Income Tax Cuts and Shifting to Sales Tax a Poor Strategy for Growing West Virginia’s Economy Lunch & Learn, 15 February 2017 presented by Ted Boettner, Executive Director West Virginia Center on Budget and Policy www.wvpolicy.org @WVCBP tboettner@wvpolicy.org @WVPolicywonk

Personal income tax almost half of General Revenue Fund Sales tax second largest revenue source 31% $4 Billion General Revenue Fund FY 2018 Sales & Use Tax Personal Income Tax 45% Source: WV State Budget Office

Personal income tax is only tax based on the ability to pay Sales tax is regressive, falling harder on low and middle income families Personal income tax is only tax based on the ability to pay Sales taxes as a share of family income Personal income taxes as a share of family income Source: Institute on Taxation and Economic Policy, Who Pays?, West Virginia 2015

Major personal income tax expenditures (in millions) Source: WV State Budget Office

Biggest income tax cutting states not seeing job boom Total nonfarm job growth since the tax cuts took effect Source: WVCBP

Biggest income tax cutting states not seeing income growth boom Total personal income growth since the tax cuts took effect Source: WVCBP

North Carolina underperformed most of its neighboring states Total private sector job growth since North Carolina tax cuts took effect None of the five saw the economic growth that was claimed, and in North Carolina the modest growth that did occurs was concentrated to urban areas of Charlotte and Raleigh leaving the rest of the state behind. Source: WVCBP

What’s the Matter with Kansas? Kansas Credit Rating Downgraded 3 Times! Source: Arizona Center for Economic Progress

What’s the Matter with Kansas? Part II Kansas cut taxes on the wealthy, raised them on low-income people Impact of Kansas Tax Changes Between 2012 and 2015 Source: Institute on Taxation and Economic Policy – 2015 Income Levels Note: Included personal income tax cuts, Cigarette tax increase (&.79 to $1.29, Sales tax increase from 5.7% to 6.5%

There is no academic consensus that income tax cuts boost economic growth None of the five saw the economic growth that was claimed, and in North Carolina the modest growth that did occurs was concentrated to urban areas of Charlotte and Raleigh leaving the rest of the state behind. Source: WVCBP

States tax and small business growth A rigorous 2012 study commissioned by the U.S. Small Business Administration and co-authored by John Deskins found “no evidence of an economically significant effect of state tax portfolios on entrepreneurial activity.” None of the five saw the economic growth that was claimed, and in North Carolina the modest growth that did occurs was concentrated to urban areas of Charlotte and Raleigh leaving the rest of the state behind. Source: WVCBP

Are West Virginians fleeing to states without income taxes? Florida? Between 1993 and 2015, 403,821 households left W.Va. and 392,313 moved into W.Va. 97.2% of departing households were replaced by new arrivals 84% of households moving from WV to FL were replaced by new arrivals from FL None of the five saw the economic growth that was claimed, and in North Carolina the modest growth that did occurs was concentrated to urban areas of Charlotte and Raleigh leaving the rest of the state behind. Source: Internal Revenue Service

States with highest income tax rates experiencing faster economic growth Per capita real GDP growth from 2005 to 2015 (chained 2009 dollars) None of the five saw the economic growth that was claimed, and in North Carolina the modest growth that did occurs was concentrated to urban areas of Charlotte and Raleigh leaving the rest of the state behind. 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. Source: BEA

Personal income tax is a more stable source of revenue than sales tax Personal income and sales and use tax revenue growth in W.Va. None of the five saw the economic growth that was claimed, and in North Carolina the modest growth that did occurs was concentrated to urban areas of Charlotte and Raleigh leaving the rest of the state behind. Source: WV State Budget Office

Replacing Income Tax with Revenue Neutral Sales Tax of 14.4% Boon for Top 1%, Tax Increase for 80 percent of West Virginia Families Less than $19k (Lowest 20%) $19K-$33K (Second 20%) $33K-$51K (Middle 20%) $51K-$84K (Next 20%) $84K-$159K (Next 15%) $159K-$353k (Next 4%) $353K or more (Top 1%) +$465 +$826 +$824 +$34 -$2,039 -$6,311 -$28,383 Households with a tax increase Households with a tax break Source: Institute on Taxation and Economic Policy

Replacing Income Tax with 12.7% Sales Tax w/ broader base Boon for Top 1%, Tax Increase for 60 percent of West Virginains Less than $19k (Lowest 20%) $19K-$33K (Second 20%) $33K-$51K (Middle 20%) $51K-$84K (Next 20%) $84K-$159K (Next 15%) $159K-$353k (Next 4%) $353K or more (Top 1%) +$424 +$747 +$728 -$131 -$2,288 -$6,642 -$29,117 60% households get tax increase Richest 40% of Households get tax break Broader base would include accounting, personalized fitness, legal services, contracting services, veterinarians, electronic data processing, advertising, engineering, architects, investment counseling, land surveying, computer software, and the sale of digital downloads. Source: Institute on Taxation and Economic Policy

Shifting from income to sales tax would increase business taxes in W Shifting from income to sales tax would increase business taxes in W.Va. According to COST, business pay 42% of state/local sales taxes $3.9 Billion FY 2015 None of the five saw the economic growth that was claimed, and in North Carolina the modest growth that did occurs was concentrated to urban areas of Charlotte and Raleigh leaving the rest of the state behind. Source: Ernest & Young, FY 2015 COST Report on State and Local Business Taxes  

Moving to flat income tax of 5% is a big tax cut for wealthy Boon for Top 1%, Tax Increase for 80 percent of West Virginains Less than $19k (Lowest 20%) $19K-$33K (Second 20%) $33K-$51K (Middle 20%) $51K-$84K (Next 20%) $84K-$159K (Next 15%) $159K-$353k (Next 4%) $353K or more (Top 1%) +$30 +$147 +$247 +$249 -$269 -$1,408 -$7,372 Households with tax increase Households with a tax break Source: Institute on Taxation and Economic Policy

The income tax reform West Virginia needs to grow its economy Scale back income tax exemptions – Every taxpayer regardless of income receives a $2,000 exemption for each dependent. Phase it out between $150,000-$200,000, and eliminate it for those over $200,000, and it would increase revenue by an estimated $10 million. Modernize rates and brackets - West Virginia’s personal income tax schedule has not changed since 1987, when the state’s top personal income rate was reduced to 6.5 percent from 13. Since then more middle-income households into higher tax rates. A 3% surcharge on income over $200,000 would yield $96 million. Create a refundable WV Earned Income Tax Credit (EITC) – 26 states have a state EITC modeled after the federal EITC, which is the most successful anti-poverty poverty program in the nation. A 15% WV EITC would provide an average tax credit of $332 to over 155,000 families in West Virginia and help boost labor force participation, reduce poverty, and led to better health and education outcomes. None of the five saw the economic growth that was claimed, and in North Carolina the modest growth that did occurs was concentrated to urban areas of Charlotte and Raleigh leaving the rest of the state behind.