2025 West Virginia Tax Cuts
Next year, West Virginians will see an income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
cut thanks to revenue triggers in a 2023 law.
Governor Jim Justice (R) signed House Bill 2526, the West Virginia Property TaxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services.
Reduction Act, into law in March 2023, cutting income tax rates by about 21.5 percent across the board (including reducing the top rate from 6.5 to 5.12 percent)—the largest rate reduction in state history.
That law also stipulated that if the fiscal year-adjusted general revenue fund collections from the immediately preceding fiscal year are more than the inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.
-adjusted base year revenues, then the rates of personal income taxes would be reduced by the same proportion as the excess, subject to a cap of a 10 percent reduction in any given year.
The tax revenues for this past fiscal year totaled approximately $5.7 billion, higher than the adjusted previous year’s $5.24 billion. As a result, income earners of all levels and tax brackets will see a 4 percent reduction in their taxes starting January 2025, reducing the top rate to 4.92 percent (projected).
All else being equal, a reduction in marginal tax rates will increase the returns to labor, increasing labor supply and leading to stronger economic growth in the future. This is particularly important given that West Virginia’s unemployment rate is slightly higher than the national average. Economic growth in the state has been strong during the governor’s current term but has softened in recent quarters.
Total general revenue fund collections in June surpassed $609 million, against the month’s target of $638 million. Notably, individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
collections were more than $236 million in June and over $2.2 billion for the year, against a target of $2.05 billion, even though rates were reduced by 21.25 percent last year.
The governor has also called on his legislators to pass a further 5 percent reduction in tax rates in the upcoming special session in August, in which he also intends to create a competitive child and dependent tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.
, first announced during his latest State of the State address. This proposal has been criticized by some lawmakers, including prominent Republicans, as too much too fast, given the existing mechanisms for phasing in tax relief out of sustained economic growth. Many lawmakers are also frustrated with Justice’s opposition to structural reforms, including tackling the state’s tangible personal property tax.
In more recent reforms, the state finally abolished its distortionary beverage tax, which had been a feature since 1951. As a prime example of how targeted taxes and exemptions are harmful, the tax raised only $14 million in revenue—making it essentially a nuisance tax—but came with compliance costs, such as the printing of tax crowns and stamps, and the associated filing requirements, afflicting beverage businesses small and big for the last 71 years. That ended this month.
West Virginia joins 14 other states that have cut income taxes this year. Recent tax relief in West Virginia has already provided $1 billion in tax savings, a boost to the economic well-being of a state that has the second lowest per capita income (not adjusted for cost of living) in the country.
Given recent receptivity to tax reform and a legislature that wants to do more than just focus on rates, this may be the perfect time for West Virginia to take steps to improve its 22nd-place ranking in the Tax Foundation’s State Business Tax Climate Index by not just lowering its taxes but by also reducing its tax complexity. While further rate reductions wait in the wings should West Virginia’s tax collections continue to grow, the state could also improve its tax system by moving toward a single rate tax, tackling the inventory tax, and reducing or eliminating the taxation of all tangible personal property (machinery and equipment).
Some potential low-hanging fruit for the legislature: reforming the economic nexus criteria for collecting and remitting sales taxes. West Virginia is among the 17 states requiring marketplace facilitators and remote sellers to collect and remit sales taxes if either they meet a dollar threshold of sales, or if the seller meets the threshold for a given number of transactions in the state. Forcing economic nexus through transactions alone can be quite burdensome, especially for smaller vendors, as compliance costs associated with collection and remittance requirements could be greater than the revenue received from the state. As a result, states like West Virginia may see small businesses decide to not do business within their borders. This is a golden opportunity for the legislature to push through reforms in this area, relying exclusively on a dollar-denominated threshold.
West Virginia has, in the recent past, shown real initiative to emerge out of the shadow of other, more business-friendly states. Policymakers now have the chance to follow them up with other reforms that not only reduce the tax burden on their citizens and businesses but that also put the state on a sustained-growth trajectory.
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