July’s tax collections continued a concerning trend of declining revenues, even before the 2023 tax cuts have been fully implemented. July’s collections came in 12 percent, or $46 million, below last July’s revenues, barely exceeding fairly modest revenue estimates and creating significant doubt about the current and future availability of revenue to pay for a myriad of needs and funding shortages across West Virginia’s public services.
In a previous analysis, we found that revenues significantly slowed in the second half of FY 2023, so much so that 90 percent of the fiscal year’s true surplus, or revenue growth about the prior year, was generated in the first six months of the fiscal year. Revenues began clearly trending down in the months following. July, the first month of the new fiscal year, continued that trend, with total tax collections 12.1 percent below the previous July.
While July’s collections exceeded the revenue estimate by $7.7 million, that revenue estimate was set 14 percent below the previous July’s actual collections. July revenues came in $46 million below July 2022’s tax collections, a 12.1 percent decline. Adjusting for inflation, this July saw the lowest tax collections of any July in six years.
In addition to severance tax collections declining as energy prices settle back down to normal levels, much of the revenue decline is self-inflicted due to the sweeping tax cuts passed in 2023, even before the revenue losses are fully felt. According to the legislation’s fiscal note, the tax cuts will reduce revenues by an estimated $696 million in FY 2024 and balloon to $818 million in FY 2025, with additional increases in future years both due to inflation and triggers built into the legislation that could increase tax cuts if certain conditions are met.
Both the personal income tax and the sales tax were below last year’s collections for the month of July. The income tax was down $15.6 million, or 9.7 percent, from this month last year, while the sales tax was down $2.6 million, or 2.7 percent. In fact, the sales tax came in lower than the estimate of $99.1 million, which as mentioned before, comes from intentionally low estimates. While some proponents of income tax cuts promised that sales tax revenues would increase as the income tax declined, offsetting some of the losses, evidence in both West Virginia and around the country doesn’t bear that out.
The steep decline in the personal income tax just one month into the fiscal year is particularly concerning with the underperforming sales tax. The sales tax is the second biggest source of tax revenue for the state, after the income tax. As tax cuts continue to erode the income tax, the state will grow more reliant on the sales tax to keep the budget afloat.
Given a growing reliance on fewer (and smaller) sources of revenue, legislators have essentially locked the state into flat—or more accurately declining– budgets for the foreseeable future. Even before tax cuts have been fully phased in, the state is barely meeting modest revenue estimates, leaving little or no money for increasing appropriations to existing programs or funding new needs. And because of the triggers built into the 2023 tax legislation, all revenue growth above the baseline will automatically be diverted to additional tax cuts rather than budget needs, of which there are already plenty.
While the crisis is already here, it could get much worse. Public services that rely on state funding are experiencing shortfalls and crises in a myriad of areas, including funding crises across our volunteer fire departments, Emergency Medical Services providers, and the state’s land grant university; vacancies in our schools and correctional facilities; and coming child care provider funding cliffs, among other things. Already passed GOP priorities including the Hope Scholarship and aides in K-3 classrooms will see their costs grow as they are implemented and expanded. The big question is where will the money to pay for these things come from?
