Two federal proposals could worsen West Virginia’s budget problems

Two proposals regarding federal spending and taxes could have a major impact on West Virginia’s budget. First, Republican leaders in the House of Representatives have signaled that they plan to pursue the $105 billion cut in non-security discretionary programs in the 2011 budget first proposed in the “Pledge to America” campaign document. This would be 21.7 percent less than in President Obama’s proposed budget and 21.1 percent less than what was provided in 2010.

Roughly one third of all non-security discretionary spending is composed of grants in aid for state and local governments. This includes funding for K-12 education, housing programs, children and family services like WIC, job training, and law enforcement. While the proposal does not require Congress to cut all non-security programs by the same percentage, other programs that would be eligble for cuts are politically popular, including the National Institutes for Health biomedical research and the Federal Bureau of Investigation law enforcement activities.
If lawmakers cut these appropriations to state and local governments by 21.7 percent, or in proportion to the proposed overall reduction, West Virginia would stand to lose $254 million in federal funding in 2011.

Losing $254 million would have a significant impact on West Virginia’s budget which already faces a $200 million gap in the upcoming year. Severe budget cuts would be unavoidable, which would likely result in public employee layoffs, canceled contracts, lower payments, and benefit cuts. All of these would result in a drag on the already weakened economy.

The other proposal is President Obama’s proposed temporary tax incentive to encourage investment in machinery and equipment. The proposal would allow businesses to immediately deduct the entire cost of capital investments from their gross income, instead of gradually deducting these costs over a period of several years. Since states almost always use the federal definition of taxable income as the starting point for their own calculations, this proposal would impact state tax collections.

The proposal would result in revenue losses in 2011, 2012, and 2013. West Virginia would lose an estimated $223 million in revenue in that time frame. While about 85% of the revenue would be recovered in later years, as the subsequent depreciation deductions would not occur, this does little to ease the immediate fiscal impact, particularly in light of the mentioned potential cuts in state aid and looming budget gap. The revenue loss would likely lead to more cuts in the state budget, placing a further drag on the economy, and erasing any temporary stimulative effect.

More information about the potential cuts in state aid is available here and more information about the proposed tax change is available here.

West Virginia’s General Revenue ‘Reversal of Fortunes’

West Virginia’s combined cash flow for the first four months of FY 2011 resulted in $95.6 million dollars in surplus revenue, a significant reversal of fortunes from the same start in FY 2010.  Figure 1 below shows the cumulative general revenue cash flow from the beginning of the fiscal year starting in July through the end of October during the past four fiscal years.  This data represents the difference between actual and estimated general revenue projections.  

West Virginia’s fortunes have clearly turned for the better compared to the same period from FY 2010 when the state was reeling from The Great Recession.  At the start of FY 2010, West Virginia’s general revenues were running about $17 million dollars behind estimated projections.

The latest general revenue data identifies a $12 million increase in actual revenues over estimated projections in October 2010.  Should this trend continue for the next eight months, West Virginia would end FY 2011 with a projected surplus of nearly $200 million dollars.  

The table below reports the underlying general revenue source of West Virginia’s surplus.  Personal income tax collections have outperformed better than expected.  To date, personal income tax collections account for one-third of the total surplus revenues.  Corporate net income and business franchise taxes account for the next largest share of the state’s surplus, 27.2 percent.  Severance taxes make up 17.6 percent, consumer sales and use tax make up 13.8 percent while business and occupation tax make up a relatively small percent of the total surplus, 4.3 percent.

Personal income taxes and consumer sales tax make up a combined 70 percent of total general revenues and are highly sensitive to downward pressures in the economy.  Therefore, surplus revenues from personal income taxes and consumer sales tax is a significant change in fortunes for West Virginia’s budget outlook.

By comparison, FY 2010 saw a significant decline in personal income tax and consumer sales tax collections as a result of The Great Recession.  West Virginia’s fiscal year would have more bleak had it not been for severance tax collections.   

Today’s surplus in general revenues bodes well for West Virginia’s future budget outlook.  The new acting Governor, Earl Ray Tomblin has the benefit of surplus general revenues which should minimize the need for his administration to look for major cuts in government spending.  The state needs all of its available revenue to help West Virginia’s economy to continue moving forward.