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West Virginia Constitutional Amendment Would Roll Back Property Taxes on Machinery and Equipment

Tax Policy – West Virginia Constitutional Amendment Would Roll Back Property Taxes on Machinery and Equipment

Localities in West Virginia have long relied heavily on business tangible personal property taxes. These are taxes on machinery, equipment, furniture, fixtures, inventory—really, any sort of property that can be touched and moved. Such taxes are not rare, despite a widespread recognition that such taxes stand in the way of economic growth. What’s unusual is just how important they are in West Virginia, where nearly a third of all property tax collections are derived from tangible personal property. This year, Governor Jim Justice (R) is pushing a constitutional amendment to chip away at that reliance. The resolutions are being carried by House Speaker Tim Armstead (R) and Senate President Mitch Carmichael (R) in their respective chambers.

Tangible personal property taxes reduce capital investment by making it costlier to invest and particularly to put new and more productive equipment into service. In addition to the actual tax burden, moreover, tangible personal property taxes impose substantial compliance and administration costs because the tax levy is “taxpayer active.” This means that businesses must fill out forms identifying all their personal property subject to taxation and detailing relevant attributes including, but not limited to, a physical description, the year of purchase, the purchase price, and any identifying information (e.g., serial numbers). The tax is to be remitted upon the depreciated value of each article of personal property.

All tangible personal property taxes impose considerable burdens, but one constituent element of West Virginia’s tax particularly stands out: the tax on business inventory. Inventory taxes are highly distortionary because they force companies to make decisions about production that are not entirely based on economic principles but rather on how to pay the least amount of tax on goods produced. They violate widely held principles of sound tax policy: they are not transparent, for instance, and they are highly nonneutral, falling much more heavily on select industries like manufacturers.

Inventory taxes can create strong incentives for companies to locate inventory in states where they can avoid these harmful taxes. They also impose high compliance costs for businesses, which are required to track and value their inventory for reporting and tax remittance purposes. West Virginia is one of only ten states which still taxes most inventory.

In 1999, the Commission on Fair Taxation proposed eliminating tangible personal property taxes and the business franchise tax, identifying both as barriers to the state’s economic growth. In 2006, the Tax Modernization Project made an identical recommendation. Little came of either proposal.

The difficulty in tackling the issue is obvious when observing the unequal reliance across the state. About 10.9 percent of property tax collections in Morgan County (in the northeast of the state) are derived from personal property; on the other hand, in Dodderidge County (toward the northwest), that percentage is 78.5 percent. Similarly wide variations are evident at the municipal level. Statewide, about 32.8 percent of all property tax collections are attributable to the personal property tax.

Clearly, a proposal that holds Morgan County harmless isn’t going to cut it for Dodderidge County, and a solution that preserves Dodderidge County’s revenue streams would likely result in anomalously high tax burdens in Morgan County. In nine counties, personal property taxes account for less than 20 percent of all property tax collections. In seven counties it’s more than 50 percent.

Because of this difficult reality, proposals to repeal tangible personal property taxes haven’t gone anywhere. This year, however, Gov. Justice and legislative leaders have a different proposal—more modest and, thus, more workable.

The Just Cut Taxes and Win (JCTAW) Amendment would phase down the assessed value of tangible industrial machinery, equipment, and inventory personal property between 2020 and 2026, from its current 60 percent assessment ratio to 0 percent by fiscal year 2027. The state would make up the difference to localities, maxing out at $140 million a year in transfers by fiscal year 2027.

Localities are made whole; the state is not. The constitutional amendment, if adopted, would represent a tax cut, beginning at $20 million a year and increasing by another $20 million each year until maxing out at $140 million, enough to cover the full elimination of property taxes on industrial machinery, equipment, and inventory.

The proposed amendment doesn’t eliminate tangible personal property taxes altogether, which ought to be the long-term goal. It does, however, take an important step in the right direction, phasing out these destructive taxes where they hit the hardest.

Past proposals have faltered over fears about local revenue streams, and because the state was unable to commit to making up the difference. The narrower scope of the JCTAW amendment makes state aid a viable solution to the problem, and though such an approach is imperfect—it locks in local revenue based on tax rates and economic activity as it existed at a certain moment in time—it’s also the best opportunity West Virginia lawmakers have had to improve the state’s outmoded property tax structure in a long time.


Source: Tax Policy – West Virginia Constitutional Amendment Would Roll Back Property Taxes on Machinery and Equipment

Tax Reform Moves to the States: State Revenue Implications and Reform Opportunities Following Federal Tax Reform

Tax Policy – Tax Reform Moves to the States: State Revenue Implications and Reform Opportunities Following Federal Tax Reform

Key Findings

  • States incorporate provisions of the federal tax codes into their own codes in varying degrees, meaning that federal tax reform has implications for state revenue beyond any broader economic effects of tax reform.
  • Because the base-broadening provisions of the new federal tax law often flow through to states, while the corresponding rate reductions do not, most states will experience a revenue increase. The vast majority of filers will receive a tax cut at the federal level, but they could easily see a state tax increase unless states act to prevent one.
  • Eighteen states and the District Columbia have “rolling” conformity with the Internal Revenue Code, meaning that they will conform to relevant provisions of the new federal law automatically, while nineteen must update their fixed-date conformity statutes to adopt the new provisions. The remaining states only conform selectively.
  • The largest revenue increases will be in states which conform to the now-repealed federal exemption, either directly or by linking their own personal exemptions to the number of exemptions claimed at the federal level. States which conform to both the standard deduction and the personal exemption will also experience a revenue increase.
  • Six states will incorporate the new 20 percent deduction for pass-through business income unless they decouple from the provision or change their income starting point from federal taxable income to federal adjusted gross income.
  • Unless they act, most states will not conform to an important pro-growth element of federal tax reform, the provision providing for immediate expensing of investments in machinery and equipment. The additional revenue from base broadening elsewhere may provide an opportunity to conform to this provision.
  • States which include Subpart F income, a component of income for multinational businesses, in their base may receive a repatriation windfall, but should avoid building this one-time revenue into their budget baseline.
  • States anticipating additional revenue should view this as an opportunity to make their tax codes more competitive. In the past, federal tax reform has initiated a round of state tax reform as well.
  • State fiscal offices have an obligation to provide critical revenue estimate information to legislators during the 2018 legislative sessions.

Table of Contents

Introduction

Each state has its own approach to taxation—its own combination of tax types, rates and structures, and rules and exemptions. These variations reflect a multiplicity of purposes and an array of fiscal aims, some with contemporary urgency and others lost to the ages. Yet even the most iconoclastic state tax structures draw upon the federal tax code, which becomes more pertinent with the federal Tax Cuts and Jobs Act now in effect.

Some states adopt large swaths of the federal tax code by reference; others use it as a starting point, then tinker endlessly; and still others incorporate federal provisions and definitions more sparingly. In some states, the federal tax code is mirrored; in others, echoed. The differences matter greatly, but so do the points of agreement.

States conform to provisions of the federal tax code for a variety of reasons, largely to reduce the compliance burden of state taxation. Doing so allows state administrators and taxpayers alike to rely on federal statutes, rulings, and interpretations, which are generally more detailed and extensive than what any individual state could produce.[1] It provides consistency of definitions for those filing in multiple states, and reduces duplication of effort in filing federal and state taxes. It permits substantial reliance on federal audits and enforcement, along with federal taxpayer data. It helps to curtail tax arbitrage and reduce double taxation. For the filer, it can make things easier by allowing the filer to copy lines directly from their federal tax forms. In the words of one scholar, federal conformity represents a case of “delegating up,” allowing states to conserve legislative, administrative, and judicial resources while reducing taxpayer compliance burdens.[2]

Delegating up, of course, means ceding a certain amount of control, hence the myriad of ways that states modify or decouple from the Internal Revenue Code (IRC). As states enter their legislative sessions following the first overhaul of the federal tax code since 1986, lawmakers are understandably eager to determine what effects these federal changes will have on their own states’ system of taxation—and, perhaps more to the point, on state revenues.

Most states stand to see increased revenue due to federal tax reform, with expansions of the tax base reflected in state tax systems while corresponding rate reductions fail to flow down. The extent to which this is true (and indeed in some cases, whether it is true) depends on the federal tax provisions to which a state conforms. This paper aims to survey some of the more significant federal provisions often incorporated by the states, shedding light on what each state can expect and what options are available to states as they respond to federal tax changes. In the wake of federal tax reform, states have a golden opportunity to move their own tax codes in a more simple, neutral, and pro-growth direction.

State Approaches to Federal Conformity

All states incorporate parts of the federal tax code into their own system of taxation, but how they do so varies widely. In broad terms, however, approaches to IRC conformity can be divided into three classes: rolling, static, and selective.[3]

States with rolling conformity automatically implement federal tax changes as they are enacted, unless the state specifically decouples from a provision. This autopilot approach tends to provide the greatest clarity and predictability for taxpayers, though at a modest cost of state control.

Static (or “fixed date”) conformity also incorporates wholesale updates of the federal tax code, but to the IRC as it existed at a specific point in time, rather than the adopting all changes on a rolling basis. Some such states conform legislatively every year and are functionally identical to states with rolling conformity, albeit with a measure of added uncertainty. Others are inconsistent, and may even conform to an outdated version of the IRC for many years.

Finally, a handful of states only conform selectively, incorporating certain federal provisions or definitions by reference, but omitting large swaths of the federal tax code and forgoing the use of federal definitions of income as their own starting points for calculation.

No state, of course, conforms to every provision of the Internal Revenue Code. Each state offers its own set of modifications, additions, and subtractions to the code. Each adopts its own set of rules and definitions, frequently layered atop those flowing through from the federal code. But from definitions of income to exemptions to net operating losses, and even what filing statuses are available and whether a taxpayer can itemize their deductions, the federal tax code consistently informs state-level taxation.

Reviewing the Credit Union Tax Exemption

Tax Policy – Reviewing the Credit Union Tax Exemption

The federal tax code exempts several businesses and industries from taxation for various reasons. One example of this is the exemption for state and federal credit unions. As lawmakers continue to evaluate the structure of the tax code, reviewing the justification for this expenditure would be worthwhile.

In 1934, Congress passed the Federal Credit Union Act and made a variety of financial institutions exempt from paying corporate income taxes. Then, in 1951, Congress removed the exemption for some financial institutions while specifically granting the exemption for credit unions to remain in the IRS Code.

An Internal Revenue Service (IRS) document from 1979 provides some explanation for why lawmakers decided credit unions should be tax-exempt. It can be summed by these three reasons: that credit unions would 1) help unbanked, lower-income people, 2) restrict their customer base, and 3) avoid high-risk, high-return investments.

The document explains that customers of tax-exempt institutions are “wage earners of moderate means” with no other place to deposit their savings. And to join credit unions, customers were required to have a common bond; for example, they must be employees of a particular business or residents of a well-defined neighborhood. A final distinction was favoring safe, low-interest investments such as small personal loans. Thus, the function of credit unions, Congress argued, was ostensibly unlike that of other financial institutions.

It is these ideas that justified the tax expenditure of exempting credit unions from paying corporate income taxes. The Joint Committee on Taxation estimates that in 2018, the tax expenditure for credit unions will cost $2.9 billion in terms of lost income tax revenue. The Committee projects the annual cost will rise to $3.2 billion by 2020, making the five-year cost from 2016 to 2020 total $14.4 billion.

Given the change in the financial sector over the last several decades, it would be useful for lawmakers to reexamine the extent to which credit unions currently fulfill their original purpose. If they have strayed from their intended function and now resemble other taxed financial institutions, their exemption would represent a disparity across similar economic activities. The aforementioned IRS report even stated that if Congress felt in 1951 that credit unions had “resembled taxable financial institutions,” it “seems probable” that Congress would have removed their tax-exempt status.

Regular congressional review of all tax expenditures, like the exemption for credit unions, could help unveil areas of the tax code with potential for reform.


Source: Tax Policy – Reviewing the Credit Union Tax Exemption

President Trump Approves Tariffs on Washing Machines and Solar Cells

Tax Policy – President Trump Approves Tariffs on Washing Machines and Solar Cells

Last week, President Trump approved two new tariffs recommended by the United States Trade Representative, the interagency Trade Policy Staff Committee, and the U.S. International Trade Commission (ITC). The recommendations stem from ITC investigations into the increasing number of imported washing machines and solar panels and their effects on competing U.S. industries. Though the tariffs are said to protect Americans, it’s crucial to think through their effects for all actors in the economy, not just the competing industries.

As a review, tariffs are excise taxes on goods produced abroad, and they are intended to increase consumption of goods manufactured at home. They accomplish this by increasing the prices of foreign goods, to sway consumers to instead purchase domestic goods. For consumers, a tariff has effects similar to that of a sales tax—it increases prices.

These are the first tariffs of the Trump presidency, and they rely on a rule that has not been used since 2002. After ongoing ITC investigations into the trade practices of competing countries and import surges of these products, the President used his authorization to impose safeguard tariffs. It is worth mentioning that the last time this rule was used, the World Trade Organization ruled against the United States and the tariff was revoked.

In the washing machine case, the duties contain a quota-like element where imports above a certain threshold have a higher tariff. The rate reaches up to 50 percent on finished washing machines and on washing machine components, and is phased down over a three-year period.

Washing Machines
  Year 1 Year 2 Year 3

First 1.2 million imported washers

20 percent 18 percent 16 percent

All subsequent imported washers

50 percent 45 percent 40 percent

Tariff of washer parts

50 percent 45 percent 40 percent

Washer parts excluded by tariff

50,000 units 70,000 units 90,000 units

The new tariff on imported solar cells and modules is an additional duty, and it follows a similar gradually decreasing pattern. It includes an exclusion threshold for imported cells (unassembled electronic components), but not for imported modules (the assembled package).

Solar Cells and Modules
Note: First 2.5 gigawatt of imported cells are excluded from the increased tariff.
  Year 1 Year 2 Year 3 Year4

Tariff increase

30 percent 25 percent 20 percent 15 percent

Generally, tariffs result in consumers paying more for goods than they would have otherwise in order to prop up industries at home. Tariffs have other effects, too. As consumers spend more on goods on which the duty is imposed, they have less to spend on other goods—so, in effect, one industry is propped up to the disadvantage of all others. This results in a less efficient allocation of resources, which can then result in slower economic growth.

While tariffs may sustain production of certain goods and services at home, they do so at a cost. Though industry estimates must be taken with a grain of salt, one group has estimated that the solar tariffs will cost approximately 23,000 jobs in installation, engineering, and project management this year and will result in the delay or cancellation of billions of dollars in solar investments. They estimate that in the long run, up to a third of the 260,000 Americans employed in the industry could be at risk. As for washing machines, it is likely that every consumer who wishes to purchase one will pay a higher price.

Both tariffs are the result of years of trade litigation to remedy unfair foreign trade practices such as government subsidies that enable goods to be sold below the cost of production. But, as is the case with taxes, it is crucial for policymakers to consider not only how tariffs will impact the interested groups immediately but also how they affect all groups, including consumers and other industries, in the long run.


Source: Tax Policy – President Trump Approves Tariffs on Washing Machines and Solar Cells