Tax plan concerns business owners

Adam Bedway and his wife Beth, who own East Wheeling Clayworks, a store in Wheeling that sells ceramics and other items, share worries about Gov. Jim Justice's income tax plan. (Mountain State Spotlight)

This story was originally published by Mountain State Spotlight. For more stories from Mountain State Spotlight, visit www.mountainstatespotlight.org.

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Jeff McKay, like many business owners in West Virginia, has had a tough time dealing with this pandemic.

“I’m probably being too conservative by saying that,” said the owner of Huntington’s Summit Beer Station.

Fortunately, with the vaccine rate improving, McKay says things are looking up for him and his employees. Business has had a huge bump in the last month.

But his optimism is dampened by Gov. Jim Justice’s proposal to reduce and eventually eliminate the state’s income tax, while also raising the sales tax and tax rates on beer, wine and liquor — all of which McKay sells.

“I kind of feel a momentum right now,” he said. “I truly believe that it’ll be tough to maintain that momentum if we have to charge more money to our customers. And it kind of baffles me that we’re trying to do this during a pandemic when consumption spending is already low.”

It’s not just McKay who has concerns that the governor’s tax proposal will increase costs for consumers and reduce West Virginian economic activity. Businesses, groups representing businesses, tax experts and lawmakers have all criticized Justice’s plan. But despite the criticism and even a competing tax proposal under consideration in the House of Delegates, the governor has shown no sign of slowing down his promotion.

“Open your mind, because this is our time, this is our chance,” Justice said during a Monday roundtable. “Let’s keep the fight going. We’re going to win this thing.”

The governor has held town halls across the state throughout the week promoting his plan, which would reduce the state income tax by 60 percent in the first year and ultimately do away with it entirely. People who earn less than $35,000 annually would receive a tax rebate check of up to $350.

Income tax revenue represents 43 percent of the state’s general revenue fund. Justice’s proposal, which was introduced in both the House of Delegates and Senate a few weeks ago, leaves a funding gap that could exceed more than $185 million.

To pay the tab, Justice proposes raising the state sales tax from 6 percent to 7.9 percent and increasing the taxes on tobacco products, beer, wine and liquor. His plan would also add taxes to certain high-value luxury items and professional services, such as accounting services and legal services.

Justice’s plan would also put in place a tiering system for natural gas, oil, and coal severance taxes that raises companies’ tax rates the more successful they are.

The governor says the proposal will boost economic activity and will attract 400,000 more people into West Virginia. But state business groups, including the West Virginia Business and Industry Council and the West Virginia Chamber of Commerce, contend many business owners won’t benefit while also seeing a rise in production costs and sales tax on their products.

Mountain State Spotlight reported last month last month that economists worry that the income tax removal would exacerbate the state’s problems. When Kansas passed a similar sweeping tax cut, the economy lagged, and the changes were later repealed.

The effect on sales, business owners and communities

Justice has previously said that small business owners who believe the tax plan would hurt them are misinformed.

But McKay has done his research and estimates that he’ll have to pay $10,000 more each year because of the tax increases. This means he would have to raise the prices on drinks, and he’s worried about losing customers.

Similar worries are shared by Adam and Beth Bedway, who own East Wheeling Clayworks, a store in Wheeling that sells ceramics and other items.

“For a small business like us, if we have to increase our sales tax, that’s going to [make us question], ‘Can we pay our workers? Can we reasonably expect people to understand that this is the price of our piece?’” Beth Bedway said. “This isn’t reinventing the wheel. This is putting a wheel out that is already proven not to work.”

Justice argues that with income tax savings, more West Virginians are likely to support in-state businesses. But Wesley Tharpe, deputy director of state policy research at the left-leaning Center on Budget and Policy Priorities, said the lion’s share of the benefits from slashing the income tax is likely to flow to those at the top of the income ladder, not to working families more likely to pump dollars into local economies. In addition, those families will pay higher taxes on some of the things they buy.

At the same time, Tharpe said getting rid of such a state revenue-earner like the income tax can have the effect of driving cuts to government services that are crucial to local economies, such as infrastructure, health care and good public schools.

“It’s really just as likely that local economies and families and communities would come out on the losing end from a plan like this,” Tharpe said.

Steve Roberts, president of the West Virginia Chamber of Commerce, said the tax on professional services is also a big concern.

He said he’s talked to businesses worried that the tax on professional services could cost them millions and lead to layoffs, and they say they might leave the state.

Businesses often use professional services, and since Justice’s plan would increase their costs, Roberts said, that’s another bigger cost businesses will have to pay.

While businesses will be expected to shoulder the increase in taxes, the incomes of many are excluded from seeing an income tax reduction, per the governor’s plan. Among the multiple types of incomes excluded from the benefit are “Schedule C” incomes, which affect many business owners.

Jared Walczak, vice president of state projects at the right-leaning Tax Foundation, said this exclusion undercuts many of the objectives of Justice’s proposal, running counter to the goal of economic growth.

Walczak says in general West Virginia policymakers are right in recognizing that lower income taxes can generate additional economic growth and other benefits. But he said Justice’s proposal shifts taxes into areas that reduce competitiveness.

Out-of-state competition

Huntington is a short drive from both Ohio and Kentucky. Wheeling is across the river from Ohio. West Virginia’s southern coalfield counties border Virginia, and up north Pennsylvania and Maryland are just a short drive away. Groups representing state businesses and industries worry that businesses on the border could lose business from a neighboring state. The businesses Mountain State Spotlight spoke with shared the same concern.

“With 60 percent of West Virginia’s population living on the border, and border state sales taxes ranging from 5.3 to 6 percent, this legislation could encourage state residents to cross the border to make purchases, thus hurting existing state businesses,” the West Virginia Business and Industry Council wrote in a letter to legislators.

But Walczak predicted the cross-border shopping effect to be “real but modest.”

“Consumers will engage in some cross-border shopping, but most of the evidence is they won’t go substantially out of their way for everyday purchases,” he said. “They’re more likely to do so on significantly larger purchases or bulk purchases.”

Walczak says where sales tax will make a difference is in business production costs.

“Every West Virginia business will face higher costs when they pay sales tax on their production process, a lot of their intermediate transactions, so their tax costs are going up, and either that gets paid by West Virginia consumers as an embedded tax or it puts them at a competitive disadvantage with their peers outside the state who don’t face those taxes,” he said.

Though, in the context of West Virginia and its neighboring states, Roberts of the West Virginia Chamber said the impact is unknown.

The legislature’s bill

While the governor’s plan remains stagnant in House and Senate committees, a legislative income tax proposal has already passed the House Finance Committee and was on third reading in the House chamber Friday.

House Bill 3300 would phase out the state’s income tax much more slowly than Justice’s proposal, slicing it by at least $150 million each year until the income tax is eliminated, which isn’t predicted to happen until at least 2033.

The bill also creates an “Income Tax Reduction Fund” that is fed by multiple streams of state revenue. Once that fund reaches $400 million, the government can transfer $100 million into the General Fund to cushion an additional $150 million in cuts, according to the fiscal note.

Roberts said business owners are in favor of the bill because it moves more slowly.

But the bill is also not without controversy; while it lowers and eventually eliminates the income tax, it doesn’t contain any way of offsetting lost revenue from the cuts.

Sean O’Leary of the West Virginia Center on Budget and Policy said it “would devastate” the state budget in a recent blog post.

“Instead of responsibly designed cuts and offsetting revenue increases to protect state investments, the bill would enact large, compounding tax cuts every year that are structured to lose revenue, while diverting existing revenue into a fund designed to cut taxes even further — all in a year where there are major unanswered questions about the state’s fiscal health and future needs, and after years of failed tax cuts and underinvestment in education, public health, and infrastructure,” he wrote.

Roberts said his organization believes with state economic growth the tax growth will follow, but said their view on the bill could be reconsidered if cuts are needed to make up for lost tax dollars.

“A future Legislature can come back and say, ‘Oh, this is not working the way we wanted it to? Let’s slow it down, or let’s speed it up, or let’s adjust rates,’” he said. “This is not a solution that binds us for the next 12 years. It is a bill that opens an opportunity to reduce the rate to make it more competitive.”

The fate of Justice’s legislation and the bill originating from the House Finance Committee is still unknown. The deadline for a bill to make it out of committee in its chamber of origin is Sunday.

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