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Tax cuts, low estimates and volatile revenues? Inside West Virginia’s $1.8 billion budget surplus

Mountain State Spotlight looks at the numbers and trends

By P.R. Lockhart, Mountain State Spotlight

CHARLESTON, W.Va. — West Virginia Gov. Jim Justice announced Friday that the state has collected a historic $1.8 billion budget surplus in the 2023 fiscal year. 

“We’ve shattered all kinds of records for a surplus beyond belief in West Virginia,” Justice said. 
But that surplus is mostly temporary, boosted by one-time federal aid and accomplished through low-balled revenue estimates.

Mountain State Spotlight’s Economic Development Reporter P.R. Lockhart reported three major caveats to keep in mind before getting too excited about the surplus:

  • Caveat #1: Much of the surplus comes from incredibly volatile severance tax collections

The single biggest contributor to this year’s budget surplus is severance tax collections: taxes applied to the extraction, production and sale of natural resources like coal and natural gas. This year, West Virginia collected nearly a billion dollars in severance taxes, more than double what it collected in 2020. 
But severance tax collections are dependent on the price of resources like coal and natural gas. When those prices go up or go down, severance tax collections rise and fall as well. This makes the severance tax highly volatile and not something the state can count on to be a consistent revenue source.  

  • Caveat #2: The surplus relies on artificially low revenue estimates – and temporary federal aid

While severance taxes are outside of Justice’s control, he has used his control over state revenue projections and the annual budget to help create the surplus.
The governor creates a revenue estimate that projects how much money the state is expected to bring in from taxes during a particular year. Anything over the estimate becomes surplus.  
The West Virginia Center on Budget and Policy argues that Justice has intentionally kept these revenue estimates low in recent years by projecting that the state will bring in fairly small amounts of money and then touting a “surplus” when the state brings in more than those low-balled figures. 
“The governor has essentially gamed the process by not using economic forecasting, or realistic estimates of the revenues that are expected, but what they ideologically want the budget to be,” said Kelly Allen, executive director of the West Virginia Center on Budget and Policy.

The state has also used one-time federal pandemic relief money to temporarily patch some problems, like childcare subsidies, instead of putting more money into the budget.  

  • Caveat #3: New tax cuts will reduce the state’s surplus revenue moving forward. Further cuts could be on the way.

For some local organizations and national policy groups, the biggest problem with West Virginia’s surplus is that Justice and legislative leaders used the temporary gains to justify a large, and permanent, income tax cut.
During the legislative session, Justice and several lawmakers argued that the state’s extra revenue should be returned to taxpayers, and that this would attract businesses. The tax cut package that passed will reduce state revenue by roughly $750 million a year. In the coming years, a trigger mechanism in the law could cut the income tax rate even further, potentially all the way down to zero. If that happens, the state could lose as much as $2 billion in annual revenue.

Read Lockhart’s article: https://mountainstatespotlight.org/2023/06/30/budget-surplus-revenue-income-tax-wv/?utm_source=Mountain%20State%20Spotlight&utm_campaign=c4a4441213-EMAIL_CAMPAIGN_2023_07_03&utm_medium=email&utm_term=0_91c55fb9d7-c4a4441213-482944863

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