MORGANTOWN, W.Va. – Recently, Governor Jim Justice created a proposal to repeal the state personal income tax, starting with a 60% reduction. The corresponding bill, House Bill 2027, is sponsored by Speaker of the House Roger Hanshaw and is currently going through the House Finance Committee. In place of the income tax revenues lost, this bill proposes raising and expanding the consumer sales tax, creating a luxury tax, increasing gas and coal severance taxes and increasing taxes on cigarettes, alcohol and soft drinks.
Justice argues that repealing the personal income tax will drive people to the state and increase business, even hoping that theme park giants like Disney will invest in the state. However, there’s already been a lot of controversy surrounding this bill.
Personal income taxes make up for almost half (43.3%) of the tax revenue in the state. Economics professor Dr. Amy Godfrey, from Fairmont State University, said that income tax is a pretty stable revenue source, unlike the smaller taxes Justice is proposing.
“It’s a big worry because we’re adding such a huge tax increase that there’s potential that as the price gets too high, people won’t consume as much, or they may go somewhere else to purchase it, and that increase in that tax may actually cause revenues for those taxes to actually go down,” explained Dr. Godfrey, “and that’s the opposite of what we’re wanting to do.”
The Impact on Local Businesses
One industry that is particularly worried about a rise in taxes is the local breweries. The current excise tax on beer is about $5.50 per barrel, but this bill would raise that tax to $29.25 per barrel. In other words, the tax burden would increase to more than five times the original rate.
“With the increase in the alcohol tax, we always think, ‘ok, they’re going to increase the tax so that the consumer is the one that is going to have to pay that burden,'” said Dr. Godfrey. “But, in reality, when we actually look at who pays the burden of most taxes—especially like alcohol taxes—a bigger [portion] of that burden actually goes to the businesses and not just the consumers.”
We talked to local brewery owners who said they were already struggling with the pandemic and that this tax could be a nail in the coffin. Screech Owl Brewing said it hadn’t been able to sell a keg to a restaurant or bar from April to August or September, and it had to shift its entire business model to include cans of beer.
“There were no bars or restaurants to sell anything to,” explained Roger Johnson, owner of Screech Owl Brewing. “Before COVID hit, we [had] 19 employees, and after they shut us down March 10 of last year, we’re down two and [my wife and I].”
“Everything we have is invested in this,” said Krista Johnson, Roger’s wife. “Our entire farm, house, everything we own is on the line for this. This tax will kill us.”
“It will put us under,” Roger added. “We won’t have a choice but to declare bankruptcy or move to another state.”
Brian Reymiller, director of brewing operations at Greenbrier Valley Brewing Company, shared the same sentiments.
“We run on razor-thin margins, so this will cripple us,” said Reymiller. “We were able to get through COVID, and now we get introduced to this new tax, and it’s just—we’re getting pounded left and right and trying to stay in business, and I’m not sure that we’ll be able to make it.”
Everything we have is invested in this. Our entire farm, house, everything that we own is on the line for this. This tax will kill us.Krista Johnson, owner, Screech Owl Brewing
Local businesses are more likely to source locally, and they tend to try to keep costs low for their customers. We talked to local brewery owners who say that this might change their ability to do those things.
“I think I feel pretty comfortable speaking for the other groups here in West Virginia, but none of us are greedy people. We don’t do this because we all think we’re going to get rich doing it. There’s just not that kind of money in beer—at least, in craft beer,” explained Reymiller. “We do this because we’re passionate people. We’re a center for the arts, you know? You look around here, and you’ll see local artists. We hire local artists to do all of our artwork for us at our brewery. We hire local musicians. I buy local malt and wheat to put in my beer in Hillsboro, WV. I have a farmer that I buy wheat from. I think Matt [owner of Big Timber Brewing Company in Elkins] buys local hops and puts it in his beer. So, we support our community. It’s going to be really hard to continue to do that if I’m running on these razor-thin margins.”
“As a company that always tries to be inclusive in our pricing because we don’t want to price anybody out—we want to be every West Virginian’s brewery—[the tax] would be awful for us,” explained Ashley Kwasniewski, co-owner of Big Timber Brewing Company. “And, they might not understand immediately what the reasoning is. I mean, I don’t pay attention to every piece of legislation that goes through, and I think most people are like that, so they will just think that we’ve raised our prices.”
“We feel the heat from that already,” said Reymiller. “If you look at Kroger, you see Greenbrier’s beer, and you go ‘wow, that’s expensive.’ You know, we’re already kind of high because we’re small. We don’t have as big of a shopping cart as the macro breweries do. I have to pay more for malt. So, we have to, in turn, charge more…[If] this happens, I don’t see customers—they’ll start buying out-of-state beer.”
The Struggle to Stay
It’s not just the breweries. Other businesses that are now being included in the consumer sales tax, like the cosmetology industry, worry about not being able to keep costs down. These businesses have also said that they worry that if their prices have to go up, their customers might buy less, and not as often.
“Getting your hair cut, lawyers, that sort of thing, is going to now be taxed,” said Dr. Godfrey. “And, I know that’s a big deal, in terms of the businesses worrying how much that is going to affect them, as well as us customers trying to decide, ‘ok, I get a hair cut every two months. Maybe I’m going to have to spread it out to every three months because I’m going to have to pay a higher amount.’”
Debra Roth, owner of D&B Tanning & Toning in Morgantown, said she has mixed feelings about the tax, and that, though not having to pay income taxes would be nice, this bill feels especially overwhelming coming off of COVID.
“I’m struggling to stay afloat as it is with the pandemic and the added expense of the sanitizer and wipes,” said Roth. “Not to mention the inventory—trying to get hair color and whatnot—all those prices have gone up, so I’ve ate the cost of all that to try to keep the ones I have coming in continuing to come in on the regular schedule, and I feel like people can’t take another hit.”
If it gets much worse, I’m not going to be able to keep the doors open, and that worries me because I’m 15 years from retiring at this, and it’s the only thing I know how to do. So, if that should happen, then what?Debra Roth, Owner, D&B Tanning & Toning
If this bill goes through, Roger and Krista said that they have already started pricing out how much it would cost to move across the border. They say that, already, the excise tax on beer in Pennsylvania and Maryland is about half of the $5.50 rate in West Virginia, and that just the tax alone would pay for their moving expenses in about four years. But it’s not an easy decision for them to make.
“We’re born and bred. We are. I’m originally from Wood County, near Parkersburg; Roger grew up in Huntington, Barboursville area of Cabell County. We met at Glenville State College. We’re West Virginians. This is not a choice we want to make,” said Krista.
Others, like Roth, are unsure of what they will do.
“[Hair is] the only thing I know how to do, and I’ve been at this for 35 years to build a business that I’m proud of,” expressed Roth. “But, trying to keep what clients I have coming in through the pandemic, keep them here, make them feel safe—If it gets much worse, I’m not going to be able to keep the doors open, and that worries me because I’m 15 years from retiring at this, and it’s the only thing I know how to do. So, if that should happen, then what?”
Gas and Coal Severance Taxes
Another part of this bill is an increase in gas and coal severance taxes. The taxes are tiered based on how well the industry is doing. If the coal and natural gas industries are doing well, then they will experience a higher severance tax, but if they aren’t doing so well, then the tax rate will go down with it.
“That’s not going to make for a very stable revenue source for our state because the coal industry, and especially the natural gas industry, is pretty volatile. It moves pretty frequently, and we’re used to this steady flow of income from the income tax, and now we’re going to be relying on a severance tax that is not going to be a steady flow because we’re relying on industries that are very—they move a lot, they have a lot of volatility.”
What income brackets benefit the most?
The bill has been criticized, especially by the West Virginia Center on Budget and Policy, for benefiting the rich substantially more than the poor. Despite the governor proposing a sales tax relief credit for lower incomes, that would attempt to offset the increase in sales and excise taxes, the Center on Budget and Policy suggests that the wealthiest 15% of West Virginians will get more than 60% of the tax reductions.
“I think with the elimination of the income tax, and the increasing of the sales tax to make up for the tax revenue, those with higher incomes are, obviously, going to be the ones who benefit,” explained Dr. Godfrey. “At this point, with our income tax, those at the higher income will pay the higher rates, so they have higher income taxes. When it comes to the sales taxes, the amount we purchase and the percentage coming off, not as big of a portion of their budget goes to purchasing those goods and services. So, they’re going to probably have a better impact from this elimination of the income tax than the lower income brackets, who experience that their consumption, what they’re spending on goods and services, has a higher percentage of their budget than what it is for higher incomes.”
So, can this bill drive people to the state?
During Justice’s town hall discussing the bill, he cites Tennessee as a good example of how eliminating their income tax has increased its population. Tennessee began phasing out its income tax in 2019, and it did not fully phase it out until this past January. While Tennessee’s population is increasing, it’s been steadily increasing for more than 100 years, and the recent annual change hasn’t been substantial.
That’s not to say that an income tax elimination couldn’t be a factor to bring people to the state, but Dr. Godfrey says that it’s just one part of the equation.
“People that want to come to the state might want to look at [the income tax] because if we’re going to move, we’re going to look at the tax structure, obviously,” explained Dr. Godfrey. “And, it’s more than just income taxes that people look at when they decide to move to a state. We’re fortunate here in West Virginia that our property taxes are pretty low, especially compared to other states. So, if we eliminate the income tax, and we have the low property tax, it could make us a little more attractive. But, there has to be the jobs here, and if it’s bigger business that is going to come here, they still have taxes that they have to face, as well as making sure that they have the workforce here, so there’s a lot more than just that income tax that will bring people to the state.”
Dr. Godfrey mentioned that Mississippi is another state that is also trying to eliminate the income tax, but it’s doing it in a different way, by stipulating that if it doesn’t bring in the revenue it thought, that it will stop and go back to the income tax.
“I think because it’s such a dramatic change, and our income tax is such a huge proportion of our tax revenue in the state, that it’s a good safety net,” suggested Dr. Godfrey. “Because we’ve never done this before, so see what happens, maybe five years down the road, we’re not bringing the revenue that we thought, we can revert back to adding into the income tax instead of getting rid of it forever.”
House Bill 2027 is likely to go through some changes in the House Finance Committee before being put to a vote in the House and Senate. Stay with WBOY as we continue to follow the bill through the legislature.