Now that West Virginia families and businesses are filing their 2023 taxes, the state is beginning to see the full impact of tax changes enacted last year. February’s revenue collections were historically weak, coming in 30 percent, or $124 million, below last February’s collections. February’s revenue numbers are the worst in at least a decade when adjusting for inflation. West Virginia’s total revenue gap eight months into the fiscal year now stands at $502 million below this point last fiscal year. While revenue officials in the Justice Administration have tried to explain February’s numbers as a “quirk” or timing issue, in reality, the quirk was actually artificially inflated personal income tax collections in the first half of the year, whereas what we are seeing now is likely to give us a more accurate overall picture of the impact of recent tax changes.
February’s weak revenue numbers were driven by income tax collections, which came in at just $28.9 million–well below the estimate of $91.5 million–as well as 76 percent, or $93.1 million, below last February’s collections of $122.0 million. Even with an estimate far below FY 2023’s income tax collections, this February’s collections came in dramatically low.
February’s paltry $28.9 million in personal income tax collections marks the worst month in at least a decade, even before adjusting for inflation.
One reason for the income tax’s poor performance in February was businesses taking advantage of the SALT workaround passed in 2023 under SB 151, which allows pass-through entities to prepay income taxes during the first half of the fiscal year and receive credit for those taxes paid during the second half of the fiscal year. This essentially frontloaded or boosted personal income tax collections to the first half of the year that officials noted would be reduced by a similar amount in the second half.
Additionally, the 2023 income tax cuts are having a similar effect on revenues, where some families and businesses withheld too much in the first half of the year, leading to artificially inflated personal income tax collections in July through December that will be reduced by a similar amount as they file their taxes. Even those households and businesses that adjusted their withholdings right away upon passage of the income tax cuts will get a retroactive tax cut for the first quarter of the 2023 calendar year, as the tax cut was made retroactive.
The rest of FY 2024 will likely see the income tax continue to weaken as people continue filing taxes and getting larger-than-usual returns. Income tax collections are already $168.1 million below last year’s collections at this point in the fiscal year, or down 10.5 percent. Revenue officials have said they expect FY 2024 to finish with personal income tax revenues down 10-15 percent compared to last year. This means as more businesses claim their SALT workaround credit, tax filing season begins, and income tax cuts continue to take effect, the worst may still be yet to come for income tax collections.
Beyond that, the personal property tax rebates passed last year do not go into effect until FY 2025. These are expected to cost an additional $200 million in revenue each year, further depressing income tax collections. And these rebates will create a similar phenomenon next year, since they will begin to impact collections in the second half of the fiscal year as people file their tax returns.
All of this is coming before further tax cuts are automatically triggered. A potential additional cut to the income tax for Social Security income could lead to estimated revenue losses of $37 million in FY 2025, $37.7 million in FY 2026, and increasing amounts in subsequent years.
As the 2024 legislative session nears its close, many pressing needs remain unaddressed or up in the air, including pay raises for public employees, finding permanent funding for Medicaid, making our child care system more sustainable, and simply balancing the budget. But none of that will be possible without adequate revenue needed to fund basic needs and important programs.
