This week, Governor Justice announced a special session to be held at the end of September to override tax cut triggers enacted as part of the 2023 tax law and slash taxes by an additional $114 million. As we highlighted recently, the proposal ignores realities and defies fiscal responsibility. While policymakers are still learning the full impact of recently enacted tax cuts, we already know they have contributed to deep revenue declines not seen in 25 years. With slowing revenues, more tax cuts on the way, and a host of spending needs after years of austerity, lawmakers should reject the governor’s efforts and focus on the sustainability of programs that help families and businesses and grow our economy.
Fiscal Year (FY) 2024 marked just the second time in 25 years that West Virginia’s nominal state revenue collections declined year-over-year outside of a recession. On average, state revenues grew by about 2.7 percent per year between 1999 and 2019, allowing the budget to keep pace with inflationary cost growth. In 2024, revenue collections shrunk by 12 percent. That experience is not unique to West Virginia—many states saw revenue collections shrink as federal pandemic-era funding expired and energy prices declined.
But West Virginia is on pace to have two consecutive years of revenue decline if the Justice Administration’s revenue projections are correct. That has not happened in 25 years outside of a recession. And the declines in FY 2024 and FY 2025 are much deeper than any over the span of more than two decades, including the years of the Great Recession.
This decline is in large part explained by recent personal income tax cuts. In addition to the nearly 12 percent revenue decline from FY 2023 to FY 2024, the Revenue Department anticipates an additional 7.8 percent (or nearly $500 million) revenue decline from FY 2024 to FY 2025. Combined, that would be a 19 percent nominal revenue decline over two years—more than four times greater than the losses seen during the Great Recession—even before adjusting for inflation.
While West Virginia would have likely seen slowing revenues between the pandemic-era revenue peak in FY 2023 and FY 2024, the decline would have been significantly smaller without 2023’s income tax cuts. If we assume that the tax cuts reduced revenues by $600 million in FY 2024 (consistent with the fiscal note), the overall revenue decline would have been just 2.7 percent, compared with the actual decline of 11.9 percent.
FY 2016 is the most comparable year to the current scenario (a revenue loss outside of a recession), although it’s worth noting the 2.4 precent revenue decline seen in FY 2016 is one-fifth of the size of the losses experienced in FY 2024. Nevertheless, the factors at play then echo what is happening now, just on a smaller scale. 2016 was the year in which West Virginia’s last major tax cut efforts were fully implemented, when then Governor Manchin enacted major reductions in the corporate next income tax, the elimination of the business franchise tax, and the elimination of the sales tax on groceries. Additionally, FY 2016 marked a steep drop in severance tax collections, which up to that point had helped offset the revenue impacts of the aforementioned corporate tax cuts.
Today, we could anticipate a similar trajectory, wherein the impacts of major tax cuts are initially masked by temporary factors including federal aid and high energy prices, but the true impacts are felt as those short-term factors subside.
The rest of 2023’s tax cuts will begin to impact revenue collections in the second half of FY 2025. On top of the $609 million in revenue lost to the first personal income tax rate cuts, property tax rebates and a triggered tax cut are expected to reduce personal income tax collections by an additional $183 million and $95 million respectively, for a total of $887 million/annually.
Two months into the new fiscal year, tax collections are below this point last year and below the Justice Administration’s own revenue estimates.
Over the first two months of the fiscal year, severance tax collections are down by 37 percent compared with this point last year. And that’s after FY 2024’s severance tax collections declined by 61 percent compared with FY 2023, the year the state enacted major permanent tax cuts.
While personal income tax collections are holding steady so far compared with this point last year, a significant portion of the tax changes implemented in the 2023 and 2024 legislative sessions have not yet been implemented, and thus have not yet been reflected in revenue collections. Both property tax rebates and a four percent reduction in marginal personal income tax rates will go into effect for the second half of the fiscal year, beginning in January. That is expected to reduce personal income tax collections by a combined $300 million annually, along with a three-year phase-in of the elimination of personal income tax on Social Security benefits for high earners.
Proponents have attempted to justify previous tax cuts by pointing to revenue surpluses—but collections now are coming in below estimates. Now, Governor Justice is pointing to surpluses from prior years as justification for additional tax cuts. But tax cuts (and new spending programs) are recurring costs, meaning they must be accounted for in the budget every year, whereas surplus dollars are, by definition, only available one time. As such, justifications for tax cuts require a longer-term look at financial and economic conditions. And given there is no surplus in the current fiscal year, as the economic picture presently stands, any tax cuts would reduce our existing state budget.
Moreover, in recent years ongoing state budget costs have been paid for with surplus dollars—including a $180 million reserve fund for ongoing Medicaid costs and nearly half of the expected 2024-25 cost of the Hope Scholarship. As surpluses that were available in recent years substantially shrink or disappear entirely, lawmakers must consider how they will balance ongoing budget needs and new costs from enacted legislation including the expansion of the Hope Scholarship, rising PEIA costs, and the full implementation of the Third Grade Success Act.
A recent Pew analysis highlighted the fleeting nature of West Virginia’s pandemic-era surge in revenue collections, which drove the 2023 tax cut fever as well as current efforts to cut taxes again. Pew researchers found that state tax revenues all over the country peaked between 2021 and 2023 and are now declining after historic revenue surges. But West Virginia stood out among the states whose pandemic-era revenue growth was likely temporary in nature, indicating that growth is likely an unsustainable replacement for revenue lost due to tax cuts.
Across all states, approximately 38 percent of tax revenue growth during the 12 quarters of the pandemic exceeded pre-pandemic growth trends, meaning it was likely temporary in nature. In West Virginia, 65.6 percent (or nearly double the national average) of state revenue growth exceeded pre-pandemic trends and was likely temporary. According to Pew, “The more above-trend revenue a state collected, the more revenue that state is in danger of losing as collections return to and eventually dip below the trend line.”
The WVCBP has long cautioned that 2023’s tax cuts were based on temporary revenue surges due to federal aid, high energy prices, and other temporary factors. Even as lawmakers are still assessing the effects of recent policy changes, it is clear that the subsidence of pandemic-era revenue collections combined with recent tax cuts is having a deep impact on state revenue collections and, by extension, our ability to meet longstanding budget needs. To double down with even more tax cuts that primarily benefit the wealthy would be fiscally reckless and likely would impede even Republican spending priorities.
