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Tax Reform in West Virginia:

The Saga Continues

Reprinted by Permission, from Tax Notes: State, Vol. 101, No. 1, July 5, 2021, pp. 11-15.

By Michael E. Caryl

     One can look back at least half of a century to see efforts by West Virginia’s public leaders to review and dramatically reform the state’s tax structure.[1]  Unfortunately, despite those efforts, the changes actually made to the system over those years have clearly failed to effectively move the state from remaining a population-declining, low-income-earning, excessive-government-spending island of poverty in a sea of regional and national prosperity.

     While this year’s sixty-day regular session of the West Virginia Legislature concluded without enactment of the long-sought comprehensive reform of the state’s tax system, important conversations were had and some actual legislative progress was made.   Thus, while notable differences among the policy-makers and their respective advisors were exposed, it does appear that some of the groundwork for ultimately meaningful reform may, well, have been laid. 

     Perhaps, the most relevant policy disparity which emerged is whether and how to reconcile two related, but fundamentally distinct goals of substantive state and local tax reform.  Thus, the primary focus of Governor Justice’s sweeping proposal was to immediately reduce and ultimately phase out the personal income tax for the sole purpose of attracting new residents to the State.  The importance and urgency of that objective is vividly reflected in the most recently released U.S. Census Bureau data, which shows that, in the last decade, West Virginia lost 60,000 residents, being a higher percentage of its long-declining population than any concurrent population decline in any other state.   Though the far more elderly profile of West Virginia’s population has inherently led to a natural population decline, that is simply another result of the real problem: the state’s long-declining economy. [2] 


     On the other hand, the separate and traditional strategy of making tax law changes, in order to attract new job-creating business investment, remained the principal driver of several other proposals, a few of which were actually manifested in other approved legislation.


Details of Process and Different Tax Relief Versions

          First, in his “State of the State” address, opening the legislative session, the Governor,  in order to encourage the relocation of individuals to become residents of the State, called for both immediate relief from some, but not all aspects of the personal income tax, along with its ultimate repeal altogether.  Unfortunately, despite the scope and importance of such a proposal, it was not until nearly mid-way through the 60-day session when actual legislation was presented to implement such a plan.[3]


     Once introduced, the Governor’s proposal called for an immediate sixty percent (60%) reduction  of tax rates on individuals’ income from wages, retirement plans and unemployment income, while leaving the current rate system fully in place for individuals’ income from business profits and from investment income such as rents, royalties, capital gains, interest and dividends.[4]

     To recover a portion (just over three-fifths) of the revenue lost due to such a proposed income tax reduction,[5] the Governor’s proposal called for both a major rate increase and a selective broadening of the base of the consumers sales and service tax.[6]   In addition, other sources of replacement revenue in the proposal included imposing a new excise tax on purchases of so-called “luxury” items, imposition of a tiered (replacing currently flat) severance taxes rates on production of various types of natural gas, oil and coal, along with significant increases in the current excise tax rates on tobacco products, alcoholic beverages and soft drinks.

      Then, to somewhat mitigate the undeniably regressive effect of such consumption tax increases, the Governor’s proposal called for the payment of tax rebates to lower-income taxpayers of some of their remaining, otherwise payable personal income taxes.[7]   However, even after indulging presumptions advanced by the Governor’s office that the plan would both stimulate taxable economic activity and (somehow) also lead to public employment attrition, his proposal would still leave a deficit of over $185 million which is more than four percent of the current FY 2021 general fund budget .[8]   

     Moreover, that deficit would only be reduced by half if certain spending reductions, along with the contemplated government employment attrition and projected annual revenue growth also actually occurred.  The anticipation of some other government spending reductions should, however, be entirely justified given the long-standing fact that, only partly due to its declining population, West Virginia has among the nation’s highest levels of per capita state government expenditures ($9,343 vs. $6,573 nationally in 2018) and of state and local government employees (including those in education) per 10,000 residents (565.9 vs. US. median of 526 in 2018).[9]   Fortunately, recent manifestations of legislative fiscal discipline and restraint do signal a most encouraging prospect for lowering the cost of government in West Virginia. [10]

     Unsurprisingly, reflecting little, if any, timely executive branch coordination with the Legislature to promote such a major proposal, neither body of the Legislature officially took up the Governor’s bill.  Instead, in the House of Delegates, an entirely separate bill was originated in that body’s Finance Committee.[11]  The House’s bill was far more limited in its scope and (depending on the operation of certain acceleration contingencies) was primarily intended to more gradually phase-out the personal income tax entirely via rate reductions potentially spread over a dozen or more years.   Importantly, the relief in the House bill applied to all personal income tax liabilities - regardless of income source - and it did not mandate increases in any other existing taxes or enact any new taxes.  Rather, for fiscal balancing, it depended on recent fairly consistent projected revenue growth, budget discipline and use of expected surpluses from certain other existing tax revenue sources. 

     Finally, the third distinct version of income tax relief the Legislature considered was manifested in the Senate’s strike-and-insert amendment of the House Bill when it came before them.  The Senate’s version would both reinstate many of the key concepts contained in the Governor’s original proposal, while also employing, but refining some of the administrative aspects of the original House bill.[12]  

     Among the major changes to the Governor’s version which the Senate adopted were: (1) an even larger increase in the sales and use tax rate to 8.5%; (2) extension of the income tax relief to unincorporated business income (leaving only investment source personal income to remain taxable at current rates); (3) softening the impact of the Governor’s elimination of sales/use tax exemptions for most non-medical professional services by reducing the tax rate imposed on such charges to 3%; and (4) re-imposing the long-ago repealed tax on purchases of food for home consumption, but at an even lower rate of 2.5%. [13]

     Most significantly, unlike the House version of the package, the Senate would base the planned future annual phase-down/out of the personal income tax rates on achievement of specific revenue collection goals from both existing and new revenue sources.[14]  Among those new revenue sources under the Senate version, would be sales of recreational cannabis which the Senate would -- subject to certain use limitations -- legalize for the first time in the state.

Stated Policy Agenda

     One the rationales, advanced in support of each version of the personal income tax relief proposal, was to take advantage of the recent trend toward jobs which involve remote (virtual) work.[15]  Thus, it was argued, that, assuming the existence of reciprocal agreements between West Virginia and the states in which  the employers of such newly attracted, remotely working West Virginia residents are located, which permit only it to impose taxes on its residents’ wages, the lowered and ultimately repealed state income tax rates should be a major inducement for such relocation.  Of course, the same contention would apply to attracting more new residents to engage in the long-standing current practice whereby West Virginia residents commute daily to relatively near-by employment in surrounding states.

     Unfortunately, the proposed concurrent increases in both the rates and bases of West Virginia’s consumption taxes, would exacerbate the “border competition” concern about losing more revenues to the same neighboring states.  In fact, as a practical matter, those residents who commute out-of-state for work are, logic suggests, the prime prospects for various kinds of out-of-state retail shopping during their daily commutes.  Although, theoretically comprehensive and effective use tax enforcement would preclude the adverse impact of such “border competition,” the practical outcome under current law would continue to be largely otherwise.[16] 

Fuller Context and More Effective Alternatives

     Implicit in this state and local tax policy debate is the general recognition that broad-based consumption taxes, along with their far easier taxpayer compliance and tax collector administration,  are also far superior to income taxes in terms of many policy goals.[17]  Thus, one is led to reflect on the broader policy debate about the means by which to replace state government reliance for revenues on current income taxes with higher and/or broader-based consumption taxes.  Clearly, absent protective measures, interstate competition inherently undercuts simply raising the rates of existing consumption taxes to provide revenues to replace those lost from reduction/removal of income taxes.  Likewise, without some thoughtful counter-measures, adoption of a major broadening of the bases of consumption taxes also suffers from the same revenue loss threat.

     Thus, to effectively achieve the benefits of shifting revenue reliance away from taxation of income to taxation of consumption, the inherent three (3) challenges of fair and effective consumption taxation must each be addressed.  Those policy challenges are:  (1) the anti-competitive consequences of pyramiding tax burdens by causing multiple taxation of business inputs; (2) the regressive effects of taxing purchases of the necessities of life by low-income people and (3) the border competition threat inherent in both relatively higher consumption tax rates and in a broader base of taxable items.

     Although they are far more common outside the United States, the basic design of value-added taxes (VATs) are recognized as having the effect of enabling the imposition of a broad-based consumption tax while inherently avoiding the multiple taxation of business inputs.[18]  Interestingly, despite the literal label of VATs, their designs can involve either the addition-method (which taxes input values at the production stage where they are first introduced) or a subtraction method (which deducts previously taxed value inputs before taxing those just being added). 

     It must be recognized that, for reasons which are not entirely apparent, the VAT concept, while most common in tax systems throughout the rest of the free market world, is not one often encountered in the United States.  Domestic exceptions include New Hampshire’s current and Michigan’s (recently-replaced) so-called Single Business Taxes.   This author has also proposed consideration of a similar VAT labeled the Enterprise Consumption Tax (ECT) as a major aspect of a comprehensive reform of West Virginia’s current tax system, which, unlike New Hampshire’s system, would also replace both the personal income tax and the corporation net income tax.[19]   

     Most importantly, by allowing the deduction from the taxable base of the “cost of goods sold,” the VAT-like design of the ECT limits the direct taxation of all other  business in-puts to one time thereby fully addressing the “pyramiding” concern raised by tax policy thought leaders.

     The other major component of the Fair 55 Tax Reform Plan proposal, replacing all of West Virginia’s taxes on income and tangible person property along with its current general sales and use taxes, is the General Consumption Tax (GCT) imposed on individuals.   In doing so, by means of the issuance of a Fair Tax Credit Card to low-income individuals, the Plan avoids a regressive impact on $500 of annual purchases of clothing by such residents, which is the only necessity of life not otherwise exempt.[20] 

     Finally, although, at 5.5%, the rate of the GCT would actually be lower than West Virginia’s current sales and use taxes, the Fair 55 Plan would further address the border competition concern, inherent in its relatively broader base, by imposing  what it calls the Progressive, Creditable Implied Purchases Tax (PCIPT).[21]  Thus, based on a portion of the taxable consumption attributed to them in the progressive income-graduated federal income tax tables allowing itemized deductions for state and local taxes, middle to higher income-level residents would be subject to the equivalent of a use tax version of the GCT, but only to the extent such taxpayers do not demonstrate their actual payment of either the GCT or of other, creditable consumption taxes in the other jurisdictions where they actually shopped.[22]  

Some Steps in the Right Direction

      Though omitting the vast majority of provisions that comprehensive and truly effective state and local tax reform require, this year’s actually enacted tax legislation in West Virginia did address two important aspects of reform.  The first, and most important of that legislation, was the adoption of a resolution to place on the state’s ballot in the next general election (November 1, 2022) the question of amending its constitution to authorize the Legislature to exempt, from property tax, business tangible personal property and all vehicles (the only such non-real estate item on which individuals currently pay that tax).[23]  Although the scope and curative effect of this year’s resolution was not nearly as broad as the one actively considered but not adopted last year, it does represent an important move in the direction of property tax reform.[24] 

     In another property tax system improvement , this year’s Legislature did enact a bill which not only codified a more objective method of appraising certain natural resource property, but it also enabled a more fair, objective and independent review.[25]

     Finally, while there was no reported consideration of accompanying the proposed personal income tax relief with similar reductions of the corporation net income tax imposed on C corporations, a bill was enacted which, at least, replaced, with a single sales factor, the multi-factor apportionment method currently used to allocate among the states the total net taxable income of multi-state entities.[26]   Thus, by eliminating consideration of in-state property and payroll, that legislation effectively removed one major and highly undesirable disincentive to locate such resources and personnel in West Virginia.[27]



      West Virginia’s long history, of considering comprehensive state and local tax reform, has, thus, during this year’s regular legislative session, manifested yet another chapter.  Beyond the necessity of employing a collaborative and objective approach, whether such efforts will ever result in achievement of that goal inherently depends on its policy-makers’ collective recognition of a hand-full of fundamental substantive policy and procedural principles.  

        As described above, those are: (1)  due to its far greater ease of compliance and administration, and the availability of effective solutions to each of its three major challenges of regressive effects on the purchases of life necessities by low income residents,  border competition and tax pyramiding of business inputs, a broad-based consumption tax is the ideal form of a broad-based tax system; (2) any responsible process to achieve comprehensive tax reform should involve an inclusive planning process, sophisticated econometric projections and implementation which relies on a gradual phase-in employing fiscal milestones; and (3) the focus of the tax system improvements must include those which will attract new job-creating private investment as well as new individual residents of all ages, all of whom are powerfully discouraged by imposing heavy tax burdens on individual income, business profits and tangible personal property of all types. 

         The coming months, which may include a special session of the Legislature to consider comprehensive tax reform, will soon tell us whether the 2021 regular session was the penultimate chapter in West Virginia’s long history of seeking that objective. 



[1]  Earliest among those efforts was the 1970 enactment of the so-called Papke Plan, a version of a value-added-tax (VAT) to replace the long-standing Business & Occupation (B&O) tax on most business’ gross receipts. Robin C. Capehart, Real Tax Reform for West Virginia, Public Policy Foundation of West Virginia, 2009. However, then-Governor, Arch Moore, being unconvinced of the new law’s revenue-generating capacity, vetoed the bill after the time a legislative override of his veto could occur. Michael E. Caryl, The Fair 55 Tax Reform Plan for West Virginia, pp. 34-35, Tuscarora Institute for Enterprise Studies & Advancement (TIESA), 2016.    Later, in 1985, in the only comprehensive change in the state’s tax system to actually become law in many decades, the Legislature enacted a phased-out repeal of the B&O Tax, replacing it with a package of taxes on business capital and certain industries’ gross receipts.  Since then, however, neither of the state’s other two comprehensive tax reform projects resulted in actually enacted significant legislation.  Capehart, Id. p. 23.

[2]  Interview of John Deskins, Director of WVU Business And Economic Research by Hoppy Kercheval, Metro News on 4/27/21.

[3]   Senate Bill No. 600 and House Bill No. 2027, identical 78-page bills containing the Governor’s proposals, were first introduced in the respective legislative houses on March 9, 2021, which was twenty-eight days into the sixty-day session.  This lag by the executive branch, in initiating the legislation to implement its tax relief proposal, stands in contrast to the extensive efforts by the legislative leadership to organize and pre-plan much of the rest of the session’s agenda.

[4]   Under current law, on a joint return, graduated rates on all sources of taxable income range from 3% on taxable income below $10,000, up to a maximum of 6.5% on all taxable income over $60,000.

[5]    Projected by the Governor’s office to represent more than $1 billion (or more than 22% of the current General Fund Budget).

[6]    The current 6% CST rate would be increased by nearly one-third to 7.9%, and the current exemptions for  sales of computer products and services (hardware, software and processing), of most non-medical professional services,  of health/fitness memberships and of lottery tickets, would all be repealed.

[7]   Gradually decreasing income tax rebates would be provided to taxpayers with otherwise taxable incomes  up to  $35,000.

[8]   See, Governor Justice’s “Personal Income Tax Repeal Plan,” pp. 6-7 (Published March 4, 2021). 

[9]   See, Total State Expenditures Per Capita, Kaiser Family Foundation, 2018.

[10]   For at least the last three (3) years, the state’s general fund budget has, unlike the pattern of preceding decades, remained flat in amount and timely in its approval within the 60-day annual session.  Likewise, due to fairly consistent revenue budget surpluses in recent years, the balance in the state’s Rainy Day Fund is now approaching $1 billion. 

[11]   H.B. No. 3300, originated on March 23, 2021, being the 39th day of the 60-day session.

[12]   Both Houses would employ special revenue fund structures to manage public revenue receipts from varying sources which, depending on the future annual levels of same, could result in an acceleration of the projected rate phase-down/out of the personal income tax.  The House fund was designated the “Income Tax Reduction Fund” and the similar, but somewhat different Senate version was designated the “Stabilization and Future Economic Reform Fund (SAFER Fund)”.

[13]  Among the exceptions to those amended sales tax provisions the Senate made were to include contingent legal fees (made taxable for the first time) and currently taxable purchases of prepared food, which would both be taxed at the full 8.5% rate.

[14]  Among the new revenue sources proposed in the Senate version were a Hotel Occupancy Fee, modifications of the current Soft Drink Tax and dedication of the revenues from Lottery Scratch-Off Games.

[15]  The viability of such a trend occurring in West Virginia is highly dependent on the effective improvement of its currently inadequate broadband capacity, which was the focus of other legislation enacted this session (Comm. Sub. for HB 2002) as well as of strong efforts by its recently more prominent U.S. Senators, Joe Manchin, and Shelley Moore Capito, to direct major federal expenditures to that improvement.

[16] Caryl, Fair 55 Tax Reform Plan, supra. pp. 25-27.

[17] Jared Walczak, Evaluating West Virginia Income Tax Repeal Plans, Tax Foundation, p. 10, 16-17.

[18]  Caryl, Fair 55 Tax Reform Plan, supra. p. 34.

[19]   Caryl, Fair 55 Tax Reform Plan, supra. pp. 28-35.

[20]   Thus, under the Fair 55 Tax Reform Plan,, each member of households with annual Federal Adjusted Gross Income (FAGI) under $30,000, would receive the benefit of a Fair Tax Credit Card worth $500.00 in annual clothing purchases. That benefit would be ratably phased out in any year when the household’s annual .FAGI reaches $40,000. Moreover, due to the application of Federal Food Stamp and Supplemental Nutrition Assistance programs, regressive taxes on purchases of food for home consumption would remain exempt.  At the same time, by retaining certain long-standing excise and consumption tax exemptions, purchases of the other necessities of life (housing, medical services, healthcare products, home utilities and public transportation) would remain exempt for all residents, regardless of income levels. Id. pp. 22-26

[21]  Michael E. Caryl, The Progressive, Creditable Implied Purchases Tax: A Modest, Self-Help Proposal Enabling Individual States To Address The Remote Seller Tax Problem And Much More. Tuscarora Institute for Enterprise Studies & Advancement, LLC 2018.

[22]  Though the initial purpose, for which the PCIPT was designed, was to provide another tool to improve collection of consumption taxes due on remote-seller transactions, it could be equally effective in addressing the “border competition” concern. Under the proposal, each resident of the state, subject to the implied purchases use tax, would be required to compute his/her/their implied purchases use tax amount based on the federal tables.  The amount of their liability for that tax would be less a credit for the cumulative amount of the sales or use taxes they actually paid during the same annual period to vendors in their home state or in any other US jurisdiction.  Admittedly, adoption of a PCIPT arrangement requires a degree of policy trade-off between more effective anti-border competition enforcement and the maximum simplicity of both taxpayer compliance and tax collector administration that a broad-based consumption tax otherwise makes possible.


[23]  Comm. Sub. for House Joint Resolution 3.

[24]  See, discussion of 2020 Senate Joint Resolution 9 and implementing legislation, Senate Bill 837, in Robert S. Kiss, “Major Reform Continues to Elude West Virginia’s Tax System,” Tax Notes State, April 20, 2020, p. 333.

[25] See, Comm. Sub. for HB 2581, which established and mandated use of an income method to set the taxable values of producing oil, gas and coal property, and, most importantly, provided taxpayers with the option of appealing disputes about such values to the State Tax Department’s Office of Tax Appeals instead of to the inherently biased county commissions.  Likewise, the appellate reform bill also replaced the judicially-established “clear and convincing evidence” burden of taxpayer proof with a more reasonable “preponderance of the evidence” standard.

[26]  See, Comm. Sub. for HB 2026.

27  The policy merits of such an approach cannot be overstated. E..g., see, Walczak, Evaluating West Virginia Income Tax Repeal Plans, supra. p. 10.

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