Pages tagged "Budget"
The FY 2018 base budget (General Revenue, Lottery, and Excess Lottery) totaled $4.653 billion, $46 million more than the FY 2017 budget, which totaled $4.607 billion. Most of that increase can be attributed to Medicaid. General Revenue appropriations for Medicaid are increased by $60.9 million from FY 2017. This increase is due to the use of $70 million in Rainy Day Funds in FY 2017 for Medicaid, which lowered FY 2017's General Revenue appropriations. FY 2018's budget does not use the Rainy Day Fund, and makes up for it with an increase in General Revenue appropriations. So even though the state is appropriating less overall for Medicaid in FY 2018, General Revenue appropriations have increased.
Aside from General Revenue appropriations for Medicaid, nearly every other area of the budget is cut compared to FY 2017. Executive Branch agencies are cut by $2.7 million, the Department of Commerce is cut by $4.1 million, the State Department of Education is cut by $12.9 million, Education and the Arts is cut by $2.4 million, DHHR other than Medicaid is cut by $7.7 million, and Higher Education is cut by a total of $19 million. The only areas of the budget to see a significant increase over FY 2017 are payments to the Teacher's Retirement System Unfunded Liability (+$23.3 million) and the WV State Police (+$7.1 million). The table below details all of the changes from FY 2017 to FY 2018.
FY 2018 continues the downward trend for state expenditures. Since 2012, only Medicaid, foster care, and the Judiciary have seen an increase in General Revenue spending (Senior Services was not fully part of General Revenue in FY 2012). Higher Education has seen the biggest divestment, with appropriations declining by $74 million since 2012. Overall, General Revenue spending has only increased by 1.9 percent since 2012.
The FY 2018 budget totals $4.653 billion, including $4.225 billion from General Revenue. That is $280.3 million less than what was proposed by the governor at the beginning of the regular session, and $124.6 million less than the governor's special session proposal.
Cuts were made throughout the budget to bring it into balance. Some of the major cuts, compared to the governor's original proposal, include:
- Eliminating the Save Our State Fund
- $5.3 million cut from the Department of Education, including $1 million cut from 21st Century Assessment and Professional Development and eliminating Innovation in Education and Technology Systems Specialist funding - $4.5 million.
- Canceling the teacher's pay raise - $19.4 million.
- Smoothing teacher's retirement system unfunded liability payments - $44.7 million.
- $4.5 million cut from the Division of Health, including eliminating funding for the Tobacco Education Program - $3 million.
- $5 million cut from the Consolidated Medical Service Fund.
- $84.2 million reduction from General Revenue funding for Medicaid.
- $3.8 million cut from the Division of Corrections.
- $1.5 million cut from the State Police.
- $2.8 million cut from Community and Technical Colleges.
- $6.2 million cut from Higher Education, which comes on top of the $10 million cut in the original FY 2018 budget proposal.
- Funding for the Educational Broadcasting Authority, which was eliminated in the governor's original proposal, was restored, but cut by $1 million from FY 2017.
To recap, after vetoing the budget passed during the regular session, which was balanced by taking $90 million from the Rainy Day Fund and major cuts to Medicaid and higher education, the legislature went into a special session and the House, the Senate, and the governor have all been in a stand off over personal income tax cuts and sales tax increases ever since.
With no deal on revenue, the governor introduced a new budget with HB 115. HB 115 made a number of cuts compared to the governor's original proposal, including reducing the Save our State Fund to $15 million and cutting higher education by $5.4 million. At the time, HB 115 would have required the legislature to raise about $260 million in revenue to balance the budget.
Yesterday, the House introduced a committee substitute for HB 115, with $78 million in further cuts. While the full text of the bill is still not available, a summary was posted online.
Here are the major changes in the committee substitute for HB 115 compared to the governor's version.
- The Save Our State Fund is eliminated fully. The governor's originally called for a $105.5 million SOS Fund, and then reduced it to $15 million at the start of the special session. The House bill eliminates it entirely.
- $28.3 million in further cuts to the Department of Education, including $8 million in program cuts and $20 million cut from canceling the teacher's pay raise. HB 115 already included $44.7 million in savings from the unfunded liability smoothing.
- $1.7 million in further cuts to the Department of Education and the Arts, including $941,294 cut from Education Broadcasting Authority.
- $33 million cut from DHHR. According to the summary posted online, this includes $13 million cut from Medicaid.
- No further cuts to Higher Education, leaving Higher Ed at $13.8 million below FY 2017's funding.
Here are the major changes in the amendment to SB 1013 compared to the Governor's introduced version of HB 115.
- The Save Our State Fund is fully eliminated, plus an additional $250,000 cut to the Division of Energy.
- The teacher pay raise is canceled, cutting $20 million from the Department of Education.
- $85,813 cut from the Education Broadcasting Authority.
- $118 million from Medicaid.
- $5.6 million cut from the Bureau of Senior Services.
- $19.3 million cut from Community and technical colleges, which would be a 30 percent reduction from FY 2017.
- $75.2 million cut from Higher Education, which would be a 22 percent reduction from FY 2017.
Last night, the Senate passed an amended version of SB 1013, with smaller cuts than the version mentioned above, due to improved revenue forecasts. The Senate budget, balanced with millions in cuts, was passed in response to the failure to come to an agreement on a tax reform package that include major cuts to the income tax. Compared to the Governor's special session budget bill, the version passed by the Senate includes:
- Elimination of the Save our State fund.
- Canceled teacher's pay raise.
- $85,813 cut from the Education Broadcasting Authority.
- $54.3 million cut from General Revenue funding for Medicaid. The net effect of this cut is only $34 million, as the Governor adjusted down the amount needed for Medicaid by $20 million in a letter to the legislature.
- $5.6 million cut from Senior Services
- $6.4 million cut from Community and Technical Colleges, which would be a 10% cut from 2017.
- $23.3 million cut from Higher Education, which would be a 7% cut from 2017.
After the Senate passed SB 1013, the House last night amended and passed their own version of the bill. Like the Senate's bill, the House's version of SB 1013 totaled $4.225 billion, but makes cuts in different areas than the Senate's version, and also relies on some reserve funds and anticipated lottery surpluses. The House's version of SB 1013 includes:
- Elimination of the Save our State Fund.
- Canceled teacher pay raise.
- $8.3 million cut from the Department of Education.
- $1.7 million cut from the Department of Education and the Arts, including $941,294 cut from the Education Broadcasting Authority.
- $5 million cut from the Consolidated Medical Service Fund.
- $74 million cut from General Revenue funding for Medicaid. The net effect of this cut is only $25 million, after the Governor's adjustments and the planned use of reserves and surpluses.
- $197,723 cut from Veterans' Assistance.
- No further cuts to Higher Education, which would leave Higher Ed at $15 million below FY 2017 levels.
West Virginia relies more on federal assistance than other states because of our high poverty rates, low-wage jobs, and our generally unhealthy and aging population. In FY 2017, West Virginia received over $965 million dollars for discretionary spending from the federal government, which will be reduced by nine percent, or about $86.5 million overall, in the president's FY 2018 proposal. The cuts at the federal level will shift the responsibilities onto states to provide the necessary funds to maintain discretionary programs such as 21st Community Learning Centers and the Appalachian Regional Commission. It is highly unlikely West Virginia would chose to fund any of these programs.
Cuts to mandatory funding will have a deep impact as well. In FY 2017, the state received over $4 billion in mandatory funding, for programs like Medicaid, Supplemental Security Income, Social Security and Disability Income, and Supplemental Nutritional Assistance Program. If the president's proposal is enacted, West Virginia will lose about five percent or $187 million, of those funds next year. West Virginia is in no position to inherit this combined $273 million expense next year in light of the current budgetary shortfalls. Over the next 10 years, that number will grow as reductions in vital safety net programs such as SNAP begin in 2020.
Proposed Budget Cuts to Discretionary Funds
The fiscal impact of the elimination of federal grant programs by the president's budget will vary from state to state. Some states simply require less federal assistance than others due to the relative disparities in economic strength. A $94 million reduction in discretionary funds is disconcerting because it will lead to increased economic insecurity and decrease access to programs that provide basic housing, nutritional, and health needs. These funding cuts will come from eliminating educational programs, vouchers for nutritional and housing needs, job training programs, and other federal initiatives aimed at economic development in Appalachia's rural communities. The only department that is not seeing any cut is the Department of Transportation, which is getting a $9 million increase. However, this slight increase counts for only 1 percent of the total discretionary funds.
The Department of Education has served an estimated 200,000 West Virginian students since 2004 through the 21st Century Community Learning Centers program, which provides academic enrichment opportunities during non-school hours for children, particularly those who live in high poverty and low performing school districts. President Trump's budget completely eliminates this program. As of 2014 there are 133 sites across the state providing mostly elementary students with resources to meet state and federal education standards.
The Appalachian Regional Commission (ARC), which the President singled out and entirely eliminated under his proposed budget, was one of the most ambitious programs currently investing in West Virginia and the Appalachian region. The ARC brought nearly $24.1 million to 55 projects throughout West Virginia in the last two years and was set to attract nearly $28 million more in private investment to create economic opportunities, a ready workforce, and critical infrastructure.
Proposed Budget Funding Cuts to Mandatory Funding
Cuts to mandatory funding could be somewhere around $800 Billion over the next 10 years, according to experts. Programs that serve as a basic safety net have long since been considered instrumental to the country's national wellbeing. For example, without Social Security an additional 122,000 seniors in West Virginia would live in poverty. In West Virginia, and in many other states, safety net programs are also a large share of the state's economy.
An illustrative way to measure how much of an impact these programs have on West Virginia's economy is to look at each program's contribution as a percentage to the state's personal income – a proxy for a state's economy. Medicare for instance, brings in about 6.4 percent of the state's personal income, the most of any state.
The Supplemental Nutritional Assistance Program (SNAP), also known as food stamps, which helps struggling families and workers put healthy food on the table, reached nearly 357,000 West Virginians, or 20 percent of the state's population and put approximately $499 million into West Virginia's economy. The president's proposal cuts $193 billion (25 percent) of SNAP's funding nationally over the next 10 years. For West Virginia, that would mean an annual state contribution of $125 million, and $869 million over the next 10 years to replace the loss in federal funds.
West Virginia will likely see deep cuts in Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI), as well. SSI and SSDI benefits go directly toward low-income households who had professional careers cut short due to a disability and families caring for children with disabilities such as down syndrome, autism, and blindness. The president's proposal cuts $72 billion over 10 years to disability programs, including SSI and SSDI. A reduction to these funds will mean those already struggling to make ends meet will struggle even more for the assistance they need to support themselves and their families and stay out of bankruptcy. Once again, West Virginia relies more on these programs than any other state.
The president's proposed budget is an effort to reduce overall federal spending on programs and strengthen the military, it achieves this through targeting the nation's poorest and most vulnerable populations by drastically reducing funding for the programs they rely on. The figure below is an illustration of major federal programs (SNAP, SSI, SSDI, Medicaid, and Medicare) together as a share each state's personal income. West Virginia stands to lose the most from the funding cuts proposed by the president not only in real dollars flowing into the state, but perhaps even more importantly, in the quality of the services these programs provide (Figure 1).
Now with HB 115, we can see what the governor's plan is once there is some revenue agreement with the legislature. Total General Revenue spending in HB 115 totals $4.35 billion, which is $155.7 million below the governor's original proposal. The latest revenue projections show available General Revenue funds for FY 2018 to be $4.09 billion, which means that the legislature would need to raise about $260 million in new revenue for this budget proposal to be balanced. Current revenue proposals fall far short of that mark, and create bigger budget problems in the future.
Here are a list of major changes in HB 115 from the Governor's original proposal:
- The Save our State Fund in the Department of Commerce is reduced from $105.5 million to $15 million. Other cuts to the Department of Commerce total $629,448.
- In the Department of Education, $1 million is cut from 21st Century Assessment and Professional Development. The "smoothing" of payments to the Teacher's Retirement System's unfunded liability is also included, saving $44.7 million.
- Funding for the Education Broadcasting Authority is restored, but still cut by $85,813 from FY 2017 level. Other cuts in the Department of Education and the Arts total $493,403 below the governor's original proposal.
- In DHHR, funding for the Center for End of Life, Office of Healthy Lifestyles, Osteoporosis and Arthritis Prevention, and the Tobacco Education Program are eliminated, while General Revenue Funding for Medicaid is cut by $9.9 million below the governor's original proposal.
- The Department of Military Affairs and Public Safety is cut by $5.1 million below the governor's original proposal, including $3.8 million cut from the Division of Corrections.
- Community and Technical Colleges are cut by $1.3 million below the governor's proposal.
- Funding for HEPC and 4 year colleges and universities is cut by $5.4 million below the governor's original proposal, while $1.6 million in funding is restored for WVNET. Overall funding for Higher Education would be $13.8 million below FY 2017 funding levels.
- Cuts in other areas of the budget, including DEP, Department of Revenue, and Executive Branch agencies, total $1.4 million.
There was only one change from the governor's proposal in the Excess Lottery Fund. Excess Lottery funding for Medicaid was increased by $5.4 million above the governor's proposal, offsetting some of the General Revenue cuts.
The Senate bill includes raising the Sales Tax to 7.25 percent from 6 percent, expanding the sales tax base (telecommunications, digital goods, contracting services up to $40k, electronic data processing, health and fitness club memberships, primary opinion research, and ending direct use exemption for communications companies), an increase in the Historical Structure Rehabilitation Tax Credit to 25 percent from 10 percent, ending General Revenue transfer to Road Fund from sales taxes on highway construction, exempting all military retirement income from income tax, eliminating Social Security from income taxes over two years for those with less than $70,000, a new coal severance tax sliding scale based on price, a temporary three year increase in the Corporate Net Income Tax rate to 7 percent from 6.5 percent, and new Personal Income Tax brackets that will reduce income tax collections by 15 percent in 2018 and 20 percent in 2019. The bill also includes a gradual phaseout of Personal Income Tax rates of 0.1 percent per year based on growth in the General Revenue Fund and inflation. The phase down is estimated to begin by FY 2021.
According to the Department of Revenue, the net impact of the legislation is a one-year increase in revenue in FY 2018 because the sales tax rate hike begins on July 1, 2017 while the personal income tax reduction does not begin until January 1, 2018 (Fiscal Year = July 1 to June 30th). After FY 2018, the Senate bill is projected to lower revenue by $56.1 million in FY2019, $121.5 million in FY2020, $137.4 million in FY21021, and $177.6 million in FY2022 when the Personal Income Tax rates begin to drop.
As shown above, the Senate tax plan not only fails to provide enough revenue for next year's budget, but it also creates large future revenue holes that will likely result in more deep cuts to higher education, schools, and health and human services. This is especially important since next year is an election year when legislators often shy away from raising taxes.
Similar to previous tax plans from the Senate, this plan increase taxes on most West Virginians while lowering them for higher-income residents. According to the Institute on Taxation and Economic Policy, the Senate tax plan increases taxes on 60 percent of West Virginia households while lowering taxes on the top 40 percent of households. This is because lower income West Virginians pay more in sales taxes than income taxes, while the opposite is true for higher income people. Overall, the top 1 percent in West Virginia would receive an estimated tax cut of $2,245 on average while those making $26,000 would see a tax increase of $88 dollars on average.
Over the next couple of weeks, the Senate and House will take their tax plans to a conference committee to work on amenable plan that can pass both chambers so they can finally pass a budget from the upcoming year. The plan will have to include additional revenue if it aims to avoid more draconian cuts, especially in the outer years. One item that needs to be taken off of the bargaining table is the deep cuts to the personal income tax that largely benefit wealthier West Virginians. Only when this happens, can we ensure that we are not going down the Kansas road of a fiscal inferno with deep cuts to important programs, more credit downgrades, and weaker economic growth.
A good place for negotiations to start would be to adopt a simple tax plan, like the one we have endorsed or Delegate Pushkin has introduced that asks everyone to pay their fair share to avoid a government shutdown and cuts to essential services for families, children, and seniors.
The tax plan passed the Senate by a vote of 32-1, but was killed by the House, prompting a 10-day recess for the legislature. The bill, while currently dead, is still heavily favored by the Senate and the Governor and likely still will be the basis for the budget deal.
The tax plan introduced during the special session and passed by the Senate would make major changes to the state's tax system. The plan includes changes to the severance tax, major income tax reductions, a sales tax increase with base broadening, a temporary tax bracket for high-incomes, a temporary increase in the corporate net income tax, and increases in motor fuel taxes and Division of Motor Vehicle fees dedicated to the state's roads. Altogether, these changes would decrease General Revenue Fund collections by $52.2 million in the first year of full implementation, and lower General Revenue collections even further once the temporary corporate net income and high-income tax bracket expire. The tax plan would also increases State Road Fund Revenues by $118 million.
The table below breaks down the tax changes in SB 1004. The centerpieces of the plan are raising revenue with an increase to the sales tax and temporary taxes on businesses and high-income earner, which are almost entirely offset by major cuts to the income tax. The tax plan lowers revenue collections in future years even further since both the increased corporate net income and high-income tax expire by FY 2020, and the personal income tax is phased out over the coming decades.
Because the sales tax increase has an earlier effective date than the income tax cut, the tax plan would increase General Revenue Fund revenues by $135.3 million in FY 2018, but would reduce revenue by $59.2 million in FY 2019 once the income tax cut is in effect for the full fiscal year. And once the temporary corporate net income and high-income tax bracket expire, the plan would result in a net revenue loss of $92.2 million.
The changes to the State Road Fund include an 8-cent increase in the motor fuel tax and increases in various DMV fees. This totals approximately $118 million in additional revenue for FY 2018. These revenues would go to the State Road Fund, and would not contribute to closing the state's $500 million budget gap for FY 2018.
Like previous versions of the compromise tax plan, this plan would not only worsen our state's budget problems, it would do so by increasing taxes on 80 percent of West Virginia households making below $84,000, while lowering them on the 20 percent of West Virginians that make more than $84,000. Those making on average $11,000 would see their annual taxes rise by $123 or 1.1 percent of their income, while those making on average $778,000 (top 1 percent) would see an average tax cut of $2,626. Once again, the latest compromise tax plan is a plan that raises taxes on most West Virginians to give large tax breaks to those that need them the least.
The table below breaks out the tax changes for each income group in West Virginia. It includes the full-implementation of income tax reductions in 2018 and the 6.5% rate on incomes over $300k. While every income group sees an increase in their taxes from the proposed changes to the sales tax, motor fuel tax/DMV fees, and the increased corporate net income tax, the large personal income tax reductions mostly goes to the top income groups. In fact, approximately 60 percent of the more than $300 million in income tax cuts go to the top 20 percent, according to the Institute on Taxation and Economic Policy. This is why higher income West Virginians are estimated to receive an overall reduction in taxes while low and middle-income West Virginians see an increase in taxes.
The two temporary provisions of the tax plan, the increased rate for the corporate net income tax and the 6.5% income tax on incomes over $300,000, expire after 2020. Taking out these two parts of the plan largely benefit the top 1% of West Virginians, and do little for the other 99%. Once these two provisions expire, the overall tax cut for the top 1% of West Virginians will increase from $2,626 to $4,134.
As noted in previous tax proposals, these changes will not only exacerbate income inequality and make it harder for low- and middle-income families to make ends meet, but they will lead to large future budget shortfalls that will damage our state's ability to invest in the building blocks of our state's economy. Cutting taxes on the wealthy, while planning for further tax cuts for the wealthy in the future, is not going to pave a strong future for the state. Instead of moving in this direction, lawmakers need to work together to ensure tax reform is addressing the state's looming budget crisis together not making it worse.
Education The FY 2018 budget cuts $17.2 million from the State Department of Education. These cuts including eliminating state funding for the Regional Education Service Agencies (-$3.5 million), Innovation in Education zones (-$2.5 million), and 21st Century Community Learning Centers (-$1.7 million).
For State Aid for Schools, the state's share of school funding decreases by $24.8 million compared to FY 2017, while the local share also decreases by $12.5 million, netting the state a $12.1 million decrease in total basic state aid for schools. Overall, State Aid for Schools increased by $17.1 million over FY 2017, with increases in retirement systems payments causing the increase.
Education and the Arts General Revenue appropriations for Education and the Arts are cut by $1.7 million in the FY 2018 budget compared to FY 2017. The cuts include a $1 million cut to the Education Broadcasting Authority, whose funding was fully eliminated in the governor's proposed budget.
Health and Human Services The FY 2018 budget cuts $49.0 million from DHHR, with most of the cuts coming from General Revenue appropriations for Medicaid. The FY 2018 budget cuts $46 million from Medicaid's General Revenue appropriations compared to FY 2017, but replaces the cut with transfers from the Rainy Day Fund and increased Lottery fund appropriations. However, funding for Medicaid remains $56.3 million below the governor's FY 2018 proposal.
Other cuts to DHHR include eliminating state funding for the CARDIAC Project (-$427,500), the Center for End of Life Care (-$420,198), the Healthy Lifestyles Coalition (-$147,034), the Osteoporosis and Arthritis Program (-$158,530), the Tobacco Education Program (-$3.0 million), and the WV Women's Commission (-$156,408).
Military Affairs and Public Safety The FY 2018 budget cuts $1.6 million from DMAPS compared to FY 2017. Appropriations for the State Police are increased by $7.7 million, while appropriations for correctional facilities are cut by $7.9 million. Other cuts to DMAPS total $1.4 million.
Higher Education The FY 2018 budget cuts Higher Education by $30.7 million, including $26.6 million in cuts to 4 year colleges and universities, $1.8 million in cuts to the HEPC, including eliminating funding for WVNET, $2.2 million in cuts to community and technical colleges, and an $156,816 cut to the Council for Community and Technical Colleges.
Other Cuts Other cuts in the FY 2018 budget include $2.1 million in cuts to executive branch agencies (Governor's Office, Auditor, Treasurer, Agriculture, Conservation Agency, Attorney General, Secretary of State, State Election Commission), $533,302 in cuts to the Department of Administration, $4.3 million in cuts to the Department of Commerce, $172,064 in cuts to the Department of Environmental Protection, $653,287 in cuts to the Department of Revenue, $355,709 in cuts to the Department of Transportation, $143,508 in cuts to the Department of Veterans' Assistance, and $733,387 in cuts to the Bureau of Senior Services.
As Phil Kabler notes in the Gazette-Mail, it is also unclear what is currently included in the so-called compromise tax plan being advanced by Governor Justice. It has been rumored the tax plan is the same as Senator Fern's amendment to SB 484 with the exception that the plan includes the Governor's tiered severance tax rate changes and not the ones in the Fern's amendment that significantly reduce severance tax collections. If this is true, the revenue impact to the budget would be significantly reduced. (For more detailed account of the Ferns Amendment aka the proposed compromise tax plan, see our previous post here)
According to estimates provided by State Tax Department (via email), the proposed severance tax changes in the Fern's Amendment would result in a loss of an estimated -$135 million in severance tax collections in FY 2018 and between -$140-$150 million thereafter. Overall, the net result of the Ferns Amendment on the General Revenue Fund, according to the State Tax Department, is an increase of +$50 million in revenues in FY 2018, and a net reduction of an estimated -$170 million in FY 2019 and FY 2020, and a reduction of -$220 million by FY 2021.
For FY 2018, this includes +$280 million in sales tax increases (7 percent rate and broader base), +$49 million in additional revenue from the new and temporary CAT or commercial activities tax (0.045 percent) and high-income tax surcharge, an increase of +$12 million from ending sales tax transfer to Road Fund from sales tax collected on highway construction, and approximately -$156 million less in personal income tax collections. (Note: The reduction in the personal income tax is -$380 million upon full impact. The income tax reductions do not begin until January 1, 2018, while the other tax changes take effect July 1, 2017 - the beginning of FY 2018 - but start June 1, 2017). It is also important to keep in mind the CAT and high-income tax surcharge expire on July 1, 2020 or the beginning of FY 2021).
If the severance tax changes in the Ferns Amendment are swapped for the Governor's proposed severance tax rates that are estimated to be close to revenue neutral, this means that the net revenue impact on the General Revenue Fund would be an increase of +$185 million ($50m + $135m) in FY 2018, then a decrease of -$30 million in FY 2019 and FY 2020, and then a reduction of -$70 million by FY 2021 assuming there is no phase-down of income tax rates.
While incorporating the Governor's severance tax proposals into the tax compromise plan provides a significant revenue boost during the FY 2018 budget year, the sharp reductions in the income tax when it is fully implemented leads to revenue losses beginning in FY 2019 that will grow the state's budget deficit and lead to additional cuts to vital programs and services. These declines will grow more over time, with the phase down of the income tax and the expiration of the CAT and high-income surcharge by July 1, 2020.
When all of the tax changes are fully implemented in their first year (not including sales tax transfer from Road Fund), it adds up to $280 million in additional sales tax increases, $49 million in increased revenues from the CAT and high-income surcharge, and $380 million in cuts to the personal income tax. This means the proposed compromise tax plan is actually reducing taxes on West Virginians upon full implementation, not increasing them when it comes to the General Revenue Fund budget.
While the compromise tax plans leads to one year of positive revenue growth for the General Revenue Fund and growing deficits thereafter, the proposed revenue changes to the State Road Fund would increase revenues by about +$130 million in FY 2018 and +$138 million thereafter (if you do not include the transfer of sales tax collections from the Road Fund to the General Revenue Fund).
Altogether, the revenue changes in the proposed tax compromise plan - including General Revenue and State Road Funds - increase state revenues by approximately $315 million in FY 2018 and $108 million in FY 2019. To be clear, these estimates are subject to change at any time since there is no agreed upon tax bill or a full disclosure of what is being proposed between the Governor and legislative leadership.
The overall impact of these tax and revenue changes on households in West Virginia is the same as as has been reported in previous post, which did not include any severance tax changes because the tax is mostly exported out of the state and unable to be modeled because of difficulties obtaining proper information for the process.
Upon full implementation - which does not include any phase down of the income tax rates or the expiration of the CAT or high-income surcharge - the proposed tax and revenue changes would, on average, increase taxes on 80 percent of West Virginia households making below $84,000 per year, while lowering them on the 20 percent of West Virginians that make more than $84,000 per year. Those making on average $11,000 per year would see their annual taxes rise by $121 or 1.1 percent of their income, while those making on average $778,000 (top 1 percent) per year would see an average tax cut of $3,713.
This means that the compromise tax plan - if this is in fact it - raises taxes on most West Virginians to help pay for tax reductions for higher-income West Virginians while leaving some revenue to spare in the first year.
The table below breaks out the tax changes for each income group in West Virginia. It includes the full-implementation of income tax reductions in 2018 and the high-income surcharge. While every income group sees an increase in their taxes from the proposed changes to the sales tax, motor fuel tax/DMV fees, and the new commercial activities tax, the large personal income tax reductions mostly goes to the top income groups. In fact, approximately 59 percent of the more than $364 million in income tax cuts go to the top 20 percent, according to the Institute on Taxation and Economic Policy. This is why higher income West Virginians are estimated to receive an overall reduction in taxes while low and middle-income West Virginians see an increase in taxes.
A closer look at the proposed changes to the income tax illuminate this point further. The proposed tax compromise plan condenses the state's five income tax brackets into three brackets and reduces the rates. For example, instead of a top marginal tax rate of 6.5 percent on income over $60,000, the tax compromise proposal replaces this rate with a top rate of 5.45 percent on income over $35,000. This change will benefit those who have more income.
As the chart below highlights, the personal income tax in West Virginia is based on the ability to pay. This is largely because personal income tax rates increase as income increases. Sales taxes on the other hand, are regressive, taking a larger share of income from low- and middle-income West Virginians. And because those at the bottom and middle spend more of their income on necessities than the wealthy, shifting from the income tax to a greater reliance on sales taxes is a shift in "who pays" from those with more income to those with less income. Phasing out West Virginia's income tax would also make the state's upside down state and local tax system even more regressive over time.
As discussed in a recent report, shifting from the income tax to the sales tax is a poor strategy for economic growth. Academic research and real-world evidence from other states show that there is little evidence that such a shift will significantly boost economic growth, attract more people, or grow small businesses. However, there is compelling evidence that the income tax is a more reliable source of income than the sales tax over the long-term and that the states with more regressive tax structures increase income inequality.
As the Governor and legislature work out a compromise on the budget, including tax changes, they should keep in mind that setting West Virginia on a path of further cuts and just one year of revenue gain is not going to help build a stronger West Virginia where communities can thrive. While it is great to invest additional resources in our state's crumbing roads and bridges, those gains could be washed away be shortchanging our state's other needs - including our public colleges, schools, public safety, and health-care services.
Just any tax plan is not a good tax plan. It must be grounded in realistic assumptions and be sustainable over time. A sound plan cannot rely on false claims about trickle-down economic growth or a sudden surge in coal mining or natural gas extraction. It must provide a reliable source of revenue that can pay our state's debts and sustain public investments.
As developments of the tax and budget compromise unfold, we will continue to analyze and review them as they are released to the public.
The table below provides an overview of the tax changes included in the compromise tax plan that were offered as an amendment to Senate Bill 484. While the plan raises revenues by increasing the sales tax and enacting a temporary tax on businesses (CAT) and high-income earners, the deep cuts to the personal income and the severance tax lead to a sharp decline in revenues for the upcoming fiscal year of 2018. The tax plan lowers revenue collections in future years even further since both the CAT and high-income tax expire by FY 2020, and the personal income tax is phased out over the coming decades.
The changes to the State Road Fund include an 8-cent increase in the motor fuel tax and increases in various DMV fees. This totals approximately $118 million in additional revenue for FY 2018 or about $60 million less than the Governor proposed in his FY 2018 budget.
On top of the $115 million in lost revenues that punch a bigger hole in the state budget, the proposed tax changes would on average increase taxes on 80 percent of West Virginia households making below $84,000, while lowering them on the 20 percent of West Virginians that make more than $84,000. Those making on average $11,000 would see their annual taxes rise by $121 or 1.1 percent of their income, while those making on average $778,000 (top 1 percent) would see an average tax cut of $3,713. This means that the compromise tax plan - excluding severance tax changes - raises taxes on most West Virginians to give large tax breaks to those that need them the least.
As noted in previous tax proposals, these changes will not only exacerbate income inequality and make it harder for low- and middle-income families to make ends meet, but they will lead to large future budget shortfalls that will damage our state's ability to invest in the building blocks of our state's economy.
Cutting income and severance taxes – while phasing out the income tax – is not going to pave a strong future for the state. Instead of moving in this direction, lawmakers need to work together to ensure tax reform is addressing the state's looming budget crisis together not making it worse.