THE WHY AND HOW OF PERSONAL PROPERTY TAX REPEAL AND REAL PROPERTY TAX REFORM IN WEST VIRGINIA [1]

By Michael E. Caryl, Senior Fellow

Tuscarora Institute for Enterprise Studies & Advancement, LLC (TIESA)

A.        THE NEED FOR COMPREHENSIVE TAX REFORM IN WEST VIRGINIA

 

1.   The state’s current general tax structure makes us economically uncompetitive. 

 

      U.S. Census Bureau data shows that West Virginia is consistently in the bottom 2 or 3 states in medium family income, and is the only state currently losing population.   Thus, it should be no surprise that, as the liberal-leaning Tax Policy Center of the Urban Institute and Brookings Institute shows, by a large margin, we rank highest in the 12-state Southeastern Region in state and local tax taxes collected as a percent of that income.  Indeed, our level of state and local taxation, as a percentage of income, is 29% higher than the regional average and even 8% higher than the second highest state in the region (Mississippi).   The tax burden our modest collective income bears is also higher than that of each of our five (5) immediately adjacent states by an average of 10%.

       According to Ernst & Young’s August 2017 survey (“Total State and Local Business Taxes”), West Virginia’s Total Effective Business Tax Rate (TEBTR), which compares total state and local taxes imposed on business with a state’s gross private sector economic output, is the 6th highest in the USA and higher than all five (5) of our immediately neighboring states by an average of 38%.  That same study shows that West Virginia has the USA’s 4th highest ratio of business taxes to government spending that immediately benefits business (including a uniform portion of public education expenditures).  NOTE:  These rankings are based on circumstances existent AFTER repeal of the state’s business franchise tax and reductions of its corporation net income tax rate.

      Further, the Tax Foundation’s October, 2015 presentation to the Select Joint Committee on Tax Reform reported that. in West Virginia, the portion of total state and local taxes represented by tangible personal property taxes (including those on motor vehicles) was MORE THAN DOUBLE THE NATIONAL AVERAGE.   

      

      Thus, it is not surprising that virtually every major new industrial capital investment in West Virginia, made in the last several decades, was dependent on, and induced by, some contrived (winner-picking) state and local tax relief package in the form of investment tax credits, public/private sale/leasebacks and “salvage value” rules.  In other words, new, job-creating investments will not be made in businesses here if they are subject to the general tax structure of the state.

2.   The current property tax structure is also highly regressive for individuals, uncommonly restrictive on local government and denies due process to businesses.  

3.   Although this proposal calls for a detailed amendment to the state’s constitution, that is primarily intended to clarify its original purpose and to remove provisions that are inconsistent with the degree of flexibility and discretion the founders intended the Legislature to have in establishing policies for the general benefit of the people.[2]     

     

B.        TAX REFORM BASICS AND SPECIFICS

1.   Fair 55 Tax Reform Plan – Overview[3]

2.   Fair 55 Tax Reform Plan – Details of Constitutional Amendment/Property Tax Aspects:

          a.         Immediately repeals property tax on motor vehicles.

          b.         Phases out tax on all other existing tangible personal property (except for public utility property) and, thereafter, only imposes property tax on real property interests defined as such in the common law of property including chattels real and on all public utility property.

          c.         Requires Legislature to fully fund current expenses (regular levy) for  K-12 public education at “thorough and efficient” standard (as expressly defined by the Legislature), and to do so by  equalized block grants to counties based on student population.[4] The general fund revenue, enabling the Legislature to replace the property taxes formerly applied to this purpose, will come from the increased revenues projected to accrue from the stimulus and base-broadening in the Fair 55 Tax Reform Plan.

          d.         Gives counties and municipalities exclusive authority over the regular levy real estate/public utility property tax base, which should be ample to replace the tax revenues from non-chattels real personal property.[5]

          e.         Until each of the local school, county and municipal bond and special levies, in existence at the time of ratification of the constitutional amendment, expire by their existing terms, the schools’ former share of the retained regular levy taxes, imposed on real estate/public utility property, would be re-designated the “state’s share” of such taxes, and as such, would be collected and distributed by the state for the benefit of those levying bodies.  Thus, if, due to the interplay in a particular county, between the relative values of taxable and newly exempt property, and/or to the annual obligations of such pre-existing bond and/or special levies, specific school, county and/or municipal level, re-direction of portions of the $402 million in such revenue (shown in footnote 5, below), if needed, would be authorized for that purpose.

          f.          During the phase-out period, in the highly unlikely event that, in the case of any given levying body, the foregoing reallocated revenues do not satisfy existing obligations, the Amendment requires the Legislature to make whole such levying body in terms of tax base capacity (not budgeted revenues).  To that end, the current rule, limiting the ratio of assessed value to fair market value to 60%, would be retained, but, during the phase-out period, the Legislature could, by general law, authorize any county or municipality to seek voter approval to temporarily raise that ratio to up to as much as 100% if necessary to maintain its tax base capacity at the pre-repeal level.  Thereafter, the statewide assessment ratio could only be raised statewide (up to 100%) by a super-majority vote of three-fifths (3/5) in both houses of the Legislature.

          g.         Grandfathers the real estate/public utility property tax base and pledges the state’s credit to guarantee payment of unpaid balances on all levying bodies’ existing bond and special levies.

          h.         Retains authority of local school boards, counties and municipalities to seek voter approval for the issuance of future bond and special levies payable from real estate/public utility property taxes.

           i.          Authorizes the Legislature to establish maximum property tax rates to be levied by counties and municipalities for three property classifications, to-wit:  (A): residential (both owner and tenant-occupied), farms and managed timberland; (B):  all other real estate outside of a municipality and (C): all other real estate within a municipality, which rates must always bear the relative numerical ratios among them of 1(A) to 1.5(B) to 2(C).

3.         Fair 55 Tax Reform Plan – Other Aspects of Constitutional Amendment

            a.         Grandfathers all state and local tax investment credits, exemptions, valuation discounts and sale/leaseback (PILOT) arrangements, which taxpayers earned and on which they relied in making existing in-use investments.

            b.         Require a three-fifths (3/5) super majority vote in both houses of the Legislature to enact legislation providing any future investment tax incentives.

            c.         Preserves all existing municipal taxing authority (except tax on tangible personal property after full repeal and phase-out) and authorizes the Legislature to provide additional authority to both municipalities and counties to impose consumption and excise taxes which are equal and uniform within each county.

            d.         Requires the Legislature to establish an independent, quasi-judicial body, which is not controlled by any levying body, to review challenges to assessments of both property taxes and other local government taxes.

            e.         Requires a three-fifths (3/5) super majority vote in both houses of the Legislature to enact any new tax that does not exist on the date of ratification.

            f.          Requires the legislature to assure that the rates and application of each state-imposed tax is equal and uniform throughout the state, that all similarly-situated taxpayers are taxed equally and that the rates of all state-imposed taxes have the same numerical ratio to each other as they have at the time of ratification of the amendment and in subsequent enactments. 

            g.         Requires that any government charges denominated as “fees” be imposed on the basis of a fixed statutory dollar amount and not as a percentage of any other measure.

4.         Fair 55 Tax Reform Plan – Process for Design, Explanation and Implementation.[6]

C         CONCLUSION

       Because taxation involves the most profound and complex interaction of governmental functions with voluntary human economic behavior, there is nothing the Legislature can do to have a greater long-term beneficial impact on the lives of West Virginians than to adopt well-considered, comprehensive tax reform.  To do that, we must think outside the box of poverty in which we have been entrapped for at least a half a century.  The reflexive defenders of this bleak status quo must open their minds to give progress and prosperity a chance.  Only then, will West Virginia cease to be an island of poverty in a sea of prosperity.

 

 

10652465.1

 

 

 

[1]   An earlier version of this paper was presented in the Fall of 2017 to both the Legislature’s Joint Committee on Government and Finance (in Charleston) and the West Virginia Association of Counties (in Shepherdstown).  Except as otherwise expressly noted, the fiscal data contained in this paper was updated through December, 2018.

[2]  Specifically, in Article XII of the West Virginia Constitution, dealing with Education, it provides that “The legislature shall provide support of free schools … by general taxation of persons and property or otherwise … It shall also provide for raising in each county or district, by authority of the people thereof, such a proportion of the amount required for the support of free schools as shall be prescribed by general law.”  Art. 12, Sec. 5. (emphasis added).  Further, in Article X, Taxation and Finance, the Constitution also provides that “The legislature may impose a state tax or taxes or dedicate a state tax or taxes or any portion thereof to be distributed to such counties, municipalities or other political subdivisions … under such circumstances and subject to such terms, conditions and restrictions as the legislature may prescribe by law.” Art. 10, Sec. 6a(2).  (emphasis added).

 

[3]   See, the author’s earlier article, “West Virginia Does Not Have To Be Kansas: How Smart Tax Reform Can Succeed.” www.tiesablog.com.   

[4]   To preserve the Legislative flexibility clearly intended by the above-quoted constitutional provisions, the language of the proposed amendment in this ratable per pupil funding rule should expressly allow the establishment of a minimum per county dollar amount of such funding as authorized in recent legislation protecting smaller counties’ school budget needs.

[5]   In Tax Year 2017, taxes from non-chattels real personal property represented 27% of all property tax collections ($533 million total - $80 million from chattels real property = $453 million, which, if divided by total property tax collections of $1.7 billion = 27%), thus, making non-school levying bodies’ total revenue from non-chattels real personal property taxes = $156 million (0.27 X $586 billion), and schools’ special/bond levy revenue from non-chattels real personal property taxes = $152 million (0.27 X $563 million), for a total of tax revenue to be replaced of $308 million.  Comparing that sum to the reallocated remaining regular levy real estate/public utility property taxes (levied by the schools) which equals $402 million (0.73 X $551 million), it is clear that there will be sufficient revenues remaining in the reformed system to cover those obligations.  Source: “Classified Assessed Valuations Taxes Levied, 2017 Tax Year Fiscal Year Ending June 30, 2018.” published by the West Virginia State Tax Department.

[6]   Note 3, supra.

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