In less than a month, West Virginia's new governor, Jim Justice, will release his FY 2018 state budget that aims to close an estimated budget gap of $497 million or about 11 percent of the state general revenue fund (before leaving office outgoing Governor Tomblin released a FY 2018 state budget).
While Governor Justice has said "we have to raise revenue," the GOP controlled legislature has vowed they will not enact any tax increases and seem more inclined to push for more tax cuts, such as eliminating the business personal property tax that would reduce state and local revenues by $388 million. In order to tackle West Virginia's budget crisis effectively, it is important to understand how the state landed in this crisis. We need to look at the spending side and the revenue side of the ledger.
Big Budget Cuts Over Last Five Years
West Virginia's budget problems are nothing new, the state has had sizeable budget gaps that have ranged from $75 million in 2014 to over half-a-billion in 2016. Over this time, lawmakers have cut millions out of the budget each year. Former Governor Tomblin estimates that the state has cut over $600 million from the budget over the last five years alone. Between 2012 and 2017, the only two major expenditure increases have been in Medicaid (mostly due to growing healthcare costs and utilization) and foster care services (mostly due to substance abuse and expensive out-of-state placements) while most agencies have been severely cut (e.g. Higher Education has been cut by over $55 million since 2012). All together, general revenue fund expenditures have grown on average by less than 1 percent annually since 2008.
Tax Cuts and Weak Energy Markets Have Severely Depressed Revenues
If we look at general revenue fund collections between 1990 and 2007 – before major tax cuts where enacted – they average about 6.8 percent of our state's economy or total personal income. Today, they are just below 6 percent. If general revenue collections were at the historical average of 6.8 percent, the state would have about $628 million in additional revenue. This is pretty close to what Tomblin said we've cut from the budget since 2012.
If you adjust for inflation (CPI), estimated general fund revenue collections for the current fiscal year (FY 2017) are down about $570 million from where they were in 2008. If you look at general revenue collections during the first six-months in FY 2017, they are at the same level today as they were nine years ago (FY 2008). Either way you cut it, it seems pretty clear that West Virginia is collecting far less revenue than it should be. In other words, we have a major revenue problem – not a spending problem.
The state's revenue problem stems from two primary factors, one that's self-inflicted and one that is not. In 2007, the state started a series of tax cuts. The cuts totaled at least $425 million annually. This includes phasing out the grocery tax on food and the business franchise tax, while lowering the corporate income tax rate from 9 percent to 6.5 percent.
While the business tax cuts were sold on the idea that they would boost jobs, the state had more private sector jobs before the business tax cuts than we do today. In fact, one of the only areas of private-sector job growth over the last 10 years has been in health care services, which is mostly because of our growing elderly population and the infusion of federal money from the Affordable Care Act.
The other major factor has been the decline in the coal industry – which was foreseeable at least back to 2011 – and the major drop in natural gas prices. Both of these energy industry factors have not only suppressed severance taxes (state severance taxes are down $243 million between 2014 and 2016), but have also lowered other revenues at the state and local level.
On the coal side, production has dropped from 158 million tons in 2008 to an estimated 80 million in 2016. The stems from stiff competition from cheaper and more abundant natural (shale) gas, a huge decline in coal mining productivity in southern West Virginia (thinner coal seams), increased competition with Western coal in Wyoming and Illinois, sluggish international metallurgical coal markets, and growing demand for cleaner energy at the federal (EPA regulations) and state level (renewable energy portfolio standards).
In summary, because of major tax cuts and a weak energy sector the state has seen a large drop in revenue collections that have resulted in hundreds of millions in budget cuts over the past several years.
Closing the $400 Million Budget Gap
Going forward, it is clear the state will have to raise revenues in order to pay for vital public services such as schools, roads and bridges, public safety, and health care. This could include applying the sales tax to cell phones ($70m), digital downloads ($4m), grocery items ($170 million), and more personal services ($5.8m) while also increasing the sales tax rate to 7 percent from 6 percent ($200m). Other revenue options could also include raising the natural gas severance tax rate to 6 percent from 5 percent ($19m), reinstating the state estate tax ($20m), adding a 3 percent income tax surcharge on incomes over $200,000 ($96m), and reinstating the business tax cuts ($219m).
The good news is that a large majority – 70 percent – of West Virginia voters are willing to pay more in taxes if the money goes toward maintaining these key priorities.
While it is unclear how lawmakers will close the nearly $500 million state budget gap during the 2017 legislative session, a cuts only approach would be devastating to vital public programs and services that all West Virginians rely on each day. The most prudent approach would be to raise revenues and then set in motion some long-term government reforms (e.g. criminal justice reforms) that could reduce expenditures over time and improve our workforce. If we continue to just cut and our public structures continue to deteriorate, there is a good chance more people will leave the state and far less will make our state their home.