During the 2023 legislative session, lawmakers passed major tax cuts that will result in significantly reduced revenue to fund public programs and services. Legislators pointed to the state’s current budget surplus to attempt to justify these tax cuts; however, that surplus is largely the result of unusually high severance tax collections. The severance tax is highly unstable, and relying on temporarily high revenue during the severance tax boom for long-term funding needs is fiscally irresponsible given the inevitable bust that will eventually follow. A recent article, including insight from the WVCBP, provides further details. Excerpt below:
Here’s what to know about the biggest driver of the current revenue surplus — and how its role in state finances could change in the future.
Why are collections up right now?
West Virginia has made significantly more money from severance taxes since 2021, and experts say that the reasons behind this are complex. But one of the biggest factors is the ongoing war in Ukraine: Russia has long been one of the world’s top exporters of natural gas, but after the country’s 2022 invasion, many of Europe’s main consumers of natural gas have sought to find new sources. Because of this, demand for non-Russian natural gas has risen, contributing to a surge in natural gas prices in the U.S.
That’s helped West Virginia bring in more money from natural gas in recent years.
In the 2020 fiscal year, West Virginia’s state and local governments collected roughly $343 million in severance taxes. Two years later, they collected $840 million. And for the current fiscal year, West Virginia has already collected $787 million in severance taxes, putting it on track to collect more than a billion dollars before the end of June.
How has the severance tax affected the state budget?
Severance taxes are applied at varying rates at both the local and state level and counties do receive some of the money collected under the tax. But a significant portion of the money, like other taxes collected by West Virginia, lands in the state’s general revenue fund, where it is then able to be used towards anything. And those collections have had a huge impact on West Virginia’s state budget in recent years, particularly when it comes to its surplus revenue, the amount of extra money compared to what the state estimated it would take in.
Severance taxes as a whole have accounted for about half of the state’s budget surplus in the past few years.
With so much money on hand, the severance tax is playing a big role in the financial decisions being made by the state, including on the state Legislature’s recent move to cut the state personal income tax rate. That cut, which along with several new refundable tax credits is expected to reduce state revenue by more than $750 million in the coming years, has largely been justified by the state’s high surplus, with the argument being that with the extra money, the state can afford to return money to taxpayers.
Experts say the severance tax is volatile; what does that actually mean?
As it has had an increasing impact on state budget revenue, particularly when it comes to the surplus, some policy experts have cautioned against West Virginia becoming too reliant on the severance tax as a source of consistent, long-term revenue. That’s largely because the taxes are highly volatile, and often go through boom and bust cycles.
This has been the case historically. In 2014 for example, West Virginia experienced a significant boom in the severance tax, with it accounting for 13% of the state’s overall tax revenue. But a year later as coal production declined and natural gas prices fell, the state soon found itself in a deficit that forced budget cuts to state agencies.
That sort of shift is always possible with the severance tax, which is why some policy experts have criticized the state for some of its decisions when it comes to the budget surplus, especially the recent income tax cut.
What happens if severance tax revenue falls?
Because of how unstable the severance tax is, it is likely that the amount of money the state is collecting in severance taxes will begin to fall in the near future. And the state has little say in when that will happen.
“Energy prices as a whole are really tied to global market forces,” O’Leary said. “There’s not really anything West Virginia can do to control natural gas prices.”
These prices are already beginning to decline, with forecasters predicting the price of natural gas will drop by at least 50% in 2023 when compared to last year. The West Virginia Center on Budget and Policy also notes that this year’s severance tax revenue is starting to trend downward from the highs of last year. While the state does have the extra money, the Center has argued that the current surplus would be better used providing additional support to address a number of ongoing state crises, and also backs giving additional surplus money to the counties that produce the highest amount of natural resources, some of which face significant financial difficulties.
“This extractive industry has not fulfilled its promises of economic prosperity in the areas where the actual extraction is taking place,” O’Leary said.
As of now, if severance tax revenue does decline, that combined with the recently-implemented tax cuts means the state will have less money to work with. Though it’s unclear exactly how that will play out, it could cause officials to have to make significant shifts in the future.
And more broadly, as West Virginia continues to enjoy the boom of the current severance tax collections, there’s still no indication from state leaders how they are preparing to handle the inevitable bust.
For more context on severance tax revenue beginning to trend downward, see this blog post.
Last fall, West Virginia voters overwhelmingly rejected Amendment 2, an effort to reduce local funding for public services by giving big businesses windfall property tax breaks.
But all over West Virginia, local governments give those same businesses and developers economic incentives which reduce public funding for local services and infrastructure. Right now the Raleigh County Commission is considering such a deal for Gov. Justice’s family.
Join us to learn more about how this could impact public services and how local citizens can ensure accountability for these projects.
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If you are a Mon Power or Potomac Edison customer, we need your voice now! Submit your comments to the West Virginia Public Service Commission opposing the Pleasants Power Station bailout by the end of the day TODAY, April 14th.
FirstEnergy is scheming to keep Pleasants Power Station open by forcing increased costs onto ratepayers like you. Not only is Pleasants an out-of-date, coal-fired power station that was already scheduled to close in 2019, but even FirstEnergy acknowledges that the plant is expensive to operate. The worst part is that West Virginians don’t even need the plant – we have enough power being generated in-state already to meet our needs!
The current comment period is about keeping the plant open for a year while officials further “study” the proposed sale. If the plant doesn’t operate during that year, most families’ bills will go up by about $36 a year – but if the plant operates, bills will go up even more.
FirstEnergy’s proposal would protect its own shareholders, while forcing West Virginia customers to bear the costs and risks. If FirstEnergy’s scheme is successful, customers would be saddled with potentially massive costs and liabilities.
Please act now to send your comments to the WV Public Service Commission demanding they say NO to the Pleasants Power Station bailout. Don’t forget to personalize your letter: tell the Commissioners how increased rates will harm you, and the people and businesses you love. They need to hear it’s important to you that YOU don’t pay for another corporate bailout.
During the 2023 West Virginia legislative session, lawmakers passed significant tax cuts that will considerably reduce the revenue available to fund our state’s public programs and services.
Who will benefit the most from this year’s tax changes? What impact could they have on the quality of our state’s schools, libraries, health care system, and other public services and their ability to adequately serve our communities?
Join us Monday, May 1 at the Milton Public Library to discuss, learn more, and have the opportunity to share how underfunding of public services has impacted you or your community.
RSVP to the Facebook event here.
The Summer Policy Institute brings together highly qualified traditional and non-traditional undergraduate students, graduate students, and policy-curious people of all ages to build policy knowledge, leadership skills, and networks.
SPI attendees participate in interactive sessions where they learn the ins and outs of policy change through a research and data lens, as well as crucial skills rooted in community engagement and grassroots mobilization. Attendees will meet West Virginia leaders from government, non-profit advocacy, and grassroots organizing spaces to build relationships and networks.
Throughout the convening, participants work in small teams to identify and develop policy proposals to shape the future they want to see in the Mountain State, culminating in team “policy pitches” to community leaders. Sessions will equip participants to focus on defining the problem as an essential first step before progressing to proposing solutions.
After three years of virtual SPI, we’re excited to announce that we will be returning to an in-person format for SPI 2023! The event will take place at Fairmont State University from July 28-30.
There is no cost to attend, and students can work with professors to receive course credit. It is required that participants attend all sessions during the three-day convening.
For more information, please see our event landing page.
The WVCBP’s Elevating the Medicaid Enrollment Experience (EMEE) Voices Project seeks to collect stories from West Virginians who have struggled to access Medicaid across the state. Being conducted in partnership with West Virginians for Affordable Health Care, EMEE Voices will gather insight to inform which Medicaid barriers are most pertinent to West Virginians, specifically people of color.
Do you have a Medicaid experience to share? We’d appreciate your insight. Just fill out the contact form on this webpage and we’ll reach out to you soon. We look forward to learning from you!
You can watch WVCBP’s health policy analyst Rhonda Rogombé and West Virginians for Affordable Health Care’s Mariah Plante further break down the project and its goals in this FB Live.
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