The Hidden Cost of State Income Tax Repeal: A Case Study of the West Virginia Neighborhood Investment Program Credit

Abstract

In March 2023, West Virginia significantly cut its personal income tax rates and paved a path toward the full repeal of the personal income tax. This repeal would directly impact West Virginia’s nonprofit sector and reduce charitable giving because it would render West Virginia’s Neighborhood Investment Program (“NIP”) tax credit ineffective. NIP tax credits have been the primary charitable tax incentive in the state’s income tax code and have been widely supported by nonprofits. This Article argues that if the NIP credit program incentivizes charitable giving, then state income tax repeal comes with a hidden cost—the cost of lost revenues to private charities increasingly tasked with providing vital social services. Following the introduction in Part I, Part II looks at West Virginia’s state personal income tax repeal and similar repeal proposals under consideration in other states. Part III reviews state level charitable giving incentives and their interplay with the Federal charitable deduction, using the NIP credit in West Virginia as a case study. Part IV introduces Professor Paul McDaniel’s federal charitable matching grant proposal, first introduced in 1972, which was developed in response to changes in the federal charitable income tax deduction and a growing concern about the role of tax expenditures. The Article proposes that Professor McDaniel’s federal matching grant program could be adapted by those states that have repealed (or are considering repealing) their personal income tax but still wish to incentivize charitable giving on the state level. Part V specifically demonstrates how Professor McDaniel’s grant program overlaps considerably with the structure of West Virginia’s NIP tax credit and could be easily amended to replace the credit in the event of full personal income tax repeal. The Article concludes by urging West Virginia to be a leader among the states considering income tax repeal by demonstrating the manner in which a matching grants program could replace charitable tax incentives