CHARLESTON — It’s been nearly 24 years since a commission formed by West Virginia’s oldest and youngest governor recommended the elimination of tangible personal property taxes on machinery/equipment, inventory and vehicles. But that question still dominates today as voters consider a constitutional amendment in November.
Early voting begins on Wednesday with Election Day on November 8. Among the dozens of candidates on the ballot, voters will vote on four amendments to the West Virginia Constitution, including Amendment 2.
The constitutional amendment would update language and give members of the West Virginia Legislature the power to exempt six categories of corporeal property taxes that counties, cities and school systems rely on. These include taxes on tangible personal property on vehicles, machinery/equipment, inventory, computer equipment, furniture and fixtures, and leasehold investments.
If approved by voters, Amendment 2 would not automatically remove these taxes. This would require lawmakers to pass a bill during the 60-day legislative session that begins each year or in a future special session to exempt these tangible personal property taxes from collection.
It would also force lawmakers to come up with a plan to keep counties whole. The combined assessment for the 55 counties for these six categories for the 2021 tax year was more than $515 million according to the West Virginia Association of Counties, although the total amount of taxes collected by the counties did not not been made public for that same taxation year.
According to previous studies by the nonpartisan Tax Foundation, corporeal personal property taxes account for nearly one-third of total county property taxes, with real property accounting for 54% of collections and utility property accounting for 13%. The state constitution requires that all taxable property be assessed at a minimum of 60 percent of market value.
State Senate Republicans have a draft plan to fund county governments and county school systems from other tax collections through the general revenue fund. Opponents of Amendment 2 fear that counties will depend on future legislatures for funding and loss of local control.
Eliminating tangible personal property taxes on machinery/equipment, inventory, and vehicles has long been a goal of West Virginia Republicans. The state Republican Party platform includes a provision supporting the elimination of these taxes. One of the first things Republicans did after winning a majority in 2015 was create the Joint Committee on Tax Reform that looked at personal property taxes.
A number of studies of West Virginia’s tax landscape have been done over the past 55 years, but the first recent study that recommended ending taxes on tangible personal property was done under the late Republican Governor. Cecil Underwood, who served one term in 1957 as a state representative. youngest government and served a second term in 1997 as the state’s oldest governor.
“BETTER GOVERNMENT – NOT BIGGER GOVERNMENT”
Underwood established the Governor’s Commission on Fair Taxation on July 25, 1997. The 14-member commission charged with determining whether the state’s tax system “adequately embodies the principles and values of the people of West Virginia”, and to develop reforms to the tax system to make it fairer among taxpayers, between the system and taxpayers, and fair in the workings of government.
During his 1998 State of the State Address, Underwood said the commission’s work would be completed by July of that year, although the work would not be completed until January 11, 1999. The Democratic-controlled Legislature never implemented any of the commission’s recommendations by the time Underwood left office in 2001.
“We must continue to focus on the essential task of reforming and modernizing government,” Underwood said. “Now is the time to review progress in making government ‘better, not bigger’.”
The commission found that West Virginia’s tax system at the time was too regressive, contained too many taxes, too many exemptions, was not adaptable to changing economic conditions, and did not generate enough revenue. for local governments, among other issues.
The commission was chaired by Robin Capehart, a Marshall County native, Underwood secretary of the Department of Taxes and Revenue. One of the commission’s recommendations was to eliminate tangible personal property taxes on vehicles and a three-year phase-out of tangible personal property taxes on machinery/equipment and inventory.
The commission also recommended reducing reliance on property taxes overall and increasing the ability of counties and cities to generate tax revenue in other ways. Now president of Bluefield State University, Capehart said it makes sense for state and local governments to rely on property taxes during the state’s infancy, but a new fiscal balance is needed in the state. modern economy between consumption taxes, income taxes and property taxes.
“The only thing they really had to tax was property because in those days property kind of gave you an idea of your ability to pay,” said Caphart. “It’s just an outdated form of taxation.”
Capehart also said the tax on tangible personal property is inherently unfair. As an example, Capehart said a law firm that earns $20 million a year likely pays significantly less tax than a coal company with the same annual income due to the possibility that the law firm might lawyers have little or no tangible personal assets, having no real estate if they rent, and not being subject to severance pay. Capehart said his example shows the injustice within the state’s tax system.
“We looked at the fairness of the tax base, not the tax rate,” said Caphart. “You have about 50 different types of taxes, and you have to look at the tax base for each of them… It’s not the rates that create the injustice, it’s the tax base. And that is the problem with property tax. It no longer measures wealth, it falls disproportionately on people with high capital investments.
ASSESS THE SITUATION
One of the ways the commission considered to maintain the financial integrity of counties and cities was to allow those counties to retain the portion of local property taxes used to fund schools – the local portion – to replace lost revenue from the fact of the elimination of taxes on tangible personal property.
Funding lost to county schools would then be provided by the state from the school aid formula. State law requires the state to make up any shortfall in county education funding, requiring no action by the legislature. Funding for public education accounted for more than 42% of the general revenue budget for fiscal year 2022.
“This idea that local property tax pays for schools is kind of a myth in that if they couldn’t find the money because they had property that was worthless, then the state would have to pay the rest because that’s what the tutoring formula does,” said Caphart.
Capehart also pointed out that counties could also seek to regain control of levy rates. County assessors set levy rates for cities, counties, and schools, but that power has been transferred to the legislature. Legislators have the legal power to increase levy rates up to 100%, although it would take two-thirds majority votes in the House of Delegates and the Senate to change those tax rates.
Legislation passed in 1991 limits the growth of tax revenues collected by local authorities. Several studies, including a 2009 study by the West Virginia Bureau of Business and Economic Research, found that the state ranks among the lowest in the nation when it comes to property taxes.
“Currently, property is categorized and taxed, with some modifications, in accordance with legislation passed just after the Great Depression, which was designed to reduce taxes for residents and farmers in the state and depends on the majority of the income of the companies”, wrote researchers Amy Higginbotham, Arzu Sen and Tami Gurley-Calvez. “Based on analyzes of who actually bears the burden of the tax, regardless of who wrote the check, it is unclear whether this goal is being achieved.”
West Virginia ended the prior fiscal year with more than $1.3 billion in excess tax revenue caused by maintaining a stable budget and controlling spending since 2018 and natural growth in tax revenue, as well as above-average starting tax collections, an influx of federal stimulus, and inflation driving up prices and additional tax revenue. The state is expected to surpass $500 million in excess tax revenue by the end of this month.
Whatever form tax reform takes — elimination of taxes on tangible personal property or a 10% personal income tax cut favored by Gov. Jim Justice — Capehart said there is no no better time to implement serious tax reform than now. It’s an opportunity that Underwood couldn’t see happening. He died in 2008.
“When you have a huge surplus, there’s never a better time to look at the fairness of our tax bases than when you have huge surpluses,” said Caphart. “I guess the question is, where do you want to be at the end of the day? Do you want lots of people where their spending is going to drive the economy, or do you want a capital investment-led economy? It’s an age-old question.It’s the old supply side versus demand side.
(Adams can be contacted at [email protected])