While the COVID-19 pandemic created havoc in the state’s economy over the past year, the state’s revenue collections have exceeded expectations. West Virginia ended FY 2021 with total general revenue collections of $4.989 billion, which is $413 million above the original estimates for the year. And while Governor Justice celebrated the revenue report as being full of “goodies,” West Virginia still remains on fragile financial footing moving forward.
West Virginia may have ended FY 2021 with a sizable revenue surplus, but the state remains in a rather large jobs deficit. West Virginia lost over 96,000 jobs last spring when the pandemic first began to affect the economy, and as of May 2021, the state was still down over 36,000 jobs. So far in 2021, West Virginia has added an average of 2,120 jobs per month. At that pace, it will be another 17 month before West Virginia gains back all of the jobs it lost last spring.
So how is it possible that West Virginia revenue collections are $413 million above estimates while the state is down 36,000 jobs? A few reasons.
First, West Virginia’s $413 million FY 2021 surplus is actually a $221 million FY 2021 surplus. FY 2021 started with a surplus due to moving “Tax Day” from April to July. As part of the pandemic relief, the governor delayed the due date for personal and corporate tax returns by three months. As a result, $192 million in personal and corporate income tax revenue that was supposed be collected in April, as part of FY 2020, was instead collected in July, as part of FY 2021. As such, nearly half of FY 2021’s surplus is really just delayed collections from FY 2020.
Looking back to the beginning of the pandemic, which now spans over two — and soon to be three — fiscal years, West Virginia’s revenue collections are $163.7 million above estimates.
While a $163 million surplus is less impressive than a $413 million surplus, it is much better than what one would expect for a state that is still down 36,000 jobs. However, the state’s economy, and therefore the budget, would have been in much worse shape had it not been for the various provisions included in the federal CARES and ARP Acts. Over $12 billion in federal aid has flowed into West Virginia over the past year, including nearly $5 billion in stimulus checks and over $1.6 billion in enhanced and expanded unemployment benefits. This funding boosted both incomes and state tax revenue, even as jobs were being lost, and helped keep the economy and the budget afloat throughout 2020.
While Governor Justice has publicly downplayed the role of federal stimulus and other relief funding in boosting state revenue, last month the state revenue estimates were revised, with a note stating that increases in the estimates reflect “strong growth in consumer spending partially associated with significant federal fiscal stimulus payments.”
Beyond the impact of federal COVID relief aid on revenue collections, relatively low revenue estimates also played a role in creating the surplus. West Virginia’s general revenue estimate for FY 2021 was $4.585 billion. This estimate was included in the FY 2021 budget, which was presented to the legislature by the governor on January 8, 2020, before COVID was even a concern. But that estimate had already been lowered substantially from previous expectations, even before accounting for COVID. In the FY 2020 budget, revenue estimates for FY 2021 were $4.805 billion, $220 million higher than the estimate included in the FY 2021 budget. West Virginia’s budget outlook was deteriorating even before COVID was a factor, and expectations for FY 2021 were low.
If West Virginia’s revenue estimate for FY 2021 hadn’t been revised down so significantly in January of 2020, and if Tax Day hadn’t had been shifted from April to July, then the state’s $413 million surplus for FY 2021 would have been a shortfall of about $8 million.
This all goes to demonstrate how powerful the revenue estimates are to the budget process. The revenue estimate is provided by the governor, and the legislature cannot spend any money that is not included in the estimate. When revenue projections turn out to be too high or too low, it is the governor who orders adjustments.
In particular, when revenue estimates are too low, as they were for FY 2021, they may end up producing an apparent “surplus,” but that also means that state agencies can’t build needed funds into their budgets and that the legislature doesn’t get to account for the funds in regular budget process. While West Virginia had an apparent $413 million surplus, the governor proposed a “flat budget” with no new investments in making higher education more affordable, mitigating rising food and housing insecurity during the pandemic, improving schools, or addressing looming issues with public employee health care. Further, it is particularly concerning that many of the various income tax elimination plans proposed this past year relied in part on tapping budget surpluses.
A big surplus can also create the appearance of financial strength for the state, but if that surplus is coming from lowering revenue estimates, then that appearance may just be a mirage. And future budget revenue projections again are substantially lower than they were just one year ago, signaling a deteriorating budget situation. The current general revenue projection for FY 2023 is $4.57 billion. That is $264 million below the projection from the FY 2021 budget, which already showed a $158 million shortfall for FY 2023. For each year that the FY 2021 six-year outlook showed a budget shortfall, revenue projections have since worsened.
Many of the revenue sources highlighted by the governor as over-performing their estimates are projected to fall back down in future years. In particular, severance tax revenue is projected to decline by 14 percent from FY 2022 to FY 2026, and tobacco tax revenue by over 5 percent. The state’s strongest source of revenue going forward is the personal income tax, which is projected to grow by 20 percent from FY 2022 to FY 2026, and which is the source of revenue the governor has tried to eliminate, citing budget surpluses as justification for its elimination.
West Virginia was fortunate to make it through the pandemic and recession without any major budget problems in 2020. But without federal aid and low expectations, the state budget would be in far worse shape. As it currently stands, even with a “surplus,” the budget is on shaky financial ground, with reserves running dry and future revenue growth significantly curtailed.
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