CLARKSBURG, W.Va. (WBOY) — West Virginia Gov. Jim Justice Wednesday announced his intentions to propose cutting the state income tax by 10% permanently during an upcoming special session.

This comes as the state sees a record budget surplus of $1.308 billion.

West Virginia would not be the first state to cut its income tax rate recently. According to the Tax Foundation, 25 states have cut their income tax rates since 2012:

State20122022Target
Arizona4.54%2.98%2.50%
Arkansas7.00%5.50%4.90%
Colorado4.63%4.55%
Delaware6.75%6.60%
Georgia6.00%5.75%4.99%
Idaho7.40%6.00%
Illinois5.00%4.95%
Indiana3.40%3.23%2.90%
Iowa8.98%8.53%3.90%
Kansas6.45%5.70%
Kentucky6.00%5.00%Indefinite*
Louisiana6.00%4.25%
Maine8.50%7.15%
Massachusetts5.25%5.00%
Michigan4.33%4.25%
Missouri6.00%5.40%Indefinite*
Montana6.90%6.75%
Nebraska6.84%6.84%**
New Mexico4.90%5.90%
North Carolina7.75%4.99%
North Dakota3.99%2.90%
Ohio5.925%3.99%
Oklahoma5.25%4.75%
Utah5.00%4.85%
Wisconsin7.75%7.65%
Source: The Tax Foundation. *Kentucky and Missouri have revenue triggers in place which will continue to phase in rate reductions, with no defined end point, subject to revenue availability. **Nebraska reduced its lower rates but kept the top marginal rate unchanged.

The Tax Foundation found that even when adjusted for inflation, the 25 states that cut income taxes saw a 31.9% increase in tax collections on average over the past decade, compared to an increase of 27.8% in the five states that increased their income taxes in the same period—Connecticut, Washington, D.C., Minnesota, New Jersey and New York.

The Tax Foundation cautioned that the lower tax rates are not necessarily directly responsible for higher revenues, but, the numbers do show lower revenues are not guaranteed when income taxes are cut.

The Long Game

Gov. Justice cited job growth and population growth as two main reasons behind his support for cutting the state income tax rate.

“When you look at states like Florida, Texas and Tennessee, they have no personal income tax and their state economies and population are growing like crazy,” Justice said in a fact sheet released about his proposal.

2020 Census data does show growth in Texas and Florida, with Texas being the only state to gain two new representatives in the house after the national population survey and Florida gaining one. Tennessee experienced no change.

Keep in mind, those Census numbers don’t reflect the revelation that the populations of all three states were undercounted, Florida by an estimated -3.48%, Tennessee by an estimated -4.78% and Texas by an estimated -1.92%. Several others were also undercounted, and several were overcounted.

The Bureau of Labor Statistics lists Texas as the only state that experienced more than 6% job growth (6.1%) between May 2021 and May 2022, with Florida experiencing 5.3% and Tennessee experiencing 4.4% job growth. Though, several other states experienced similar levels of growth in the same period, including California (5.2%), despite the fact that it has the highest income tax rate in the nation.

What About Kansas?

Former Kansas Governor Sam Brownback’s tax policy changes and their consequences are often cited during income tax debates. The Center on Budget and Policy Priorities (CBPP) detailed the effects of the cuts, which not only lowered the tax rates in Kansas but also eliminated taxation of profits from sole proprietorships, farms, partnerships, Subchapter S corporations and limited liability companies; known as “pass-through” businesses where profits are taxed at the owners’ personal income tax rates instead of at the business tax rate.

The 2012 and 2013 bills cut Kansas’ top tax rate on wages, salaries and investment income by almost 29%, and the rate on pass-through income by 100%, and according to the CBPP, revenues plunged, necessitating cuts to education and other vital services and downgrades in the state’s bond rating.

The Tax Foundation points out that the key difference between Kansas and the 24 states above is that most of the states that saw their policies succeed “funded their income tax rate cuts either by returning a portion of projected revenue growth with their taxpayers, adopting revenue offsets that are more economically efficient than the income tax, or both.”

The Takeaway?

West Virginia University Director of the Bureau of Business & Economic Research John Deskins said this could also serve as an opportunity to “take a holistic look at government in West Virginia.” He said many systems have been in place for decades, unchanged, so this could be an opportunity to look at how big government needs to be and promote efficiency.

At 10%—the maximum amount that can be cut while remaining in compliance with funding stipulations in the American Rescue Plan Act—Deskins said Gov. Justice’s proposed rate cut is likely not enough to make a dramatic shift, but that cuts to the income tax rate lead to more money in people’s pockets, which is a good thing, and may entice people to move here.

Data shows that it is possible for states to grow tax revenues even if they cut personal income tax rates, as long as the tax cuts aren’t too deep and the revenue is made up for in other parts of the budget. The Tax Foundation notes that many states that cut taxes and experienced growth paired the cuts with other pro-growth reforms. Deskins said one way to ensure the income tax cut doesn’t cause revenues to plunge is to close tax loopholes to ensure the tax base is broad, which enables a lower tax rate.

So, if the budget stays balanced after the cuts and they’re paired with other business-friendly policies, the trajectories of other states that have cut their income taxes rates suggest West Virginia could see economic and population growth while managing to increase tax revenues.

The details of the tax cut will be worked out in a special session, which will coincide with the interim meetings from July 24-26.

West Virginia Senate Minority Leader Stephen Baldwin (D – Greenbrier, 10) sent a statement Wednesday that seemed to indicate a willingness to work with Republicans on the proposed cuts.

We are happy the Governor agrees with us that West Virginians need relief from growing inflation. We have been pushing this issue since March.

This 10% income tax reduction proposal merits discussion and research. Can we do this responsibly? Will it provide equitable tax relief or disproportionately benefit the rich? Can we afford it if the machinery, inventory, equipment, & personal property tax amendments are passed by the voters in November? We are mindful that our historic surplus this year is one-time money. Without a six-year outlook, we have great concern about ensuring that our police, schools, and first responders will be fully funded on the county level.

We look forward to seeing the details of this legislation and continuing the conversation with our colleagues later this month.

WV Senate Minority Leader Stephen Baldwin