Tackling West Virginia’s Tax Code

Photo by Tracy A. Toler Photography.

Benjamin Franklin once wrote, “In this world, nothing is certain except death and taxes.” Over 200 years later, the saying seems to hold true. It is nearly impossible to turn on the television, listen to a podcast or enter a conversation on current events without hearing an opinion on who should pay and how much.

During the 2021 session of the West Virginia Legislature, Governor Jim Justice submitted a bill to repeal personal income taxes. Justice’s press promoting the bill said it was aimed at transforming West Virginia’s tax structure, raising wages and home values, attracting new businesses and reversing the state’s trend of population decline. House Bill (HB) 3300 would have repealed personal income taxes completely and called for raising taxes in other areas to offset the cuts. The House of Delegates unanimously voted against it shortly after it was proposed.

This year, the Legislature took up a new, more conservative proposal—HB 4007—toward repealing personal income taxes in phases, starting with a 10% reduction on current income tax rates on January 1, 2023. While the bill passed the House, it did not make it past the Senate Finance Committee before the end of the session.

Although the potential benefits Justice outlined are inarguably attractive, opponents on both sides of the aisle argue that repealing personal income taxes would result in the necessary and significant increase of taxes in other areas, including taxes on businesses and professional services, which could cause Mountain State professionals to move their practices across state lines. Some say there is absolutely no feasible way to balance the budget without this large revenue stream. All this begs the question: is there a responsible, practical and logical way to repeal the personal income tax?

In 2016, West Virginia Executive sat down with academic economist, professor, author and political advisor Dr. Arthur Laffer, founder and chairman of the economic research and consulting firm Laffer Associates, to talk about West Virginia’s economy and how to generate economic growth. His recommendations included switching to a low-rate, broad-base flat tax; eliminating inventory taxes; implementing tort reform; providing incentives for students; and becoming a zero income tax state.

With the ongoing conversation surrounding personal income taxes, it seemed like the perfect time to once again reach out to Laffer, who is well-known for his influence in starting a worldwide tax cutting movement in the 1980s. As the first person to hold the position of chief economist for the U.S. Office of Management and Budget, founding member of the Congressional Policy Advisory Board, a member of President Ronald Reagan’s Economic Policy Advisory Board and a member of the Reagan/Bush Finance Committee’s Executive Committee, Laffer’s economic expertise is unparalleled.

Breaking It Down

Over the course of his career, Laffer has worked with 20 state governments and U.S. territories, including Maryland, Washington, California and Puerto Rico, on tax reform, and he is currently working with eight gubernatorial candidates across the country.

According to Laffer, repealing West Virginia’s personal income tax is not impossible or irresponsible. However, the key to driving economic growth in any state by reforming the tax code is looking at it in its entirety, rationalizing each individual tax and then deciding which ones to keep and which ones to expand.

For example, in 2018, Laffer created a detailed analysis of the spending, taxes and outcomes of the state of Missouri.

“Five years ago in Missouri, there were 2,339 separate sales tax jurisdictions with rates ranging from 4.5% to 12.5%,” he says. “With a population of 6 million, the average sales tax jurisdiction covered approximately 3,000 people, which showed no relationship between the population of the jurisdiction and its sales tax rate.”

Within each of these sales tax jurisdictions, there were as many as eight separate authorized entities empowered to impose a sales tax, each of which would be stacked on top of each other.

“Within each of these jurisdictions, there were also upward of 20 categories of goods that had separate sales tax schedules—think groceries, restaurant fees, diesel fuel—and among purchasers, the people who pay the sales tax, there were six separate categories with separate sales tax schedules. Think 501(c)(3)s, developers, producers—some of these people pay some sales taxes but not others,” Laffer explains. “I say all that to say, West Virginia’s tax system is riddled with this too, and you know who knows about it? Nobody.”

Rationalizing the Tax Code

According to the West Virginia State Tax Department, there are currently 139 local tax jurisdictions. While the state sales tax rate is 6%, local jurisdictions are collecting an additional 0.246% on average, making it as high as 7% in some areas. The state is also made up of 234 municipalities, and of those, 117 impose a business and occupation tax in some form. Taking an inventory of a state’s entire tax code across jurisdictions typically reveals hundreds of different taxes being implemented, most of which are producing a very small percentage of the state’s overall tax revenue and yet are ignoring significant burdens on income earners in the state.

While an immediate repeal or phase out of the state’s personal income tax, sales tax or property tax might seem like a win for the people, Laffer says the first step in reform must be rationalizing existing taxes—not cutting them.

“What does that mean? It does not mean you cut the taxes or raise the taxes. You rationalize them,” he says. “You take rate reductions and get rid of all deductions, exemptions and exclusions to make the tax code as rationalized as possible so that everyone pays the same tax rates, and they all have the same taxable income base.”

Laffer says the first step to rationalizing West Virginia’s tax code would be to fix the state sales tax so there is one rate for everything.

“Sales tax should not be a revenue loser or revenue gainer. It should be static revenue neutral,” he says. “I would eliminate all the different authorities and their ability to raise taxes in all these special little districts and then implement a formula for allocating the revenues back to cities, counties and local districts so no one is advantaged or disadvantaged. Have one sales tax and an allocation formula for where the revenues go, and that is it. That is what I mean by rationalization.”

After each tax has been examined and rationalized, the next step under Laffer’s plan would be to dramatically reduce the number of taxes being implemented.

“Someone needs to look through all the different taxes and find the ones that don’t do anything but clog the arteries of the state of West Virginia,” he says.

When referencing a 2012 study on Louisville, KY, Laffer pointed out that manufactured goods in transit were subject to taxation across multiple tax jurisdictions, including 776 authorities with the power to implement a tax and 81 city-level districts with the authority to tax merchants’ inventory under the state’s property tax code.

“This is true in West Virginia, too,” he says. “You have to take those taxes, put them all together and ask, ‘How do we not raise or lower tax rates but instead, rationalize the tax codes so they are not so arduous?’ You do the same thing with the income tax. Then the corporate income tax. Then severance taxes. You rationalize all your major taxes by getting rid of the small, inconsequential things that have no place in West Virginia. For each major tax, there should be one tax rate and one tax base for everyone.”

Getting to the Good Part

“Once a state has a rationalized tax system, then and only then will you see miracles occur from these changes,” Laffer says.

So how does a state raise revenues once it has rationalized its sales, personal and corporate income, property, severance and sin taxes? How do leaders decide which taxes should be eliminated, if any, and which should be expanded?

“You need to look at your major sources of revenue and ask, ‘How do we best collect the revenues here and do the least damage to the state?’” says Laffer. “You need to ask which taxes work best for the state of West Virginia. The sales tax? The corporate income tax? The personal income tax? Look at all these taxes and ask which are the worst for the state and which do the least damage.”

Once the fat has been trimmed and the tax code is made simpler, then is the time to repeal the taxes that are the least attractive to people both inside and outside the state, including the personal income tax.

“You want the taxes collected in your state to be doing the least possible damage to the economy,” says Laffer. “You want to collect the requisite revenue you need to run the state in the least damaging fashion. This is when you decide on the taxes you should eliminate and which you should expand. Sales taxes and property taxes, if they are rationalized, are very good ways of collecting revenues necessary to run government while doing the least amount of damage. Let’s say you get down to 10 taxes after rationalizing. Knock it down to eight, so you have a couple of work horses to raise revenues. Then you figure out which, say two, you can eliminate and which of the other six to raise to offset the burden.”

Championing Change

Alaska is currently the only U.S. state that has successfully eliminated its personal income tax. Still, Laffer believes this could become a reality in West Virginia if the right steps are taken. He also believes rationalizing the tax code could lead to a revenue gain rather than a revenue loss as well as lower unemployment, increased wages and decreased welfare participation. He has seen it in his adopted home state.

“Tennessee is the lowest taxed state in the nation,” he says. “When I moved here, I purchased my house with my first year’s tax savings. How cool is that?”

Laffer has written five major papers on Tennessee. The data touts that Tennessee has no earned income tax, eliminated its gift and estate tax and phased out unearned income tax. It also has the ninth lowest property taxes in the nation and the lowest tax burden with the largest surplus. He credits all of this to the state’s rationalized tax code.

He dreams of being invited to speak to the West Virginia Legislature about the Laffer Plan, and his record speaks for itself. In 2013, his plan was implemented in North Carolina. The state cut personal and corporate income tax rates, eliminated its death tax and trimmed unemployment benefits.

“A series of things happened in North Carolina soon after,” he says. “Job growth boomed. There were 200,000 new jobs added in North Carolina from 2013 to 2015. The unemployment rate fell to 5.7% from 7.8%. The unemployment insurance fund went from a deficit to surplus, and the state’s budget racked up a surplus as revenues surged by 6%.”

While Laffer’s expertise has benefitted many people, he has a soft spot in his heart for Appalachia.

“I grew up right on the border of West Virginia in Ohio. I am Appalachia all the way,” he says. “These are my people. There is no state in this nation that is more deserving of good economics and more eligible for having good economics work than West Virginia. I can assure you: I will not leave you with a revenue shortage. You have to be willing to redesign your tax code and collect taxes in the most efficient way possible, but I would love to come to West Virginia and spend a few days with your leaders—Democrats and Republicans. It’s not a partisan thing. It is just economics. You have such good people in West Virginia, and they deserve better.”