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Lawmakers consider expanding sales tax

By LACIE PIERSON

The Herald-Dispatch of Huntington

CHARLESTON, W.Va. — In managing the dollars and cents of the state of West Virginia, some legislators are hoping that expanding the state’s sales tax to cover more things can help keep the state out of an operational deficit in fiscal year 2018.

A bill has been proposed in the GOP-majority Senate that would eliminate sales tax exemptions and eventually eliminate the state income tax. Although Gov. Jim Justice also has voiced his support for eliminating some sales tax exemptions and eventually getting rid of the income tax, he isn’t in total agreement with the Senate bill.

If passed, Senate Bill 335 would mean West Virginia residents would begin paying taxes on some services and products they don’t pay taxes for now, ranging from streaming services and haircuts to other professional services such as legal, accounting and advertising. Some clarity is still needed when it comes to questions of whether things like rent for residential properties would become taxable in the proposed law.

The Senate Select Committee on Tax Reform considered SB 335 on Friday, which, as it was introduced, would phase out West Virginia’s income tax by Jan. 1, 2021, increase the state’s sales tax rate from 6 percent to 8 percent, and eliminate exemption from the sales tax for many services.

The committee adjourned Friday without taking any action on the bill, with the exception of rejecting a motion by Sen. Bob Plymale, D-Wayne, that would have prevented the committee from advancing the bill until they received a fiscal note for the bill. Fiscal notes provide legislators with the estimated cost or revenue of proposed legislation.

Committee Chairman Sen. Bob Karnes, R-Upshur, said in the meeting he believed the committee could proceed to review the policy questions without having precise fiscal numbers.

Karnes was quoted in the Charleston Gazette-Mail as saying after Friday’s meeting that waiting for a fiscal note would have amounted to letting the committee be “held hostage” by those preparing the report.

On Thursday, Karnes, who also is the lead sponsor of SB 335, talked with The Herald-Dispatch and said the bill simply was a starting point for legislators.

“The way the bill is written, it’s designed in part to find out what the numbers actually are,” Karnes said Thursday.

The state currently collects $1.9 billion from the income tax and a little more than $1.2 billion from the sales tax, Karnes said.

Revenue from the income tax accounts for about 45 percent of the state’s $4.5 billion general revenue fund.

If all sales tax exemptions were eliminated, Karnes said the state would receive an additional $2 billion in revenue, but there were plenty of exemptions legislators wanted to keep in place.

“There are some exemptions, practically, you wouldn’t want to get rid of,” Karnes said. “We’re not getting rid of exemptions for medical services or government purchases. That would be a zero-sum game anyway if we taxed ourselves.”

If SB 335 is approved by the full legislature and signed into law by Justice in its current form, the state’s sales tax would increase on July 1, 2017, and services for which West Virginians currently do not pay a sales tax would become taxable.

Among the services for which West Virginians might have to begin paying taxes would be downloadable digital goods, including books, movies and streaming services, like Hulu and Netflix; personal services like haircuts, styling and other beauty services, massage, fitness services and tattoos; and professional services including wireless and telecommunication services, accounting, printing, home improvement and repair, and advertising.

The sales tax also would be applied to food and grocery purchases.

If a business registered outside of West Virginia provides any of the applicable services in the state, that business also would incur the tax.

Purchases made by governmental, educational, nonprofit, public safety and health care entities would not be subject to the sales tax, according to the proposed bill. West Virginians would not pay sales taxes on services and items including medical services, prescriptions and tools; baby-sitting and day care services; tickets and concessions at youth league and school-sanctioned athletic events; and things purchased as part of fundraisers for nonprofit organizations and volunteer fire departments – all of which are currently exempt from the state’s sales tax, according to the proposal.

The bill also includes language that would phase out the state’s income tax by Jan. 1, 2021.

Karnes said Thursday that the bill was fluid and the exemptions that were in play in the final form of the bill would “depend on where the numbers go,” and that the goal of the bill was to be revenue neutral.

Governor’s plans

In broad strokes, the language of the bill echoes some of the points Justice brought up in his own “Save Our State” budget plan – eliminating the income tax and some sales tax exemptions.

However, when contacted by The Herald-Dispatch, Justice’s spokesman said that a plan to get rid of the income tax was a longer-term goal for Justice and not one he wanted to take until the state’s finances were more stable.

“The governor’s Save Our State budget is the only plan on the table that will jump-start West Virginia, grow jobs and fix the budget crisis,” Justice’s Press Secretary Grant Herring said in an email. “Gov. Justice wants to eliminate the state’s income tax once we climb out of the ditch and West Virginia is on sound financial footing.”

In his State of the State address on Feb. 8, Justice proposed $26.6 million in cuts and plans to raise $450.15 million in revenue from tax increases and reforms to fill an estimated $500 million hole for fiscal year 2018, which begins July 1, 2017.

Justice also has talked about his goal to eliminate the state’s income tax, but it was not included in his budget plan for fiscal year 2018.

Karnes said he’d talked with Justice about the governor’s plan and knew some of the similarities between Justice’s plan and SB 335.

“While he indicated strongly he wants rid of the income tax, his plan doesn’t include the mechanism to move in that direction,” Karnes said. “This plan creates an active process for doing that.”

Projected impact

The West Virginia Center on Budget and Policy, a progressive think tank, released a report earlier this month in which the center’s Executive Director Ted Boettner said such a measure would “dramatically shift tax responsibilities from the wealthy onto low and working class West Virginians” and destabilize the state’s revenue system.

“Income tax proposals in other states have involved significant increases in other taxes – those that affect low and middle-class households more than the wealthy – and major cuts in essential state services,” Boettner said in the report.

There are seven states in the United States that do not have income taxes: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

Sen. Mark Maynard, R-Wayne, is a co-sponsor of the bill, who said he didn’t think it would be a one-shot cure for the state’s budget woes.

“I just don’t want to put any more on the backs of West Virginians,” Maynard said. “This isn’t going to be a miracle save-all the second the bill’s passed. I think the long-term effects will really make a difference in our state.”

With 19 sponsors, SB 335 has more than enough support to pass the GOP-led Senate, but Del. Matt Rohrbach, R-Cabell, said SB 335 in its current form might be a harder sell in the House of Delegates, where the majority of members also are Republicans.

“I think this legislature has a lot of tasks ahead of it,” Rohrbach said. “I think we’re going to have to be willing to compromise and work in the spirit of moving the state forward.”

West Virginia Chamber of Commerce President Steve Roberts said Thursday that chamber officials recognized the intent of the bill to make West Virginia more competitive. Roberts agreed with the idea that West Virginia needs a different approach, but chamber officials had not reached a conclusion on SB 335.

“The other thing we know is businesses really like stability and predictability,” Roberts said. “A big tax change makes business nervous. We want to be competitive. We’ve worked for a number of years to make ourselves competitive. … We will be looking at it from the point of view of, ‘Is now the time to undertake a substantial change, or would West Virginia be better off to sort of go with what it knows?’ We haven’t reached a conclusion about that yet.”

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