West Virginia’s revenue collections are down $378 million compared to this time last year, in large part due to a collapse in severance tax revenue. At this point in FY 2023 West Virginia had collected $631 million in severance tax revenue, while this year the state has only collected $168 million as a result of cooling inflation and low energy prices. While in FY 2023 the severance tax was responsible for about 40 percent of the fiscal year’s surplus, in FY 2024 it is one of the main drivers of the state’s slowing revenue. Notably, this decline in revenue is occurring even before 2023’s income tax cut takes full effect.
The income tax cut package passed during the 2023 legislative session includes triggers for additional income tax cuts, up to 10 percent each year the trigger is met. This could eventually lead to the total elimination of the income tax, which makes up approximately 40 percent of the general revenue fund. And as these triggers are hit, there is no replacement revenue mechanism in place, leaving the state dependent on existing revenue sources.
As these ongoing income tax cuts take effect, West Virginia is projected to grow more reliant on the severance tax as a source of revenue, despite its volatility. According to estimates from the State Budget Office, West Virginia’s severance tax revenue is projected to grow from 6.4 percent of the general revenue fund in FY 2024 to over 9 percent by FY 2026, and is expected to stay above 9 percent at least through FY 2029.
States that rely heavily on severance tax revenue experience greater revenue volatility, making it risky to depend on it as a source of consistent, long-term revenue. West Virginia’s severance tax is prone to boom and bust cycles. For example, severance tax revenue grew to $488 million in FY 2014 before collapsing to $276 million just two years later in FY 2016. In comparison, the income tax has been a much more reliable source of revenue, with consistent, steady growth over the past decade.
Energy prices are heavily influenced by global market forces, leaving severance tax revenue dependent on factors beyond the state’s control. If the severance tax declines after its post-pandemic boom, the state will have fewer dollars to address priorities and needs like public employee pay raises, child care affordability, ongoing programs like PEIA and Medicaid, and already enacted legislation like the Hope Scholarship and the Third Grade Success Act. As 2023’s tax changes come into full effect, West Virginia’s risky over-reliance on severance tax revenue should raise serious concerns for the fiscal stability of the state.
