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Tax reform war in W.Va.

Last week I felt more like a war correspondent as I reported on the front lines of the tax reform war of 2022, with Republican Gov. Jim Justice on one side and Senate President/Lieutenant Gov. Craig Blair, R-Berkeley, on the other side. Of course, this has been bubbling up since the beginning of July when Justice first announced he would call a special session of the Legislature to consider a 10% cut in the personal income tax across all six tax brackets.

The state Senate had already said no to a similar bill supported by the House of Delegates earlier this year. Justice also didn’t support that at the time, citing unfounded fears about regulations within the American Rescue Plan Act that limit using the federal COVID-19 relief funds to offset tax cuts (regulations that have been stayed since last year). But with the last fiscal year ending with a $1.3 billion surplus, Justice felt he had enough cushion to cut the personal income tax.

Instead, the focus of Senate Republicans turned to making sure Amendment 2 is approved by voters in November, which would amend the state Constitution to allow them to reduce or eliminate six categories of tangible personal property taxes, such as machinery and equipment, inventory and motor vehicle taxes.

Blair and Senate Finance Committee Chairman Eric Tarr, R-Putnam, have put together a draft plan (with input from some House Republicans) that would eliminate those tangible personal property tax categories, replace the lost revenue to county governments and county school systems with direct funding from the general revenue budget over and above the county’s annual assessments for those taxes, and also cut personal income taxes by 10%, annually returning more than $800 million to taxpayers.

Justice has supported eliminating the tangible personal property taxes on machinery/equipment and inventory, the two biggest drivers of revenue for these kinds of taxes, before, both in 2018 and 2019. It’s been a part of State of the State addresses and other proposals for constitutional amendments.

Eliminating the tangible personal property taxes has been the dream of Republicans for more than 30 years, with even Democratic administrations recommending these taxes be eliminated. But since 2020, Justice has been more focused on phasing out personal income taxes. In fact, the Senate supported Justice’s 2020 personal income tax phase-out plan. While the House shared the same goal, they didn’t agree with Justice’s way to do that and the bill failed.

During the first five days of the July special session, the House chose to side with Justice this time on a 10% personal income tax cut, but the Senate said no. Justice spent that week and the days leading up to the special session attacking the Senate for not supporting his plan and criticizing their plan to eliminate tangible personal property taxes. But he had not said publicly he opposed Amendment 2 until I asked him directly a few weeks ago.

And now, not only is Justice against Amendment 2, but he is actively hitting the road to campaign against the amendment and urging voters to say no. Justice is accusing Republican lawmakers of being part of the “swamp” of big business businesses interests that want Amendment 2. Blair, prior to Justice’s Kanawha County event, accused Justice of having “schizophrenia” for flip-flopping on his prior support for eliminating tangible personal property taxes.

I think being for cutting personal income taxes or for eliminating tangible personal property taxes are fair public policy positions with valid arguments for or against. But it seems to me that this debate has gone beyond a simple public policy disagreement.

Many politicos have been taken aback at how aggressive Justice is being on advocating against Amendment 2. The Justice we’re seeing right now is reminiscent of the Justice we saw before he switched from Democrat to Republican in August 2017. Remember the vetoed budget bill on a silver platter of cow dung? It’s interesting that for many of these road show appearances, Justice is campaigning along with Democratic county commission officials.

Remember, at the end of the day, Amendment 2 in and of itself reduces or eliminates nothing. It changes constitutional language to allow lawmakers to reduce or eliminate those six tangible personal property categories. It still takes the Legislature to pass a bill later if they want to make those reductions or eliminate those taxes. House Speaker Roger Hanshaw, R-Clay, has taken no position on the Senate’s draft bill and tax plan, but he is fine with Amendment 2.

No doubt that Senate Republicans will move their plan forward to eliminate tangible personal property taxes in 2023 if voters approve Amendment 2, but considering that neither body can agree on the best way to phase out personal income taxes, I’m skeptical that a bill doing a complete elimination of tangible personal property taxes will happen this year.

Even Justice keeps saying he’s fine with eliminating the tangible personal property tax on vehicles, which can’t happen unless Amendment 2 gets enough votes. So why the full court press against Amendment 2?

As I said, we ended the prior fiscal year with a $1.3 billion surplus for the general revenue budget. That’s due to a multitude of factors: keeping the general revenue budget flat since 2018 with no new spending, natural growth in tax revenue and higher returns from out coal and natural gas severance taxes. Federal COVID and infrastructure funding also freed up state dollars that would otherwise be spent.

Justice has painted this as the great “rocket ship ride,” but Blair and others will tell you the point of the flat budget was to see if the state could sustain future tax cuts with the tax revenue the state was collecting. If Republicans go through with their tax cut plans, you’re not going to see those kinds of surpluses again, taking away one of Justice’s talking points. It would also reveal that our state tax revenue estimates are largely a joke.

I think the real battle we’re seeing is a budgeting battle versus a tax reform battle.

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