Although Congress allocated $1.25 billion in state fiscal aid for West Virginia in the CARES Act that passed last month, it’s highly likely this will not be enough money to shore up state and local government budgets from the economic impacts of the COVID-19 pandemic. To make matters worse, the U.S. Treasury issued guidance on April 22 indicating state and local governments will not be allowed to “replace revenues” or close budget gaps with their allocated funds from the Coronavirus Relief Fund. This means state lawmakers in West Virginia will likely need to explore other revenue options to ward off massive layoffs, cuts to services, and a deeper economic recession.
West Virginia’s economy is in free fall, with over 150,000 workers already filing for unemployment compensation, state budget gaps of at least $500 million for the next six months alone, and cities and counties projecting large multi-million dollar budget shortfalls. Based on other state’s experiences, the state’s budget shortfall from COVID-19 could easily eclipse $2 billion.
A recent analysis by Moody’s Analytics finds that West Virginia’s general revenue fund alone will experience a tax revenue gap of between $1.3 and $1.9 billion from COVID-19 even with $1.25 billion provided by the Coronavirus Relief Fund and the state’s reserve funds. If state and local governments, along with workers who work on state and local government contracts and grants, are forced to layoff employees because of a lack of revenue, the number of unemployed will only climb over the next month further exacerbating the “Pandemic Recession” in West Virginia.
While raising taxes during an economic recession is not ideal, it is far better than the alternative of state and local spending cuts that will further reduce spending on consumer goods and services, especially in the retail sector. This is especially true if you raise revenues on households, businesses, and sectors of the economy that have high incomes and profits and that are faring well, as economist Tim Bartik has found in recent research. Other economists, including Nobel Prize winner Joe Stiglitz and former Office of Management and Budget (OMB) Director Peter Orzsag, have found that state spending cuts are worse than raising revenues during an economic recession. West Virginia policymakers have several revenue options, some of which that been discussed previously, that ask more from those that have a clear ability to pay which is preferable to cutting budgets.
Before raising revenues on higher income individuals and corporations, state lawmakers should tap the state’s Revenue Shortfall Reserve Funds that has a balance of approximately $855 million and any other funds that might be available. Lawmakers should also stop the bleeding by postponing or eliminating scheduled tax cuts and suspend or scale down state corporate tax subsidies.
The Governor should also consider borrowing money. For example, the Federal Reserve Bank is lending to states (and large municipalities) through the municipal lending facility (MLF), which will buy up to $500 billion in debt.
Raising taxes on higher income households and businesses is something West Virginia already needs to do. The state has an upside-down tax code, where the richest residents pay a smaller share of their income in state and local taxes than those at the bottom and middle who have seen little income growth over the last four decades. Turning our state’s tax system right-side up will not only address underlying flaws in our tax code and reduce inequality, it can also help address our state’s structural deficit since it drastically cut taxes by over $500 million per year over the last decade.
Progressive personal and corporate income tax increases are the most surefire way to raise much needed revenue in the short-term and build a more sustainable future. This is because they are based on the ability to pay and that higher-income people tend to save more of their money instead of spending it locally. For example, those making under $70,000 tend to spend all of their income on consumer expenditures, while high-income people save more than a third of their income which doesn’t stimulate the local economy. Higher-income people also spend more of their money out-of-state instead of in the local economy. That’s why taxing higher income people and investing those resources in our local public schools, hospitals, and colleges is a better economic choice than relying on regressive taxes.
There are several options for raising income taxes on higher-income residents, many of which are included in this report. It is important to realize West Virginia had a top marginal income tax rate of 13% in the late 1980s and it was nearly 10% throughout the 1970s, so many of these proposed income tax changes are just going back to the future. These include raising the top marginal tax rates by creating new tax brackets (+$131 million), phasing out personal exemptions for higher income people (+$16 million), reinstating the estate or inheritance tax (+$20 million), and incorporating a high-income surcharge.
The graph below looks at the impact of enacting a high-income surcharge of 2% on incomes above $175,000. This would be similar to including an additional income tax bracket of 8.5% on income above $175,000. All together, it would increase taxes only on the top 5% of West Virginians while boosting revenue by approximately $91 million annually (based on 2019 income) with about 80% of the tax increase falling on the top 1% or those that make more than $774,000 on average annually.
Another avenue for lawmakers would be to raise corporate income taxes. West Virginia’s Corporate Net Income Tax (CNIT) only applies only to (mostly large) corporations that make a profit each year. This tax is also highly exportable since it is mostly paid by high-income out-of-state business owners and shareholders. West Virginia’s current CNIT rate is 6.5%, down from 9% in 2006. Returning the rate back to 9% would boost revenues by an estimated $57 million, based on 2019 figures. And if lawmakers also closed corporate income tax loopholes like international tax havens, the state could boost revenues by another $68 million based on the 9% new tax rate.
While it is going to take a combination of policies to close West Virginia’s looming budget crisis brought on by the Pandemic Recession, the above reforms would not only make our state tax system more fair by ensuring that the wealthy pay their fair share, but it would also give our state the revenue it needs to weather this pandemic and help by investing in the building blocks of a stronger economy in the future.
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