Beth Bedway, co-owner of East Wheeling Clayworks, is concerned about how Gov. Justice's tax plan could affect her business. Photo via Facebook.

Jeff McKay, like many business owners in West Virginia, has had a tough time dealing with this pandemic. 

“I’m probably being too conservative by saying that,” said the owner of Huntington’s Summit Beer Station. 

Fortunately, with the vaccine rate improving, McKay says things are looking up for him and his employees. Business has had a huge bump in the last month. 

“I think people are ready to get out and start doing things again,” he said. 

But his optimism is dampened by Gov. Jim Justice’s proposal to reduce and eventually eliminate the state’s income tax, while also raising the sales tax and tax rates on beer, wine and liquor — all of which McKay sells.

“I kind of feel a momentum right now,” he said. “I truly believe that it’ll be tough to maintain that momentum if we have to charge more money to our customers. And it kind of baffles me that we’re trying to do this during a pandemic when consumption spending is already low.” 

Summit Beer Station. Photo via Facebook.

It’s not just McKay who has concerns that the proposal will increase costs for consumers and reduce West Virginian economic activity. Businesses, groups representing businesses, tax experts and lawmakers have all criticized Justice’s plan. But despite the criticism and even a competing tax proposal under consideration in the state House of Delegates, the governor has shown no sign of slowing down his promotion.

“Open your mind, because this is our time, this is our chance,” Justice said during a Monday roundtable. “Let’s keep the fight going. We’re going to win this thing.”

The governor has held town halls across the state throughout the week promoting his plan, which would reduce the state income tax by 60% in the first year and ultimately do away with it entirely. People who earn less than $35,000 annually would receive a tax rebate check of up to $350.

Income tax revenue represents a whopping 43% of the state’s general revenue fund. Justice’s proposal, which was introduced in both the House of Delegates and Senate a few weeks ago, leaves a funding gap that could exceed more than $185 million.

To pay the tab, Justice proposes raising the state sales tax from 6% to 7.9% and increasing the taxes on tobacco products, beer, wine and liquor. His plan would also add taxes to certain high-value luxury items and professional services, such as accounting services and legal services. 

Justice’s plan would also put in place a tiering system for natural gas, oil, and coal severance taxes that raises companies’ tax rates the more successful they are.

The governor says the proposal will boost economic activity and will attract 400,000 more people into West Virginia. But state business groups, including the West Virginia Business and Industry Council and the West Virginia Chamber of Commerce, contend many business owners won’t benefit while also seeing a rise in production costs and sales tax on their products. 

Mountain State Spotlight reported last month last month that economists worry that the income tax removal would exacerbate the state’s problems. When Kansas passed a similar sweeping tax cut, the economy lagged, and the changes were later repealed. 

The effect on sales, business owners and communities 

Justice has previously said that small business owners who believe the tax plan would hurt them are misinformed. 

But McKay has done his research and estimates that he’ll have to pay $10,000 more each year because of the tax increases. This means he would have to raise the prices on drinks, and he’s worried about losing customers if this happens.

Similar worries are shared by Adam and Beth Bedway, who own East Wheeling Clayworks, a store in Wheeling that sells ceramics and other items. 

“For a small business like us, if we have to increase our sales tax, that’s going to [make us question], ‘Can we pay our workers? Can we reasonably expect people to understand that this is the price of our piece?’” Beth Bedway said. “This isn’t reinventing the wheel. This is putting a wheel out that is already proven not to work.” 

“Yeah, there’s a safety recall on that wheel, and you’re still bolting it on to your car,” Adam Bedway added. 

Adam Bedway, co-owner of East Wheeling Clayworks. Photo via Facebook.

Also in Wheeling, David Comack owns Tacoholix, which sells tacos and beer. Early in the summer, Comack turned to GoFundMe to help keep his business afloat. Things are getting better now, and he said it’s starting to feel like they’re coming out on the other side. 

While he doesn’t know how much the tax increases would affect his own business, Comack said  he’ll have to raise prices on his beers if Justice’s plan passes, and he worries that will turn some customers away. The current $5.50 tax on barrels of beer would increase to $29.25

“We can’t let our margins erode because of new tax legislation,” he said. “It would inevitably pass on to the customer.”

Justice argues that with income tax savings, more West Virginians are likely to support in-state businesses. But Wesley Tharpe, deputy director of state policy research at the left-leaning Center on Budget and Policy Priorities, said the lion’s share of the benefits from slashing the income tax is likely to flow to those at the top of the income ladder, not to working families more likely to pump dollars into local economies. In addition, those families will pay higher taxes on some of the things they buy.

At the same time, Tharpe said getting rid of such a state revenue-earner like the income tax can have the effect of driving cuts to government services that are crucial to local economies, such as infrastructure, health care and good public schools.
“It’s really just as likely that local economies and families and communities would come out on the losing end from a plan like this,” Tharpe said. 

Steve Roberts, president of the West Virginia Chamber of Commerce, said the tax on professional services is also a big concern.

He said he’s talked to businesses worried that the tax on professional services could cost them millions and lead to layoffs, and they say they might leave the state.

Businesses often use professional services, and since Justice’s plan would increase their costs,  Roberts said, that’s another bigger  cost businesses will have to pay.

While businesses will be expected to shoulder the increase in taxes, the incomes of many are excluded from seeing an income tax reduction, per the governor’s plan. Among the multiple types of incomes excluded from the benefit are “Schedule C” incomes, which affect many business owners.

“It doesn’t make sense,” Comack of Tacoholix said. “You have to make up for it, but wait, you still have to pay your taxes too. That doesn’t make a lot of sense.”

Jared Walczak, vice president of state projects at the right-leaning Tax Foundation, said this exclusion undercuts many of the objectives of Justice’s proposal, running counter to the goal of economic growth. 

Walczak says in general West Virginia policymakers are right in recognizing that lower income taxes can generate additional economic growth and other benefits. But he said Justice’s proposal shifts taxes into areas that reduce competitiveness. 

Out-of-state competition

Huntington is a short drive from both Ohio and Kentucky. Wheeling is across the river from Ohio. West Virginia’s southern coalfield counties border Virginia, and up north Pennsylvania and Maryland are just a short drive away. Groups representing state businesses and industries worry that businesses on the border could lose business from a neighboring state. The businesses Mountain State Spotlight spoke with shared the same concern.

“With 60 percent of West Virginia’s population living on the border, and border state sales taxes ranging from 5.3 to 6 percent, this legislation could encourage state residents to cross the border to make purchases, thus hurting existing state businesses,” the West Virginia Business and Industry Council wrote in a letter to legislators. 

But Walczak predicted the cross-border shopping effect to be “real but modest.”

“Consumers will engage in some cross-border shopping, but most of the evidence is they won’t go substantially out of their way for everyday purchases,” he said. “They’re more likely to do so on significantly larger purchases or bulk purchases.”

One example? Bristol, a twin city that is shared by Tennessee and Virginia. The state border goes down the middle of the town’s main street. 

Tennessee has the highest combined local and state sales tax rate, according to the Tax Foundation, though it also has no income tax. Virginia is ranked 41st in the nation for its sales tax rate and does have an income tax.

Beth Rhinehart, president and chief executive officer of the Bristol Chamber of Commerce, said while her organization hasn’t studied the issue, she hasn’t noticed the sales tax rate making a substantial difference where people shop. 

“For the most part, people are going to shop where it’s convenient for them,” she said. “I’m not sure that people pay a lot of attention to the state in regard to that.” She acknowledged that she has heard of people making a big-ticket purchase going across the street for the lower sales tax.

But Walczak says where sales tax will make a difference is in business production costs.

“Every West Virginia business will face higher costs when they pay sales tax on their production process, a lot of their intermediate transactions, so their tax costs are going up, and either that gets paid by West Virginia consumers as an embedded tax or it puts them at a competitive disadvantage with their peers outside the state who don’t face those taxes,” he said.

Though, in the context of West Virginia and its neighboring states, Roberts of the West Virginia Chamber said the impact is unknown.

“We can’t say it will be negligible, because we have too many companies, businesses, saying it absolutely will have an impact, they have seen it in other things,” he said. “We have our employers telling us, ‘We’re scared to death of this.’”

The legislature’s bill 

While the governor’s plan remains stagnant in House and Senate committees, a legislative income tax proposal has already passed the House Finance Committee and was on third reading in the House chamber Friday. 

House Bill 3300 would phase out the state’s income tax much more slowly than Justice’s proposal, slicing it by at least $150 million each year until the income tax is eliminated, which isn’t predicted to happen until at least 2033. 

The bill also creates an “Income Tax Reduction Fund” that is fed by multiple streams of state revenue. Once that fund reaches $400 million, the government can transfer $100 million into the General Fund to cushion an additional $150 million in cuts, according to the fiscal note.

Roberts said business owners are in favor of the bill because it moves more slowly.

“It anticipates very small reductions to the personal income tax; it allows for stopping the reductions if certain budgetary goals are not met within the state government,” he said. 

But this bill is also not without controversy; while it lowers and eventually eliminates the income tax, it doesn’t contain any way of offsetting lost revenue from the cuts. 

Sean O’Leary of the West Virginia Center on Budget and Policy said it “would devastate” the state budget in a recent blog post

“Instead of responsibly designed cuts and offsetting revenue increases to protect state investments, the bill would enact large, compounding tax cuts every year that are structured to lose revenue, while diverting existing revenue into a fund designed to cut taxes even further — all in a year where there are major unanswered questions about the state’s fiscal health and future needs, and after years of failed tax cuts and underinvestment in education, public health, and infrastructure,” he wrote.

Roberts said his organization believes with state economy growth the tax growth will follow, but said their view on the bill could be reconsidered if cuts are needed to make up for lost tax dollars. 

“A future Legislature can come back and say, ‘Oh, this is not working the way we wanted it to? Let’s slow it down, or let’s speed it up, or let’s adjust rates,’” he said. “This is not a solution that binds us for the next 12 years. It is a bill that opens an opportunity to reduce the rate to make it more competitive.”  

The fate of Justice’s legislation and the bill originating from the House Finance Committee is still unknown. The deadline for a bill to make it out of committee in its chamber of origin is Sunday; ultimately both legislative chambers need to pass a bill to get it on the governor’s desk. If Justice doesn’t like the measures lawmakers have passed, they may have to override a veto to get a tax plan enacted. And only a couple weeks of the legislative session remain.

Douglas Soule is a Report for America corps member who covers business and economic development. A Bridgeport native, he worked as an intern at the Charleston Gazette-Mail. He has served as editor-in-chief...