Two proposals regarding federal spending and taxes could have a major impact on West Virginia’s budget. First, Republican leaders in the House of Representatives have signaled that they plan to pursue the $105 billion cut in non-security discretionary programs in the 2011 budget first proposed in the “Pledge to America” campaign document. This would be 21.7 percent less than in President Obama’s proposed budget and 21.1 percent less than what was provided in 2010.
Roughly one third of all non-security discretionary spending is composed of grants in aid for state and local governments. This includes funding for K-12 education, housing programs, children and family services like WIC, job training, and law enforcement. While the proposal does not require Congress to cut all non-security programs by the same percentage, other programs that would be eligble for cuts are politically popular, including the National Institutes for Health biomedical research and the Federal Bureau of Investigation law enforcement activities.
If lawmakers cut these appropriations to state and local governments by 21.7 percent, or in proportion to the proposed overall reduction, West Virginia would stand to lose $254 million in federal funding in 2011.
Losing $254 million would have a significant impact on West Virginia’s budget which already faces a $200 million gap in the upcoming year. Severe budget cuts would be unavoidable, which would likely result in public employee layoffs, canceled contracts, lower payments, and benefit cuts. All of these would result in a drag on the already weakened economy.
The other proposal is President Obama’s proposed temporary tax incentive to encourage investment in machinery and equipment. The proposal would allow businesses to immediately deduct the entire cost of capital investments from their gross income, instead of gradually deducting these costs over a period of several years. Since states almost always use the federal definition of taxable income as the starting point for their own calculations, this proposal would impact state tax collections.
The proposal would result in revenue losses in 2011, 2012, and 2013. West Virginia would lose an estimated $223 million in revenue in that time frame. While about 85% of the revenue would be recovered in later years, as the subsequent depreciation deductions would not occur, this does little to ease the immediate fiscal impact, particularly in light of the mentioned potential cuts in state aid and looming budget gap. The revenue loss would likely lead to more cuts in the state budget, placing a further drag on the economy, and erasing any temporary stimulative effect.
More information about the potential cuts in state aid is available here and more information about the proposed tax change is available here.
