WV Center on Budget and Policy > Blog > Tax and Budget > Beating a Dead Horse: Sorry, but Tax Cuts Have Hurt the Budget

Beating a Dead Horse: Sorry, but Tax Cuts Have Hurt the Budget

Members of the state’s media have once again refused to accept that the state’s recent series of tax cuts have directly lead to its ongoing budget problems. Last week Budget Office Director Mike McKown told legislators that the state budget faces an $80 million gap that will be need to be closed before the end of the fiscal year. What Director McKown neglected to mention was the role recently enacted tax cuts have played in reducing revenue, which Ted thoroughly explained here, showing that while we may face an $80 million gap for FY 2014, the elimination of the food tax, corporate tax cuts, and the low-income family tax credit will cost the state an estimated $316 million.

In today’s Charleston Gazette, Phil Kabler attempts to deflect blame for this year’s $80 million budget gap, and next year’s $260 million budget gap away from the tax cuts, and instead claims that the the $390 million a year the state has to put into the Teachers’ Retirement Fund is a bigger contributor to the budget gap, (a refreshing change of pace from the usual scapegoat, Medicaid). Makes sense, right? After all, $390 million is bigger than $316 million. Unfortunately, it is not that simple.

While the state is paying $365 million this year to pay down the Teacher’s Retirement unfunded liability, which does account for about 10% of the general revenue fund, to blame it for the current and future budget gaps, you have to ignore a lot of facts.

First, the state has been paying into that fund since 2007, and the payments have been consistently between 7.4% and 9.3% of the general revenue fund.

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Source: WV Budget Office (*projected)

And for several of those years, despite making $300+ million payments each year, the state ran a base budget surplus. In fact, in the first year of payments, the state ran a $106 million surplus, which then-Governor Manchin trumpeted, as well as praising the efforts to pay down the unfunded liability.

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Source: WV Budget Office (*projected, thousands of $).

So, while the state’s payments into the retirement fund remained stable, the budget surpluses shrunk, and the budget gaps began to grow. And if you look at the charts closely, you’ll note even as the payment’s share of the general revenue fund is projected to fall next year, the budget gap is projected to grow.

So what happened? Why were we able to dedicate 9.2% of the general revenue fund to payments to the Teacher’s Retirement Fund in 2007, while enjoying a  $106 million surplus, to paying 8.6% in FY 2015 and facing a $265 million deficit? The answer? We’ve enacted a series of costly tax cuts that have drained the state of revenue, and will continue to do so. As Ted pointed out, they cost an estimated $316 million this year, and will continue to grow.

Revenue has been an ongoing problem for the state, and in particular, the business tax cuts are just now starting to get expensive, as the linked chart above shows, with their costs doubling between 2012 and 2013. If that doesn’t demonstrate the state’s revenue problems, then consider this: according to the Budget Office’s revenue reports, general revenue collections grew at an annual average rate of 3.6% between 1998 and 2012. But they didn’t grow at all in 2013 and are projected to grow less than 1% this year.

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Source: WV Budget Office

That’s nearly two years with almost no revenue growth, which, no surprise, is putting the state in the hole. If revenue collections had grown at the historical average in FY 2013 and 2014, it would have resulted in an additional $146 million in FY 2013 and an extra $263 million in FY 2014. The state would be running surpluses each year. 

Instead, that money is being used for tax cuts, putting the state in a deep fiscal hole. The effectiveness of these tax cuts in achieving their goals, be it encouraging economic growth or helping families, is debatable. Their effect on the budget is not.

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