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 Under SB 335, the personal income tax would be repealed on January 1, 2018 and replaced with a flat tax rate of .6% in 2018, .4% in 2019 and .2% in 2020.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.

The West Virginia Workplace Freedom Act

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In early February 2016, West Virginia became the 26th state to adopt a “right to work” law, called the Workplace Freedom Act. The new law does not simply prohibit an employer and a labor union from requiring membership in the union as a condition of employment. It goes further and also forbids requiring an employee to pay any dues or fees to a labor union as a condition of employment. The law was vetoed by Governor Tomblin on February 12, 2016 but that veto was overridden by the Legislature on the same day. The new law was to take effect July 1, 2016.

Outlawing any required fee payment to a union is a significant step for West Virginia to take. It reveals that our Legislature was not so much interested in protecting employees from compulsory membership in an organization they might not support, as it was in financially crippling labor unions. In so doing the Legislature advanced a conservative political agenda of long standing. It is the financial harm created by the new law that led the West Virginia AFL-CIO and a number of individual unions to seek an injunction in Kanawha County Circuit Court. The injunction was granted on August 11, 2016 and the implementation of the law postponed until a full decision can be rendered.

To understand this legal and political struggle, a little background is necessary. Unions can gain the right to represent employees only within a bargaining unit — a plant or department. Being an employee in a bargaining unit is not the same as being a dues-paying member of the union. But once a union becomes the bargaining representative of employees in a unit, it has the right and obligation to bargain for and prosecute grievances for all of them, whether or not they are dues-paying members. This frequently involves large sums for trained staff, arbitrators, meeting halls, offices, libraries, and more.

Over time, union security contract clauses were developed requiring an employee to become a dues-paying member of the union within a certain period after employment. If he refused, the employer was contractually bound to terminate him. But because unions engage in political as well as bargaining activity, federal courts refashioned the deal so that no employee is obligated to pay dues for political activity to which he does not subscribe, but can be required to pay a “fair share fee” to cover the collective bargaining and grievance activity the union must provide him. This was the status of the law in West Virginia until last year.

In 1947, Congress allowed individual states to forbid union security clauses altogether. Almost immediately, states in the south and west passed “right to work” laws. Recently as the strength of Republicans grew in state legislatures, RTW laws passed even in industrialized states like Wisconsin and Michigan. Not wanting to be outdone by their conservative brethren elsewhere, the West Virginia Legislature took up the issue in January 2016. The Legislature commissioned a study by WVU predicting the effect of a RTW law on union membership, job growth, GDP growth and wage growth in West Virginia.

The method used in the WVU study was to compare the group of states with RTW laws to the group without them on these various economic factors for the period 1990 to 2012. To determine whether the RTW laws actually caused any of the observed differences, a complicated regression analysis was used. The WVU study predicted that the rate of union membership in West Virginia would fall by around 20% as a result of the adoption of an RTW law. The study also predicted a long term .4% employment growth benefit and a .5% annual increase in GDP growth.

But the WVU study found no causal relationship between RTW laws and wage growth, even though nearly all other studies like this have found a robust negative effect created by RTW laws on state-wide wage growth. For example, a 2015 study by the Economic Policy Institute found workers in RTW states earned $1,558 less per year than similar workers in non-RTW states. These results did not apply just to employees covered by a union contract but to all employees. “Where unions are strong, compensation increases even for workers not covered by any union contract, as nonunion employers face competitive pressure to match union standards.”

Behaving as if the modest coercion involved in requiring an employee to pay a fair share fee was an outrageous affront to liberty, the Legislature blew past the economic benefit to all workers that exists in non-RTW states. The Workplace Freedom Act states that a person may not be required to “pay any dues fees, assessments or other similar charges . . . of any kind or amount to any labor organization.”

The legal attack by the AFL-CIO on this law is that the state has unconstitutionally deprived unions of their property without just compensation by prohibiting them from charging nonmembers the proper fee for the services unions are required to provide. Ken Hall, President of Teamsters Local 175, testified that members would end up paying an extra $172 in union dues to cover services provided to employees who benefitted from them but refused to pay. These arguments were enough to convince Judge Jennifer Bailey of the Kanawha County Circuit Court to enjoin implementation of the law until a full decision could be made in the next few months.

It is hard to predict how this legal battle will be resolved. Like any human institution, labor unions have had their share of bureaucracy, incompetence and corruption. They have also had their share of success in advancing the interests of working people. Unions improve the economic lives of members and non-members alike. Progressives don’t generally support coercion, but requiring a fair share fee from non-members who benefit from union representation seems appropriate. What is really at stake is not some grand concept of freedom and liberty. It is instead the economic viability of unions and the Republicans in the Legislature know this. Without viable unions, corporate power to set compensation will be virtually unchallenged and working class compensation will continue to stagnate.

Trump Voters Now Have Second Thoughts on Repealing Obamacare

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The Kaiser Family Foundation has issued the results of a new poll concerning repeal of Obamacare. Anyone with a pulse knows that repeal has been made a rallying cry for Republicans in Congress, in fact their centerpiece in the ideological attack on the Obama administration. But it appears that Republican ideology has gotten out ahead of the desires of voters, who are not as much interested in ideology as they are in understandable, affordable and stable healthcare.

When asked about a series of health care priorities for President-elect Trump and the next Congress to act on, repealing the ACA falls behind other health care priorities. Two-thirds of the public (67 percent) say lowering the amount individuals pay for health care should be a “top priority” for President-elect Trump and the next Congress. This is followed by six in ten (61 percent) who say lowering the cost of prescription drugs should be a “top priority,” and nearly half (45 percent) who say dealing with the prescription pain killer addiction epidemic should be a “top priority.”

When given two competing approaches to the future of health care, six in ten Americans (62 percent) prefer “guaranteeing a certain level of health coverage and financial help for seniors and lower-income Americans, even if it means more federal health spending and a larger role for the federal government” while about one-third (31 percent) prefer “limiting federal health spending, decreasing the federal government’s role, and giving state governments and individuals more control over health insurance, even if this means some seniors and lower-income Americans would get less financial help than they do today.” This level of support  for federal healthcare spending is the stake in the heart of the conservative ideological vampire.

Overall, 49 percent of the public think the next Congress should vote to repeal the law and 47 percent say they should not vote to repeal it. But of those who want to see Congress vote to repeal the law, a larger share say they want lawmakers to wait to vote on repeal until the details of a replacement plan have been announced (28 percent) than say Congress should vote to repeal the law immediately and work out the details of a replacement plan later (20 percent).

In its reporting on the KFF poll, the Washington Post pointed out that the same repeal question has been asked 16 times in the last two years and the most recent poll results show the lowest support for immediate repeal without a replacement — a drop of 6% since October. The biggest part of this drop is among Republicans whose support for immediate repeal without replacement has dropped 17%.

In 2016 Rep. Alex Mooney, the Panhandle’s Congressional representative, voted to repeal Obamacare through budget reconciliation. That is once again the method favored by Congressional Republicans. Attention Rep. Mooney! Only 20% of all respondents in the KFF poll want you to repeal Obamacare without a replacement. Here’s hoping you can think for yourself.

Sen. Joe Manchin can spot a bad deal for West Virginia when he sees one. Manchin told reporters on January 4, 2017 that he would not vote to repeal the ACA without a replacement on the table. Manchin’s office said that if the law is repealed, 172,000 West Virginians would lose health insurance coverage and the state would lose $840 million in federal funds to provide health care for low-income families.

“Most of the people [in West Virginia] that have benefited from this one way or another voted for Trump,” Manchin said. “They don’t know what they have or how they got it. I will tell you this: You repeal it and take it away, they will know who took it away.”

Progressives may be conflicted. Sen. Charles Schumer urges Democrats not help the Republicans in Congress come up with a prompt replacement if they vote to repeal immediately through budget reconciliation. His view is let the Republicans suffer the wrath of the voters for creating the unnecessary healthcare disaster that Sen. Manchin predicts. That is certainly attractive in a partisan way, but it seems like more one-upmanship and political posturing. The real suffering from this approach will be by the people who are back to having no healthcare.

Del. Michael Folk: No Friend of Education

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Del. Michael Folk (R – Berkeley, 63) professes to be interested in promoting quality education in West Virginia, but he has an odd way of showing it. In February 2016, Del. Folk was the lead sponsor of two bills that would have abolished key components of the education system in West Virginia. One of these, HB 4611, would have abolished the West Virginia Council for Community and Technical College Education.

HB 4611 would not have abolished the colleges themselves, but instead would have transferred to each of them the power and duties of the Council. Perhaps Del. Folk believed that this would eliminate an unnecessary level of bureaucracy and cost. But that appears to be incorrect.

The non-partisan fiscal notes attached to the Bill state the problem with this potential legislation:

The enactment of this legislation would have a substantial negative financial impact on the State, institutions and students served by public higher education. The Council is a critical and necessary partner in [sic] with the West Virginia Department of Commerce and others in the process to support existing businesses and attract businesses such as Proctor and Gamble and Macy’s to West Virginia. Corporations will not locate to the State without significant workforce investment commitments from a State agency that serves as the coordinating entity for Community and Technical Colleges. This coordination cannot occur at the local level.

There would be other financial consequences as well. The Council receives federal and state grants of over $2.8 million that would not be received directly by institutions. The Council also provides facilities management services to each college. The fiscal notes estimate that if each college were forced to hire its own director of facilities management the net additional cost would be $1,134,000.

Inadequate education is holding back our economy. In 2015, the West Virginia Center on Budget & Policy published its eighth annual report on the state’s economy. The report focused on West Virginia’s labor force participation rate (LFPR), the lowest in the nation — where it has ranked since 1976. Using a regression analysis, the Center isolated several factors that are drivers of the low rate. One of the most important was inadequate education.

West Virginia’s educational attainment rate is also one of the lowest in the nation. Only 21% of the state’s prime working-age population (25-54) has a four-year college degree, compared to the national average of 31%. In this same age category, 42% have only a high school education, the highest rate in the country. But when the LFPR statistics are parsed, it is clear how critical education is. Those West Virginians with a college degree have a higher LFPR than the national average, ranking the state 14th highest.

More working West Virginians mean a more prosperous economy, more secure and stable families, and much more. A more educated West Virginia means more of our fellow citizens will be working. Against this backdrop, Del. Folk’s attempt to abolish the West Virginia Council for Community and Technical College Education was reckless and irresponsible. Let’s hope he does not repeat the attempt during the new legislative session.

Repeal of Obamacare: A Disaster for West Virginia

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In January 2016, Congress passed a budget reconciliation bill repealing much of the Affordable Care Act by simply removing the funding for it. President Obama vetoed the bill. Now congressional Republicans threaten to do the same in the upcoming new session.

Most likely, Congress will not have a replacement for the ACA ready to go for quite some time. Republican leaders propose to make some provisions of the repeal effective immediately and defer the effectiveness of other provisions until a replacement bill can be passed.

A repeal through a reconciliation bill can only affect those provisions that have an impact on the federal budget. Among those is the expansion of Medicaid adopted by 31 states, including West Virginia. A recent study by the Urban Institute details the disastrous effects on the nation’s healthcare system of a repeal by reconciliation, even if the effectiveness of major parts of the repeal is delayed two years.

The bottom line is that repeal by reconciliation will hit states like West Virginia the hardest because these states would lose the most federal funding. Even if the elimination of funding for Medicaid expansion were to be delayed until 2019, the number of uninsured in West Virginia would rise from 88,000 now to 272,000 in 2019 – an increase of 208%.

Who will become uninsured? The Urban Institute study predicts that nationwide 82% of the newly uninsured would be members of working families and 56% would be non-Hispanic whites. A majority of the newly uninsured – 53% –would have earnings between 100% and 400% of the federal poverty level. Another 25% would be people with incomes below the poverty level.

One effect of the loss of health insurance is that people who need to see a doctor simply won’t. These people are at risk that their health status and earning capability will decline. And uninsured health emergencies are often the cause of a breakdown in family financial stability. Others will get emergency treatment at hospitals and clinics, but will have no insurance to pay for it. This is called uncompensated care.

How does uncompensated care get paid for? The people receiving care may pay out of their pockets. More likely, state and local governments or the hospitals and clinics themselves could be forced to absorb the cost. On December 6, 2016, the two main hospital trade groups sent a letter to President-elect Trump and congressional leaders stating that repealing Obamacare could cost hospitals $165 billion by the middle of the next decade and trigger “an unprecedented public health crisis.”

A recent  op-ed piece in the Charleston Gazette by Renate Pore, Chairwoman of the West Virginia Medicaid Coalition, said correctly that “[h]undreds of thousands of lives — pregnant women, children, working parents, seniors, people in nursing homes and who need long-term care – every family in West Virginia has a real stake in this debate.”

West Virginia voted for President-elect Trump, and our congressional representation is heavily Republican. Now is the time for them to help West Virginia avoid the financial disaster that would occur through a repeal of Obamacare that does not simultaneously replace it with acceptable policies and federal spending to insure the poor and middle class.