It’s now been almost four months since Governor Justice announced that his top priority for the 2021 West Virginia legislative session would be eliminating the personal income tax. But despite the time elapsed, we’ve yet to see a plan put to paper. That’s likely because it’s really difficult to eliminate the state’s largest source of revenue, particularly while fulfilling commitments to lower taxes for everyone and to preserve public services without major cuts. Equally important for policymakers to consider is that structural revenue issues in West Virginia’s economy paired with a growing reliance on the personal income tax in future years will make this task even more painful in the years to come.
As lawmakers consider proposals to reduce or eliminate the state’s income tax, they are being asked to do so without a complete picture of West Virginia’s future budget projections. That’s because this year, for the first time in recent memory, the Governor’s budget proposal does not include a six year outlook, which normally outlines spending plans for future years and is an essential tool for identifying expected inflation and growth in agency budgets.
Despite such critical information being excluded from the FY 2022 budget, we do have FY 2021’s six year outlook, which shows structural revenue issues and budget gaps that are likely only worsening. The FY 2021 six year plan showed significant budget gaps in the coming years, despite no new spending on higher education, declining state spending on the school aid formula, and only $157 million in new spending for Medicaid over that time frame.
While the FY 2022 budget does not contain a new six year outlook for expenditures, it does include new revenue projections, which show a deteriorating budget situation compared to one year ago. For example, the new 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.
We already know that for two consecutive years, the state has utilized one-time reserve funds from Medicaid to close significant gaps and balance the budget, showing a longer-term revenue problem where even current revenues fall short of meeting the needs of our state. This is a problem that will only grow larger in the coming years. According to the Department of Health and Human Services, the Medicaid reserve, which has been tapped in multiple years to help balance the budget and build a surplus, will be depleted by FY 2025, and will be in a $153 million shortfall by FY 2026.
The revenue outlooks in the Governor’s proposal also show that each year, it becomes more difficult to balance the budget if we reduce or eliminate the personal income tax. That is because as severance tax revenues decline and other revenues grow more slowly, the personal income tax is projected to become a larger share of the overall general revenue fund. While the income tax is projected to grow by 26 percent by FY 2026, the sales tax is projected to grow more slowly by only 10 percent and the severance tax is projected to decline by 14 percent. By FY 2026, the personal income tax will grow from 44.7 percent share of total General Revenue to over 48 percent.
Revenues from the personal income tax alone are growing faster than the rest of our state’s revenue sources combined. This means that paying for eliminating the personal income tax, while very difficult up front, gets even harder each year and will require larger and larger increases in other taxes like the sales tax or increasingly severe cuts to public services. The cost of eliminating the income tax is $2.0 billion for FY 2022, but the cost grows to $2.45 billion by FY 2026.
One hint as to Governor Justice’s plans for future spending is that he asked the legislature to consider flat budgets with no new spending over the next three years. Given that inflation costs and increases in the prices of goods and services grow each year, a flat budget inherently indicates cuts to programs year over year. Secretary Hardy indicated in a recent townhall with the Governor that his flat budget for FY 2022 actually saves — or more accurately cuts — $80-90 million in planned spending. And that ignores the fact that we now know Medicaid will be in a $153 million shortfall in FY 2026, meaning that even a “flat” budget will require additional cuts. But since the Governor’s FY 2022 budget did not include a six year plan, we do not know where those cuts will come from.
Without access to complete information from the Governor’s office regarding future spending needs and the ballooning costs of personal income tax cuts, lawmakers will be unable to make responsible and well-informed decisions about tax reform proposals.
