The Big Plan for WV: Raise Workers’ Taxes; Gut the Budget; Sell Out the Future

West Virginia Governor Jim Justice’s plan to eliminate WV’s state income tax isn’t just some free market fantasy to create population growth. It’s a recipe for sending the rich laughing all the way to Wall Street and for locking West Virginia into a new century of plutocracy.

Here’s the broad proposals, the basic economic incentives, and how it all leads to the real planned outcome.

First, his plan will eliminate state income taxes for all West Virginians, with people who earn the most receiving the biggest tax break as a result.

He wants to begin with a 60% cut to the income tax, but aims to eliminate it over time. This is an important number, because it allows them to tell workers that “your taxes will go down by more than half!”

It’s catchy, but the only people who will experience that as a lasting benefit are people who already put a large portion of their earnings into savings and investments. The most profound impact of this is that it will allow the wealthiest West Virginians to stash even more of their earnings into investments that can yield them even more untaxed income — all of which can be passed down from one generation to the next. Over time, this will effectively eliminate any sense of bootstraps meritocracy in favor of achievement by inheritance.

Simply put, this proposal will most dramatically put more money into the pockets of West Virginia’s wealthy families and their heirs.

Second, his plan will give tax rebates to people who earn less than $35,000.

I have gone on the record of stating simply that under Jim Justice’s plan, if someone spends most of their income, they will see their taxes effectively go up. This is a claim that can really only be contested because Justice asserts that under his plan, people earning under $35,000/year will receive a tax rebate check. I admit, if you just give people money, that it could conceivably create tax savings for those earners.

But why would they need to give a tax rebate to these earners if this is going to lower their taxes?

Because….

Third, by raising the sales tax to the highest in the U.S., his plan raises taxes on people who spend most of their income.

This is the sneakiest part — it’s a backdoor tax increase on average West Virginians. The only reason that it would be necessary to include ‘tax rebate checks’ in this plan is because otherwise, the recipients of those checks would immediately see their taxes go up and their spending power go down. This is because you cannot cut taxes per dollar of earnings without raising taxes per dollar of spending, at least if you’re trying to pretend like you care about balanced budget.

This third point, in turn, cuts two ways.

• Because high earners will be keeping more of their income, they will also be able to put more of their income into savings. Savings are simply earnings that you don’t spend, and so every dollar that’s not spent avoids taxation twice. This goes back to how high-earners will get to keep more of their earnings that they can hand down to their heirs.
• For earners who currently spend most of their income, and especially those who use ‘extra’ income to service debt, this means that their spending power is going to go down. Yes, they will get to keep more of the dollars that they earn, but each of those dollars that they earn is effectively worth less. Right now, every $1.00 in my wallet is effectively worth $0.94 when I go to spend it, because of West Virginia’s 6% sales tax. Under Justice’s plan, every dollar would be worth, at most, $0.92. Under Justice’s plan, it’s worth even less if you happen to use that $1.00 to buy a soda.**

Fourth, Justice’s plan seems self-defeating for a handful of reasons.

One obvious way that it’s self-defeating is that it creates a strong incentive to go out of state to buy goods, where a dollar in my wallet is worth more when I spend it. This means that West Virginia state would lose out on tax revenue twice (income tax and sales tax) and every dollar spent out of state would help bolster our neighboring states’ budgets.

Another way it is self-defeating is because it eliminates the benefit of letting workers keep more of their paycheck. The main case for eliminating income taxes for the lowest earners is rooted in the concept of the velocity of money. Investopedia uses a two-person example:

Consider an economy consisting of two individuals, A and B, who have $100 each. A buys a car from B for $100. Then B purchases a home from A for $100. B has kids and enlists A’s help in adding new construction to his home. For his efforts, B pays A $100. A also sells a car he owns to B for $100. Thus, both parties in the economy have made transactions worth $400, even though they only possessed $100 each.

This is one of the arguments for how raising the minimum wage and debt jubilees are good for the whole economy and good in a whole host of ways, even for employers.

But the way Justice’s plan works, the value of each dollar is reduced every time it exchanges hands between a buyer of WV goods and a seller of WV goods, creating more of an incentive to spend dollars out of state and avoid paying the highest sales tax in the country.

A third way it is self-defeating is that tax incentives are not a major factor when people and businesses choose to locate somewhere — good infrastructure and public services are.

Michael Hiltzik pointed this out in the LATimes when Amazon’s pulled out from New York City: “it’s well established that tax incentives rank low on the list of factors in a company’s siting decision, overshadowed by many of the other factors […], such as the availability of a skilled workforce and transportation and communication infrastructure. Companies ask for the handouts, and take what they’re offered.”

In other words, blowing a hole in the budget and cutting public services would be a great way to make our neighboring states more attractive to businesses.

Fifth, Jim Justice’s plan hurts small-businesses that sell goods or services.

Facing an increase in sales taxes, a business has two options. One option is to pass the entire tax onto the customer, which translates as a price hike. Basic economics tells us that price hikes decrease demand because it decreases the buying power of individuals. For small businesses, this means fewer sales, which would lead to another self-defeat for the plan, as fewer sales mean less revenue in the form of sales taxes.

A second option is to eat the tax hike and try to keep prices about the same. This option is only available to the most successful businesses with high profit margins. For small businesses eking by, this is not an option especially in the age of online retail! This is also self-defeating for the state, because lowering prices lowers the amount of tax collected on each gross sale.

There is of course one big exception to the rule of price hikes leading to decreased buying power.

High earners under this plan will be able to stomach price hikes. Savings can be thought of as “excess buying power,” and so price hikes don’t reduce buying power for earners with savings, price hikes only reduce excess buying power for earners with savings. Another way of looking at it is that the proposed sales taxes could lead to price hikes that mildly reduce inheritances for high earners’ heirs, but they won’t change the buying habits of the state’s high earners. If high earners were to increase their purchasing, it would be because of the incentive to buy goods in neighboring states, where their dollars are worth more.

But for anyone who doesn’t have excess buying power, the price hikes will lead to a reduction in total demand.

Finally, these aren’t bugs in the plan — these are the features. It’s not a plan to promote population growth, it’s a recipe for plutocracy.

• Hurt working people’s buying power.
• Hurt small businesses’ selling power, and force small businesses in WV to make tough decisions around the margins.
• Allow high earners to keep more of their high earnings and to pass most of their savings to their heirs.
• Collect fewer tax dollars overall, ripping a gaping hole into the budget.

Most of WV’s champions for this plan are too savvy to give up the game yet, and they seem to be dodgy about comparisons to Kansas’ disastrous experiment with basically the same plan. In Kansas a very similar plan managed to blow a hole in the state budget, shutter small businesses, lower the state’s credit rating, and let the state’s richest residents get a whole lot richer. Kansas reversed it several years ago because voters were so sick of the “red state model”.

The truth is, Jim Justice and the WV GOP know it’s basically the same plan, and that’s the goal.

According to conservative economists, Kansas’ disaster actually wasn’t a disaster because of the tax side — it didn’t work, according to conservatives, because Kansas didn’t gut their state services enough. They don’t plan on making the same mistake here.

As I’ve written before — blowing a hole in the budget by lowering taxes on the rich is just the first step of a three point plan.

The second step is to point to the hole in the budget and proclaim that we must gut the government and strangle popular public services. Again, this ensures actual service businesses and manufacturers won’t move to WV, because businesses rely on public infrastructure like good roads and reliable telco and clean air and water.

This second step works particularly well when average people lose faith in government. Often people lose faith in government because they feel like they’ve paid more in taxes while the state has gone further into debt and public services have worsened— and that’s exactly what will happen under Jim Justice’s plan.

The third step is to privatize and profitize those services to out-of-state operators. This would be to the great benefit of out-of-state hedge funds and corporations and their shareholders, but also to the great detriment of average West Virginians. (The only people who can straight-faced argue that WV would be better if everything were run by out-of-state corporations, I assume, are people who have never been a Frontier customer),

Who will own West Virginia’s community resources and public services in the future?

If Justice gets his way, it won’t be average citizens and taxpayers.

It will be New York hedge funds, multinational corporations, and the heirs of the families who are running the show in the present.

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**None of this accounts at all for municipal & county taxes, which under this plan can easily cut down the spending power of $1.00 to closer to $0.88!