PITying the Rich: Winners and Losers (Part 2)
Please find my disclosures here.
Welcome back to PITying the Rich. You’re about to dive into the second installation of my three-part series. Yesterday, I covered the basics of state income taxation. Today I will discuss its consequences.
I left you yesterday with a question: with all that West Virginia needs to improve, who would ever champion eliminating a workable and reliable stream of revenue from the state?
The rich.
You may have already guessed that from the title.
Now, I do not intend to be the harbinger of death when it comes to PIT elimination and point fingers at those who may or may not have ulterior motives. There are many people—like incoming Senate President Craig Blair—who truly think eliminating the PIT will help West Virginia. Many in the legislature see it as an opportunity to attract a more educated population, venture capital, jobs, and an overall boost to the state’s economy. However, we must also understand that there are layers to this discussion, and not all of them can be entirely honest. The outer layer consists of hard-working, dedicated West Virginians that are attempting to make changes in furtherance of our betterment. But the layer beneath may be more telling. Let’s look at the three most notable advocates of the PIT’s elimination:
Governor “Big Jim” Justice: the state’s only billionaire, owner of The Greenbrier and at least 100 other companies (including coal mines that may or may not be bankrupt/unprofitable), subject of Forbes’ “Deadbeat Billionaire” and an alleged tax- and bill-avoider
President E. Gordon Gee: President of West Virginia University, receives free housing at the West Virginia University Morgantown campus in addition to an $800,000 salary (plus $200,000 per year bonuses), Independent Director of L Brands since 2016 receiving total compensation of $268,823 per year, previous president of Ohio State University receiving a $6 million compensation package in 2013 alone, previously under fire at Ohio State for allegedly using $64,000 of public funds on bow ties/cookies and bow tie pins for himself to distribute, previously under fire at West Virginia University for spending $2.2 million on private jet travel between May 2014 and June 2017
Attorney General Patrick Morrisey: Attorney General of West Virginia, D.C. lobbyist viewed as an expert on health and drug regulations, previous partner at King & Spalding (one of the largest and wealthiest international law firms), previously under fire for his ties to “big pharma” and Cardinal Health’s paying of $1.5 million to his wife’s lobbying firm, estimated net worth of $6 million
Why would three of the richest and most well-connected West Virginians vie for the PIT’s elimination? Because they and those like them are the ones who are paying the most.
It is entirely plausible that each of these individuals may be acting in their best interest, and not necessarily for the interests of anyone else.
Why does that matter? Everyone acts in their own self-interest, right?
It may be something as simple as cognitive dissonance: the inability to understand the ramifications of the PIT’s elimination on the general population.
West Virginia currently has a progressive PIT, with rates from 3% to 6.50%, depending on taxpayers’ income and filing status. Many citizens subsequently get partial or full refunds of the tax paid (depending on the income level) under either the state standard or itemized deductions.
By way of example, for a single individual with no children taking the $1000 state tax standard deduction, every dollar made over $60,000 is taxed at 6.5%, the highest rate (even if the standard deduction is taken), while a different person making up to only $25,000 has the potential to have their entire state tax burden wiped away by the very same state standard deduction.
Thus, the brunt of the PIT is in large part borne by upper-middle-class and wealthy families. These are the families who have the potential to pay the most in state taxes. The lower-income families pay much less per year.
Now you may be asking: “But what does that have to do with PIT elimination? Lower taxes for everyone is good, rich and poor!”
Most of the suggested ideas to compensate for the gap in revenue will impose a much higher tax burden on West Virginia’s low-income citizens (and could operate to their extreme detriment), while benefiting the richer citizens by greatly relieving their tax burden.
Yes, you read that right.
So . . . Is There an Actual Plan?
Well. Somewhat. The bare musings of one.
Delegate Paul Espinosa, the majority whip in the House of Delegates, recently sent a questionnaire to delegates to measure their support for steps that could be taken to cut the PIT out of the picture. The results of the questionnaire were not released, but the survey was done to gauge which options the delegates would support should PIT elimination come to the table.
It must be noted that Big Jim currently does not want to take a “meat axe” to the things West Virginia already has, but it doesn’t appear that he is actually in support of anything else. This released bullet-point list is all we have at the moment, and with the urgency of this initiative, I fear it may be all we get.
Thus, for each of the ideas given in Delegate Espinosa’s questionnaire, I will discuss the consequences. At the end of my three-part series tomorrow, I will throw in a few suggestions of my own for good measure.
Raising the sales tax to at least 8% or higher
Bad.
If West Virginia wanted to replace even half of the lost income tax revenue, it would have to increase to 10.3 %. It would become the highest state sales tax rate in the country. According to Sean O’Leary, a Senior Policy Analyst at the West Virginia Center on Budget & Policy (one of my favorite article authors), 60% of West Virginians would also see an overall tax increase, with only the wealthiest individuals receiving a tax cut.
This phenomenon occurs because lower-income families spend a greater percentage of their income than higher-income families. For low-income families—particularly those living paycheck to paycheck—the grand majority of their income (instead of a small fraction of it) is spent on necessities. These individuals consume far more, not having the money to spend on luxury items that could last far longer. Think about it: a wealthy person and a low-income person spend $200 each in groceries per week. The $200 expense for the low-income individual hits harder. In effect, this tax attempts to raise revenue from people who have the least amount of disposable income available. Those same people would have experienced some relief with the standard deduction offered by the PIT.
And that revenue raised by the sales tax increase won’t even be enough. West Virginia would have to find an additional $1 billion of revenue from other areas (or alternatively, cut a lot of expenses).
2. Broadening the sales tax to include previously untaxed areas such as professional services (legal representation, accounting, advertising, hair care, or contracting services)
Maybe better than raising the sales tax, but still bad.
This tax adds a layer of complexity to the West Virginia taxation system that might end up causing problems, particularly to small businesses that provide or purchase the services on which that sales tax would be imposed. For example, this sales tax could cause the businesses to pay more for the necessary services, lowering profits. Additionally, it could result in them purchasing smaller quantities of the services that are deemed essential.
It may also be difficult to administer. At a general level, most small professional service businesses are taxed as partnerships or S corporations under the federal tax code due to the avoidance of double taxation that is seen with the C corporation structure. If these businesses have W-2 employees, they are already themselves responsible for withholding state and local tax from the paychecks (in addition to federal taxes). This sales tax would also demand them to withhold sales taxes from every service charge, remitting these payments to the state at the close of the tax year.
While that doesn’t exactly sound difficult from a bird’s eye view, services are not goods. Prices vary wildly depending on the service, unlike a bag of Cheetos that is always $1.99. It is foreseeable that calculations could be incorrect and small business owners could spend much more time attempting to track this additional cost and update their prices accordingly.
Another wrinkle should be considered: competitiveness. West Virginia, being in a central location, has many cities on the border that abound with out-of-state visitors. Out-of-state residents come into Huntington, Morgantown, Harper’s Ferry, Wheeling, Martinsburg, Bluefield, Princeton, and Charleston to eat, work, shop and otherwise spend money. Why would a lawyer living in Pennsylvania want to continue working in West Virginia if her services would be taxed higher, meaning she would take home less money at the end of the day? Why would a small business owner directly across the border in Ohio ask a Huntington CPA to do his taxes when he can get that same service in Ohio for cheaper?
While it could raise revenue, it is unclear if it would be enough to make up the difference, and the risk of hurting West Virginia’s competitiveness may be too great.
3. Bringing back the food tax at up to 3%
For the same reasons above, bad.
When Governor Earl Ray Tomblin was still in the state Senate in 2005, the 6% food tax began to decline in West Virginia. It was reduced to 3% in 2008, 1% in 2021, and entirely repealed in 2013. Reinstating that tax on groceries will have the same effect raising the general sales taxes above. Sales taxes on necessities will not be the way to move West Virginia forward. They are regressive taxes that exploit low-income families. Not to mention the fact that—with West Virginia being a food desert—it would likely force low-income West Virginia to opt for less expensive and less healthy food options.
4. Establishing a special sales tax on luxury goods beyond the normal rate
In theory? Decent. In practice? Ineffective.
Typical luxury taxes operate to increase sales taxes on items seen as “non-essential” or high-priced, such as expensive cars, jewelry, airplanes, boats, or real estate. The notorious “sin” taxes—often levied on cigarettes, alcohol, and gambling—are a particular subset of this type of tax.
Issues arise with a luxury tax, beginning with the term “non-essential.” As these are items not necessary for survival, what often arises is a changed behavior, incentivized by the imposed tax itself.
A prime example of this incentivization happened in 1991, when Congress tried to raise revenues with new taxes on luxury items. It was estimated that the tax would rake in $9 billion dollars over five years, yet the federal government eliminated the tax a few years later after receiving almost nothing.
Why?
Targeting the people who have enough money and influence to change their circumstances is not guaranteed revenue. They have the ability to do without and move money elsewhere. This phenomenon is seen frequently when federal tax rates (especially capital gains rates) or Internal Revenue Code provisions are changed. So, while in theory, this idea could raise revenue, in practice, wealthy individuals may very well sit on their funds or bury it in jars in their backyards (both ways preventing it from being reached by the state government).
It might not hurt to implement this as a safety, but don’t expect a fishing net to stop an elephant. This isn’t the revenue-raiser you’re looking for.
5. Increasing the personal income tax on high earners until the income tax, as a whole, is eliminated
A short-term solution to a long-term issue.
While this idea involves a steady elimination of the income tax over a period of years, taxing the highest bracket of income (any dollar over $60,000) at well over 6.5%, it does not solve anything and does not provide a viable plan going forward. It delays the issue long enough for it to become another Governor’s—another legislature’s—problem.
6. Eliminating all state appropriations to West Virginia and Marshall Universities while trading off for greater freedom in achieving savings
Bad for students.
With budget cuts already looming before the pandemic, higher education funding is now unquestionably on the front lines of the COVID-19 economic fallout. A dramatic cut to a state school’s budget will result in higher education revenue shortages, which directly result in faculty and staff layoffs, cancelled programs (like study-abroad and less-pursued degrees), lower quality education (due to the need for cheaper, less qualified professors), and skyrocketing tuition. Students will end up being responsible for more and more of the school’s revenue and will suffer that consequence: paying more out of pocket or applying for higher loans.
The best argument for eliminating state appropriations is the “trade off”—reducing West Virginia’s budget in an attempt to cut that $2.1 billion deficit from the personal income tax elimination. But again, is this an expenditure we are willing to do without? We are already ranked 44th for higher education. Cutting allocations to the two best schools in the state do nothing to increase that, and may even persuade West Virginians from pursuing an education elsewhere.
7. Elimination of the Promise Scholarship, which provides tuition assistance to high school students who choose to stay in West Virginia for college
The absolute worst thing the state government could decide to do.
The Promise Scholarship is often the only thing that encourages low-income West Virginians to stay in state for college, or even go to college at all. If an applicant receives a 22 composite score on the ACT or a total score of 1100 on the SAT—while maintaining 3.0 high school GPA—the Promise Scholarship guarantees annual awards of up to $4,750 to cover the cost of tuition and mandatory fees at public or independent institutions in West Virginia.
Currently Promise applications are down 44% so far this year, which may be a reason as to why the legislature is considering cutting it. However, this decline in applications is far more likely due to the uncertain economic situation, as many students are considering a gap year over paying full-price tuition for what could be a fully-online program.
This scholarship bridges the hurdles many low-income West Virginian families experience when trying to send their children to college, particularly when the families have no desire to force their children to take out loans themselves to pay for it. On the one hand, Promise allows educational opportunities to come cheaper, which in turn make it easier for students to live and work in West Virginia upon their graduation. On the other hand, eliminating the Promise Scholarship and subjecting West Virginians to more debt for the sake of savings doesn’t encourage citizens to build their careers in-state, where the pay is considerably lower compared to similar work elsewhere.
Removing the Promise Scholarship from the state budget would be a poison rather than a cure. Accessible education is key for economic development.
As you can see, most of these disparately impact low-income West Virginians, forcing them to bear the brunt of the burden, while giving wealthy West Virginians a tax break. And to be quite honest, a government that could support any of these without understanding the consequences may not be looking out for its constituents. Stay tuned for the final installation, where I discuss some of my own recommendations.
