BUCKHANNON — Middle class families could face a $1,000 tax hike if a consumption tax bill currently under discussion in the West Virginia Senate becomes law, a policy outreach coordinator from the W.Va. Center on Budget and Policy said at a “Lunch and Learn” event held on the campus of West Virginia Wesleyan College Sunday.
Tara Martinez spoke about the state budget and fielded questions from local residents for more than two hours at the workshop, which was hosted by Mountaineer Voices for Change.
Much of the discussion centered on Senate Bill 335, which is sponsored by Sen. Robert Karnes, R-Upshur. The sweeping bill would shift much of the state’s tax burden off the wealthy and onto the middle class by repealing the personal and corporate income taxes and replacing them with an 8 percent consumption tax, Martinez explained. A consumption tax is basically a sales tax on steroids that would apply to the purchase of almost all goods and services in West Virginia.
“We’re taking away our largest revenue base, which is our income tax,” Martinez said. “That’s where most of our revenue comes from here in West Virginia … if we move to a consumption tax, the people who are hurt the most are our low and middle income people. From $19,000 to about $51,000, they are going to take a huge hit to their budget.”
Under the bill, the state’s wealthiest residents — the top 1 percent with household incomes of $353,000 or more — would save $27,755 per year, Martinez said. The middle class — households earning between $33,000-$51,000 per year — would see the opposite effect, with their annual taxes increasing by $1,071, per the center’s estimates. Someone who makes less than $19,000 per year can expect to pay an additional $500 in taxes each year, while those earning between $19,000-$35,000 will pay an additional $946, the center predicts.
Overall, Martinez said 80 percent of the state’s residents can expect their taxes to go up if Senate Bill 335 becomes law, while the wealthiest 20 percent will see savings.
Messages were left Monday and Tuesday with both Karnes and fellow senator Greg Boso, R-Nicholas, but neither could be reached for comment by The Record Delta’s press deadline.
In addition to the higher rate, the new 8 percent consumption tax would replace the current sales tax, vastly expanding it to cover everything from groceries to professional services to hair cuts.
Martinez said that expansion would harm many of the state’s small businesses. West Virginia, one of the nation’s poorest states, would have its highest grocery tax, and residents in border counties would be more likely to hop across state lines to purchase goods and services at reduced rates.
“I talked a lady and she said, ‘Tara, that will put our small businesses, our small grocers, out of business. They’ll leave,’” Martinez said. “This is going to hurt our border counties.”
Small, local businesses would struggle under the bill, Martinez said, because unlike their corporate counterparts, they will have a harder time absorbing the tax hike without losing customers.
“[Small businesses] are not going to be able to pass that [8 percent tax] on to their consumers, because they will say, ‘That’s too expensive,’” Martinez said. “And where will they go? Walmart.”
Martinez also addressed the idea that the bill will encourage people to save more, saying that while that might be true for the wealthy, it’s simply not realistic for many West Virginians who struggle just to make ends meet.
“It’s almost impossible for lower and middle income families to have savings,” she said. “There’s no savings.”
Gov. Jim Justice, a billionaire, has supported the idea of eliminating the income tax in favor of a consumption tax, but not this year. The governor says West Virginia needs to fix its existing financial crisis — a current $120 million shortfall and a projected $500 million deficit next year — before considering such a far-reaching change to the way the state raises revenues.
Senate Bill 335 would actually fill next year’s budget gap, because state residents would essentially be double taxed — the consumption tax would kick in July 1, 2017, while the income tax wouldn’t start being phased out until 2018.
But that temporary boost won’t help much in the long run: a fiscal note attached to Senate Bill 335 says the measure would reduce overall revenues by more than $870 million over the next four years.
“How will we survive that?” Martinez asked.
To cover the gap, the legislature would have to come up with nearly a billion dollars in new taxes — over and above the 8 percent sales tax — or find ways to reduce spending. Last year, the legislature filled the deficit mostly by taking money from the rainy day fund and increasing taxes on tobacco.
Martinez said further reducing the budget is difficult because years of cuts have left many state programs barely functional.
“We’re at the bone,” she said. “We’re to the point where we will have to lop off [entire] programs.”
ProtectWV.org has released a calculator that allows state residents to try their hand at balancing the budget, for example by closing the state’s smaller public colleges like Fairmont State and Shepherd (saves $51 million), eliminating the PROMISE Scholarship (saves $48 million) or adding a 1-cent per ounce sales tax on sugary beverages (raises $88 million).
Other states that have reduced or repealed their income tax have either struggled with economic growth or used alternative measures to make up the lost revenue, Martinez said. Wyoming, for example, levies a large tax on natural resources.
“That [money] has to come from somewhere,” Martinez said. “Their severance taxes are astronomical.”
Florida, meanwhile, relies on a hundred million tourists who flock to the state’s beaches and attractions like Disney World every year. And while tourism is important in West Virginia as well, Martinez noted the state doesn’t see tourist spending on the same scale as the Sunshine State and couldn’t rely on that to fill a billion-dollar budget deficit.
Advocates for the bill say eliminating the income tax could be an economic boon for the state. But the Center for Budget and Policy released data showing the opposite is typically true.
“Over the last 10 years, states with the highest income tax rates have experienced faster economic growth,” according to a policy brief compiled by Ted Boettner. “The nine states with the highest top income tax rates also have more Fortune 500 companies, higher median incomes and a smaller share of residents without health insurance.”
As an example of what can go wrong, the brief references Kansas, which slashed income tax rates in 2013 and has since experienced slower growth than the rest of the country.
“The results have been very disappointing to tax-cut advocates,” the brief says. “Kansas’s jobs base has grown only by 2.2 percent compared to the national average of 7.6 percent (through December 2016) and personal income growth was 7.0 percent compared to the national average of 12.6 percent since the tax cuts were enacted.”
While Karnes and Boso could not be reached for comment, Del. Bill Hamilton, R-Upshur, returned a call to The Record Delta Tuesday afternoon.
The consumption tax bill is currently being debated in the Senate, and Hamilton said he would have a more detailed analysis if the proposal makes its way to the House of Delegates. But, generally, he cautioned against moving too fast on legislation with such a large potential impact.
“You don’t want to jump into something and find out later that it has some negatives to it, that it’s going to negatively affect your populace, whether they are poor, wealthy or what-have-you,” Hamilton said. “In this case, I think studying it some more would be a better option.”