The 2023 state legislative session has seen both chambers heavily focused on turning the state’s revenue “surplus” into personal income tax cuts, despite the clear need for new spending after four years of austerity forced by flat budgets. We’ve covered at length the temporary factors driving the surplus, as well as the fallacy of calling it a surplus at all when much of that money is obligated to future budget spending based on decisions lawmakers have already made. This piece will take a look at West Virginia’s expected FY 2023 surplus and outline how we could spend it in equitable and sustainable ways while still meeting our budget obligations.
Seven months into the fiscal year, West Virginia has a budget surplus of $995.3 million. Half of that, $497.8 million, is severance tax collections above estimates, which have resulted from temporarily high energy prices due to factors outside of West Virginia’s control. To put the historic severance tax collections into context, just seven months into FY 2023, we’ve collected 252 percent of the severance tax we estimated to bring in this year.
If current revenue trends continue, we would expect the total FY 2023 surplus to be just over $1.7 billion, which is the amount state officials are projecting as well.
The first question is how much of the so-called surplus really is a surplus — and not the result of underfunding state programs or kicking the can down the road on budget obligations. For the last few years, Governor Justice’s administration has not released a six-year plan as part of their budget package, which would help inform lawmakers about the state’s upcoming spending obligations.
Earlier this month, Senate Finance Chairman Eric Tarr identified in an interview that they used the budget hearing process as a workaround to understand each state agency’s upcoming spending needs. What the Senate Finance committee learned is that the state is already on the hook for “at least $917 million” in ongoing, base budget spending obligations based on legislation previously passed, which means that much of the surplus is simply not available to fund tax cuts without changing existing laws or drastically cutting the budget. Chairman Tarr noted that over $900 million is already obligated before lawmakers pass any additional legislation this year that has a price tag.
Per Chairman Tarr, the major costs contributing to that $900 million estimate included:
Again, as Chairman Tarr highlighted, each of these are ongoing, annual costs that will be added into the base budget going forward.
That leaves about $800-850 million remaining of the FY 2023 surplus. If current trends continue, we can expect the severance tax portion of the surplus to be around $800-850 million. We’ve long cautioned that severance tax revenues are incredibly temporary as they are tied to volatile energy prices — and as Chairman Tarr laid out above, we could be baking a small portion of the severance tax surplus into new ongoing spending. A fiscally responsible practice would be to not use any temporary severance tax revenue toward permanent spending — either for the budget or for permanent tax cuts. That said, it’s important for the state to meet its legal spending obligations.
With the $800-850 million of severance tax surplus remaining, these funds could be incredibly transformative in the coal and natural gas communities where these tax benefits derive from and which, in many cases, have seen underinvestment in recent years in both infrastructure and economic development. Last year, we called on lawmakers to create an infrastructure and development fund for counties that have coal and natural gas production and to place the FY 2023 severance tax surplus into that fund. With an $800-850 million pot of money, many meaningful projects could be pursued to improve economic opportunities in these communities for this and the next generation. Further, this funding could be a match for federal funding streams as part of the Infrastructure Investment and Jobs Act.
That more than exhausts the FY 2023 surplus. However, some of the costs Chairman Tarr laid out as upcoming base-building costs do not become part of the budget until FY 2025 or later. Additionally, the state still has about $500 million in unappropriated surplus funds from FY 2022 that could go to one-time needs, but again, it would be deeply irresponsible to base any ongoing spending or tax cuts on temporary surplus dollars—either those from the severance tax or from the remaining FY 2022 surplus.
West Virginia could make some long-needed one-time investments with these dollars— for example, investing in child care subsidies for thousands of families who lost theirs at the end of last year, launching a paid family and medical leave program, and investing in education and workforce training programs.
There are also equitable one-time ways to get money back into the pockets of West Virginians. The best option would be a child tax credit applied to all children in the state under the age of 18. Families with children are hit the hardest by rising costs, and a child tax credit would benefit the average West Virginia family far more than either of the tax plans are (HB 2526 and SB 424) proposed thus far this year.
For about $350 million, every child in the state could get a one-time $1,000 child rebate. If revenues continue to grow in future years, the legislature could come back and consider making the program permanent.
West Virginia’s FY 2023 surplus does present significant opportunities to invest in our people—but most of that investment will need to be in the form of meeting our obligations for public services that serve all of our people. While Chairman Tarr’s thoughtful approach to focusing on budget needs first is laudable, the Senate’s assertion through SB 424 that we have $600 million to spend on tax cuts means that we would be relying on temporary severance tax revenues to pay for a permanent, ongoing tax cut. This could mean we are scrambling to slash the budget or increase other taxes when volatile energy markets come back to earth or when the additional triggers ratchet down the personal income tax even further.
The governor’s approach via HB 2526 fails to even consider the state’s upcoming spending obligations and is altogether unreasonable.
The plan laid out above to meet our spending obligations, invest temporary severance tax revenues back into our coal and natural gas communities, and get more money into the pockets of families with children is both a sustainable and an equitable approach.