tax cuts put the state’s economy into the toilet.

Karnes and the Senate Republicans labored under a false belief that also afflicted House Republicans. It can be reduced to a simple equation: tax = bad. In an environment where we needed more revenue to avoid harmful cuts, only the House Republicans were willing to put their toe into the water to find new revenue sources. Even then, House Republicans wanted to add new items upon which to levy sales taxes rather than raise the tax rate itself, presumably so they could then claim they didn’t raise taxes. They rejected a Senate bill because it “amounted to a tax increase.” The conservative Tax Foundation, which followed the situation in West Virginia closely, said “It would almost be easier to enumerate the taxes the legislature didn’t consider as possible solutions to the budget shortfall over the past few months.”

West Virginia has well-documented problems. On just about any measure of successful governance we are last in the country or very close to it: per capita income, workforce participation rate, educational attainment, health indicators and obesity, opioid addiction. You name it. Governor Justice’s initial proposed budget recognized that important spending on education and social programs had to be retained in order to ensure that we did not become a failed state. But later he seemed to lose his head by aligning himself with Senate Republicans and their income tax cuts, presumably on the theory that even a bad idea is better than no idea. In the end he lost respect from everyone, even members of his own party.

The best summary of the cuts our FY 2018 budget will make versus the spending from FY 2017 (which itself involved cuts from prior years) has been provided by the West Virginia Center on Budget and Policy.   The budget cuts $7.5 million from colleges and universities and $2.5 million from community and technical colleges. Public broadcasting was cut nearly $1 million, the line item for the Division of Culture and History was cut 14%, and the West Virginia Commission on Women, the Division of Educational Performance and the Tobacco Education Program were all completely defunded.

We need some new thinking and new leadership who recognize that good government is expensive and that we cannot cut our way to prosperity. If West Virginia is determined to elect Republicans to majority roles in the House of Delegates and Senate, these public servants need to rise above squabbling among themselves, reject the latest fashion in right-wing economic theory, and a find a way to grow revenues over the long haul. Yes, that might mean even raising taxes, which West Virginians would welcome if we applied the revenue toward solving some of our many problems.

 

The West Virginia Budget Crisis

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Remember the large budget deficit that confronted West Virginia lawmakers at the start of the legislative session? One estimate in November 2016 was that in FY 2018 (beginning July 1, 2017) we would generate only $4.055 billion in revenue, roughly $500 million short of anticipated spending. That brought many legislators to Charleston for the general session prepared to strip spending down to a bare minimum and force the state “to live within its means.” Fortunately, those views softened when confronted by political reality.

Now projected FY 2018 revenues are about $40 million better than first predicted due to an improving coal market and a $33 million transfer from general revenues to the Workers Compensation Fund that won’t be made. But the remainder of the budget shortfall hasn’t disappeared. How the shortfall will be closed is the subject of a House and Senate conference committee meeting today. So far, the fiscal and political stress created by the shortfall has caused Governor Justice and quite a few legislators to behave as if any idea – even a demonstrably bad one – is better than nothing.

June 12 is the sixteenth day of a special session devoted to this project. The extension to allow the conference committee to meet expires on June 13 and if a solution is not reached immediately the tax reform effort may be abandoned entirely. The two opposing camps are the Governor and Senate Republicans — who want to reduce income taxes — and nearly the entire House who want to raise sales tax rates and coverage without reducing income taxes.

Neither approach is progressive. Sales taxes hurt lower and middle income citizens who have no choice but to spend almost all of their income on taxed items. Because income taxes are generally paid more heavily by wealthier citizens, the proposed income tax reductions coupled with the sales tax increases would result in an overall tax decrease for the wealthy but an overall tax increase for lower and middle income taxpayers. According to the West Virginia Center on Budget and Policy, the plan lowers taxes on the top 20% of West Virginia households and increases taxes on the remaining 80 percent of households.

Nevertheless, a sales tax increase seems likely to be in any budget deal. But it is uncertain what the new rate will be. The conference committee is now considering an increase from 6% to 6.5%. Whatever higher rate is chosen, it would be applied to previously untaxed items such as telecommunications services, digital goods, electronic data processing services and health fitness memberships. The 6.5% rate is projected to raise $96 million in FY 2018 and $106 million in FY 2019.

Beyond that, the thinking of the Governor and the Senate Republicans has come unmoored. They want to reduce income taxes by 7% in FY 2018 and in similar amounts staged over coming years. What should trigger these further reductions has been the difficult issue. Senate Republicans have only agreed to this “modest” series of reductions in income tax because opposition to their original proposal was fierce. An income tax reduction is the brain child of Sen. Robert Karnes (R, Upshur), a conservative ideologue, who headed the Senate Select Subcommittee on Tax Reform. You may wonder how a reduction in income tax collections will close the budget gap?

You’ve heard the Republicans’ answer before – tax cuts will lead to more growth and job creation, which will lead to higher tax collections. The problem is this theory has never worked. While there may be some small growth benefit in tax cuts, it never amounts to as much as the tax revenue lost. This played out painfully over a decade in Kansas, which finally abandoned its tax cutting regime by adopting tax increases passed by a Republican legislature over the veto of Republican governor Brownback.

But it is Governor Justice who has gone the furthest into fantasyland. After properly opposing massive spending cuts that would have rendered West Virginia a shell, Justice has gone over to the income tax views of the Senate Republicans in order to get a deal. He defends their position because “just think of how far they’ve come” from their original proposal to cut income taxes 30%. In other words, we should all support a bad proposal because it is not insane like the first one.

Governor Justice has engaged in what can only be described as weak and illogical explanations for his positions. He acknowledges that increasing sales taxes may swamp any benefit low and moderate income taxpayers would get from a reduced income tax. But then referring to that reduction he asks why we wouldn’t want to “give money back to the guy mowing the grass?” When pressed he has further supported the reduced income tax idea by suggesting it would be “a great move for our image and a great move to potentially bring people to our state.” Don’t bother looking for any hard numbers.

Governor Justice also has urged the adoption of a tiered coal severance tax that would generate less tax revenue when coal prices are low and increased revenue when they are high. The net impact would be a $49.9 million reduction in severance tax collections for FY 2018. This proposal is either the result of strong coal industry lobbying or faulty thinking, or perhaps both. Surely other industries in the state with greater economic impact than coal, such as healthcare, would benefit from favored tax treatment. This is just one more example of pandering to extractive industries that do not represent our future.

So in the end, how does Governor Justice believe the budget gap will be closed? He predicts an additional $100 million in tax collections from economic growth that will result from the tiered coal severance tax and his $2.8 billion infrastructure spending plan. This guesswork, called “dynamic scoring,” is so speculative it would make Donald Trump blush. There are easily a hundred ways that this tax revenue could fail to materialize even if the infrastructure plan is pursued. This is why state budgeting based on estimates of economic growth is considered unsound.

Governor Justice once appeared to be the sensible, stable player in the budget and revenue battles. Now he seems to be the chief inmate in the asylum.

 

 

 

Replacing West Virginia’s Income Tax with a Consumption Tax Promises Huge New Deficits for the Future

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West Virginia Senate Bill 335, now pending before the Senate Select Committee on Tax Reform, would phase out West Virginia’s income tax and impose an 8% consumption tax on a broad range of transactions. The legislative “findings” that precede SB 335 assert that a major change like this to our tax structure would be both fair and fiscally sound. As to fairness, this assertion is demonstrably false. SB 355 would increase the tax burden on low income and working class taxpayers and give wealthier taxpayers a substantial overall tax break.

In the face of at least a $500 million budget deficit this fiscal year and perhaps a larger one next fiscal year, West Virginia is in dire need of a tax plan that will grow long-term, stable revenues. Unfortunately, SB 335 would at best provide only temporary revenue relief and portends mounting future budget deficits. This revolutionary change to our tax structure would be bad law and worse policy.

It is important to understand how SB 335 would change West Virginia’s tax structure. The personal income tax is the state’s largest revenue source and makes up approximately 45% of the state’s General Revenue Fund Budget. Income tax collections for FY 2018 are expected to be $1.8 billion. Under SB 335, the personal income tax would be repealed on January 1, 2018 and replaced with a flat tax rate of .6% in 2018, .4% in 2019 and .2% in 2020. According to the fiscal note attached to the Bill, this would result in decreased income tax collections of $650 million in FY2018, $1.8 billion in FY2019 and $2.0 billion in 2020.

To replace that revenue, SB 335 would create a broadly based 8% consumption tax that would apply to the same sales as the current sales tax, but with the following enhancements: (1) food for home consumption, (2) non-medical professional services such as legal, accounting, engineering, architecture, real estate, advertising, funeral, and the like, (3) personal services such as hair, nails, skin care and non-medical personal home care, (4) public utility services such as electricity, natural gas, water, sewer, telecommunications, solid waste, and the like, and (4) numerous direct use purchases by business, electronic data processing, mobile home sales, health fitness services, and much more.

These consumption tax changes would result in tax collections to the General Revenue Fund of around $1.2 billion in FY2018 to $1.33 billion in FY2019. The figures do not account for “leakage” of sales by consumers who would make purchases in surrounding states with a lower consumption tax. Matching the projected decrease in income tax collections with the increase in projected consumption tax collections, the fiscal impact of SB 335 would be the following:

  • FY2018 — $550 million
  • FY2019 — ($370 million)
  • FY2020 — ($440 million)
  • FY2021 — ($610 million)

The increased revenues in FY2018 are produced only because the consumption tax increases would begin in July 2017 while the decreased income tax collections would not begin until January 1, 2018.

The fiscal note by the State Tax Department makes the following observation:

The proposed bill represents the most massive tax reform effort of any State in recent memory. Most states commit significant resources toward adequate measurement of tax reform impact on businesses and residents prior to adoption of a significant change. The resources and timeframe for the preparation of this fiscal note are woefully inadequate to properly measure the cumulative extent of all consequences associated with proposed changes.

Why then rush to consider SB 335? One argument for this change in the tax structure is that it would stimulate economic growth. But eliminating the state’s income tax can’t be counted upon to do this. The fiscal note states that SB 335 would effectively increase taxes on business inputs by an amount that is at least double the potential income tax savings on business profits. Meanwhile, the West Virginia Center on Budget and Policy notes that for the period 2005 to 2015 the nine states with the highest income tax had 5.6% GDP growth while the nine states with no income tax grew GDP only 3.2%.

Ask any merchant whether she would prefer to pay income tax on business income or be the state’s collection agent for a hefty consumption tax on her customers. My bet is that the income tax would be favored overwhelmingly. A consumption tax relentlessly faces the customer in each transaction and so discourages sales. This would be particularly true for businesses that deal in products and services that have never before been subject to the state’s sales tax. On the other hand, a business can plan for and sometimes mitigate the effects of an income tax through lawful deductions, credits and deferrals. Not so with a consumption tax.

If the West Virginia legislature truly wants to create stable future revenues for all the important work government has to do, while keeping West Virginia “open for business” as our state marketing slogan once promised, it needs sober up about what replacing the income tax with a consumption tax would really do.

 

 

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?

Republican Senators Propose Replacing West Virginia’s Income Tax with A Higher New Sales Tax

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Only nine states in the nation have no state income tax. However, there is considerable support in the West Virginia Senate to phase out our income tax completely by 2021 and replace lost revenue by raising the state’s sales tax to 8% from 6% and eliminating many sales tax exemptions. The effort in the Senate is being led by Sen. Robert Karnes (R-Upshur, 11) sponsor of SB 335. If the Bill in its present form is enacted, West Virginians would soon begin paying sales taxes on new items such as groceries, internet streaming services, haircuts, professional services, and more. The Bill is co-sponsored by eighteen other Republican Senators, including Panhandle Senators Craig Blair (R-Berkeley, 15) and Charles Trump (R-Morgan, 15).

Karnes told the Huntington Herald-Dispatch that West Virginia currently collects $1.9 billion from the income tax, which is 45% of the state’s $4.5 billion general revenue fund. The state collects approximately $1.2 billion from the sales tax. If all sales tax exemptions were eliminated, Karnes said the state would receive an additional $2 billion in revenue. Of course, there is no way all sales tax exemptions would be ended, particularly for things like medical services, day care services, and the like. The whole situation is fluid but the Senate Select Tax Reform Committee, of which Karnes is Chair, wants to move quickly. It rejected a motion to await the preparation of a “fiscal note” designed to predict the fiscal impact of the Bill.

Without a fiscal note, adopting a major change to the state’s tax structure seems reckless. Governor Justice has said that it would be “phenomenally risky” to make major changes to the state’s tax laws during a budget crisis. In fairness, the Select Committee will probably not take final action until there is a fiscal note. But there seems little point to working on a major change to the tax structure that may end up being a non-starter because it won’t raise more revenue. West Virginia is facing a $500 million budget deficit this fiscal year and perhaps a larger deficit next fiscal year. What we want is our Legislature to get busy working on a fair tax system that generates enough revenue to close the budget gap and promotes economic growth that will form the basis for stable future revenues.

There is reason to doubt that eliminating the state’s income tax will actually promote economic growth. The West Virginia Center on Budget and Policy reports that for the period 2005 to 2015 the nine states with the highest income tax had 5.6% GDP growth while the nine states with no income tax grew GDP only 3.2%. Perhaps there is no causal relationship here, but it makes one wonder and should cause the Republican sponsors of SB 335 some concern.

On the question of fairness, 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. This is the nature of a progressive tax. Contrast a sales tax, which taxes consumption. The sales tax doesn’t concern itself with how wealthy you are, only how much you spend and on what things.

Consider two hypothetical taxpayers. A taxpayer making $30,000 spends every dollar of his income supporting his family with shelter, food, clothing and other necessities. A taxpayer making $250,000 supports her family with relative ease and also consumes luxury goods, but still saves 20% of her income. Unless there are exemptions in the sales tax structure for necessities, under SB 335 our low-earning taxpayer will pay an additional 2% sales tax on 100% of his income, while the wealthier taxpayer will pay an additional 2% on only 80% of hers. In most cases, the total tax paid by the low income taxpayer will rise slightly, while the total tax paid by the wealthy taxpayer will drop considerably. This is because the additional 2% sales tax paid by the wealthy taxpayer on consumption is far less that the income tax she saves.

Sen. Patricia Rucker (R-Jefferson, 16) removed her name as a sponsor of SB 335. Perhaps she had second thoughts about the wisdom of the Bill. So should the rest of the Republican members of the Select Committee.