Latest News, West Virginia Legislature

Senate Finance OKs measures to end inventory tax, and raise sales and tobacco taxes

MORGANTOWN — The Senate Finance Committee on Monday approved the long-awaited and often discussed resolution and companion bill to end the personal property tax on manufacturing inventory, equipment and machinery.

The package, in order to make up the lost revenue that would go to schools and counties, includes hikes on the state sales and tobacco taxes.

The tax cut and hikes would depend on voter approval of SJR 9. It proposes a constitutional amendment to give the Legislature more control over taxation of personal property.

If approved by the voters in November, the amendment would allow the Legislature to classify property as real or personal for the purposes of taxation. It would eliminate the constitutional requirement for uniform taxation and allow the Legislature to set varying rates for differing “species” of personal property, or exempt one or more species from taxation.

A provision prohibits the Legislature from setting tax rates above the current constitutional limits.

The details are spelled out in a bill originated in the committee, OB 4 until it reaches the floor and gets a number.

OB 4 phases out three taxes over the course of six years, starting April 1, 2021, pending approval of SJR 9: the manufacturing inventory, equipment and machinery tax; the retail inventory tax; and the personal property tax on automobiles, including ATVs and utility vehicles. Newly purchased items would be immediately exempt.

Legislators have said that the automobile tax cut was included as an incentive to win voter approval of the resolution.

To replace the lost revenue, the sales tax would be raised from 6% to 6.5%. The cigarette tax would go from $1.20 to $2 per pack; the other tobacco products tax from 12% of wholesale price to 50%; and the vaping liquids tax from 7.5 cents per milliliter to $1, to be on par with the cigarette tax, estimating 2 ml of vape as equivalent to a pack of cigarettes in nicotine content.

Sens. Robert Plymale and John Unger discuss the tax measures.

Committee staff said the gradual phase-out and the accompanying tax hikes resulted from stakeholder talks, and fears about the lost revenue.

The sales tax hike is projected to generate an additional $116.5 million per year. The tobacco tax hike would initially produce an additional $88 million. This new money would be channeled to a new Revenue Reallocation Fund intended to keep the schools, counties and municipalities whole as they lose the inventory tax income.

Staff displayed a series of charts illustrating how the numbers would play out. In Fiscal Year 2023, the first year of the phase out, the lost revenue would total about $49 million. That would grow to $294 million by FY 2028.

The replacement revenue would be about $102.w million for the last half of FY 2021, then hit $204.4 million in FY 2022. While the sales tax component is conservatively projected to remain constant, the tobacco tax revenue will drop as the tax hikes drive some to quit. So by FY 2028, the replacement revenue would be about $179.9 million.

During the period, the Revenue Reallocation Fund amount will rise, then begin to fall as losses exceed revenue. By FY 2032, the fund could face a deficit of $70 million to $80 million, barring any economic growth this package is intended to spur.

Senate Minority Leader and former Finance chair Roman Prezioso, D-Marino, observed that the package makes the Legislature responsible for keeping the schools and counties whole.

Commerce Secretary Ed Gaunch appeared before the committee. He said he couldn’t speak to or support OB 4 or SJR 9 because he wasn’t familiar with their specifics. But he supports the concept. “I’m 100% of favor of getting rid of the inventory personal property tax.”

Gaunch said the Development Office has weekly, sometimes daily conversations with businesses concerned about the inventory tax. “It’s a very important tax to the West Virginia development Office. It impacts our attraction for new business.”

It affects the decisions, he said of companies looking to move here and in-state companies considering expansion and seeing the tax as a hindrance.

Gaunch’s remarks generated some skepticism among some Democrat senators, who wondered if big out-of-state companies that see the tax cuts would turn it into employees raises and expansion, or wuld take it back to their home states and pocket it.

Sen. Doug Facemire, D-Braxton, said that the companies will see the benefit while the state’s residents backfill the money hole with the tax hikes. And the projected growth is just assumption and hope at this point.

To counter that, Gaunch said he had a conversation last week with a West Virginia business considering whether it would expand here, or in Ohio where there is no such tax.

Jonathan Adler, executive director of the West Virginia Association of Counties, said the association remains opposed to the measure because SJR 9 is vague and takes taxing authority away from the counties. And they’re unsure about the bill’s promises to keep them whole.

“That certainly has us wondering quite a bit. … It goes back to fear, fear of change.” There is also the issue of Replacement Fund deficits in the out years. “That has the counties worried, yes.”

The committee took up OB 4 for a vote first. Sen. Chandler Swope, R-Mercer, supported it. He looks at it, he said, as a businessman considering the aim of the bill. Wil it bring in business or drive it away?

“If we don’t do something that has a chance of moving the needle, we won’t do any better. Operating from a positon of fear is not good judgment.”

Sen. Ron Stollings, D-Boone, succeeded in adding an amendment to direct $2 million of the increased tobacco tax revenue to tobacco prevention and treatment programs.

The bill passed in a voice vote, with at least one audible no, and some not saying anything. SJR 9 also passed in a voice vote, with no audible no votes.

Both go to the Senate floor.

Tweet David Beard @dbeardtdp Email