PITying the Rich: Should West Virginia axe the income tax? (Part 1)

Please find my disclosures here.

Since November 4th, 2020 (the day after he was re-elected as West Virginia’s governor by a shocking majority), Governor “Big Jim” Justice has been fiercely advocating for the elimination of West Virginia’s Personal Income Tax (“PIT”). Every day, his administration comes closer to doing so, rallying supporters from every corner of the state. Legislators, powerful businessmen, and one overpaid university president who enjoys bowties, have all gotten behind the idea that the elimination of the income tax is a good thing for West Virginia. 

Over the course of this three-part blog series, I will write to show why it may not be. Today, I will cover the basics.

Please understand I speak from a place of privilege at this point. My family and I would be extremely happy without state income tax. The thought of it sounds nice. And according to Big Jim, “from a sex appeal standpoint, elimination of the income tax carries with it the most appeal of anything we could do.” He’s right. It is downright sexy. It means the state government won’t be doing this in my face every time I make a respectable paycheck:

Yet while I am a “taxation is theft” person generally, some taxation is actually necessary if it helps more than it hurts (and it’s most certainly in the business of keeping me employed). If I know anything (and as a tax nerd, unfortunately that means I do indeed know some things), two things in life are certain: death and taxes. And the PIT is a big one, representing $1.97 billion—43%—of the state budget for 2020. And that actually hasn’t been enough in the past, with West Virginia having to dip into money set aside to match Medicaid expenses for the past several years just to cover expenses. The PIT’s elimination means only one thing. Money will have to come from other sources. So . . .

What are we as a state willing to lose? 

Perhaps that is not a fair question. In order to make that assessment, we need to look at what we have versus what we lack. Right now, West Virginia ranks 6th in equality (measured by gender parity and racial inequality in education, income and unemployment rates) and is the 8th most affordable state in the Union (measured by the cost of living and housing affordability). 

However, in a state-by-state comparison, West Virginia as a whole is ranked 47th out of 50. Specifically, we are ranked 50th in business environment, employment, and public health; 49th in internet access and transportation; 48th in health care quality; 47th in economic opportunity and growth; and 45th in higher education. We have 19.1% of our citizens living in poverty, five points higher than the national average. The average household income is $43,469, $17,000 less than the national average. We are losing population and have no regular streams of venture capital. 

Ladies and gentlemen, the numbers are plain. We lack a great deal. 

I recognize the want to mistrust the government—particularly this state’s government, given its history of exploitation and corruption—but looking at the figures above and understanding the massive hole about to be blown into the state budget with the PIT’s absence, my face went:

Here’s why.

State Taxes: Generally

In a general sense, most states primarily rely on three taxes to balance their budget each year: sales, property, and income taxes. Various other taxes exist as well—corporate, payroll, locality, beer, grocery, and investment taxes, for example—but sales, property, and income taxes are the largest three because they generate the most revenue and cover the largest proportion of state residents. Depending on the state, these taxes can be flat (a fixed percentage) or progressive (rates based on income, similar to the federal income tax). 

Examples of Where No PIT Works and Why

Elimination of the state income tax is not unheard of. Many states function without them. But no two states are alike, and what works for one may not work for another.

Take Florida, for example (because for some laughable reason, West Virginia is being compared to it).

The average Florida Man is likely not swayed by income tax. Ranked 13th out of 50 on the state-by-state comparison list, Florida is a giant beach, has perfect weather and a thriving population of golf courses, and is the home of the Disney World and Universal Studios theme parks. In the digitalized world, businesses now have more choices than ever when it comes to location, so most logically go to and invest in the state with the best weather (even if they have to pay a 4.458% corporate income tax). Aside from the occasional hurricane or rogue gator, the average Florida Man isn’t going to choose his retirement spot based on income tax alone (unless you’re Tom Brady and are swimming in that NFL income), particularly if he is retired and is quite literally making no income. But a lack of income tax does help with the decision, considering the price Florida Man has to pay to live. Florida ranks 35th in the country in affordability, due to its higher-than-average cost of living and housing costs. On top of that, Florida has an average 7.08% local sales tax (22nd worst in the country), a .94% of value property tax (25th worst), a 42.29 cents-per-gallon gas tax, and various tobacco taxes. Recently, Florida has also been able to offset the lack of income tax further by requiring medical cannabis dispensaries to pay over $50 million for the right to one of 14 dispensary licenses in the state.

Even with all of the additional taxes, it still doesn’t seem like Florida could make up the difference, but with a population of approximately 22 million people, Florida raked in an impressive $44.8 billion in state tax revenue in 2019. Proportionally (revenue/population), that’s $2,036.36 of revenue per person living there. For all of the services that the Florida government provides and without the income tax.

On the other end of the spectrum, let’s look at Wyoming (a closer comparison to West Virginia if comparing natural resources and a lack of beach).

Ranked 31st out of 50, Wyoming is the second least-densely-populated state behind Alaska (a wild frontier where my friend Hannah recently told me she carries bear spray with her on a daily basis) with a population of roughly 580,000. It was the first state to allow women the right to vote and to have a female Governor (*cough*). Wyoming draws in several million tourists a year who long to experience rodeos and the beauty of its seven national parks, Yellowstone being the most famous. Akin to West Virginia, Wyoming is also a top coal producer. 

Different considerations apply to Wyoming’s circumstances. Wyoming has no income tax in large part due to its small population. Bison are not paid employees and do not receive W-2s. Instead, Wyoming makes up that difference by taxing its natural resources exorbitantly, receiving more than 60% of its $2.11 billion state tax revenue in 2019 from oil, natural gas, and coal taxes. Those taxes are supplemented by a .55% of value property tax and an average local sales tax of 5.33%. 

Proportionally again, doing basic division, Wyoming receives approximately $3,637 of state tax revenue per person (which is considerably more per person than Florida). A lack of income tax in that sense seems more beneficial to Wyoming, since it is clear Wyoming is receiving more revenue proportionally (by population) than Florida’s state government. That revenue is put to good use as well, as Wyoming is the second-highest spender on education per pupil in the western United States, the reason for it being ranked 3rd highest in the country for higher education (while Florida is ranked 1st). Sometimes there is simply no need for an income tax at all.

The Success of One Does Not Guarantee The Success of Others

Not every state has had this great of a success. Kansas attempted to pass an income tax elimination package in 2012 that ended in disaster. The same year taxes were cut, expenditures increased by more than $430 million. The failure of Kansas to effectively eliminate income taxes has been a cause for concern among states with expenses currently in excess of revenues (and West Virginia should be one of those states). This failure also demands a smarter spending policy, one the Kansas state government wasn’t yet ready to implement (and West Virginia is similarly not prepared to implement a smarter spending policy this fiscal year).

As you can see, different state governments allocate their tax revenues with different goals in mind. Seven other states have eliminated their income tax, and I encourage you to investigate them as well (and laugh with me at Nevada). Notice each state’s tax structures and attributes that make them competitive.

Several factors go into the decision to eliminate the income tax, including population density, cost of living, industry viability, investment potential, household income, and natural state advantages. The fate of the income tax should always rest on the means any particular state has to make up the difference in revenue and how much revenue a state needs to function properly. The budget for Wyoming would never work for Florida. Along this same vein, I argue a step further: the fate of the income tax must rest on things the state can afford to lose. 

And for West Virginia, as already discussed, that isn’t much. We need many things and the funding to ensure those things can be accomplished. With all that West Virginia needs to improve, who would ever champion eliminating a workable and reliable stream of revenue from the state? 

Stay tuned for the answer.