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West Virginia has miserable company when it comes to budget troubles

CHARLESTON, W.Va. — If there’s a bright side to West Virginia’s state budget troubles — in a misery-loves-company kind of way — it’s that plenty of other states have been having trouble too.

Meg Wiehe

“West Virginia is not unique this year or even in recent years in taking a little longer than usual to agree on a budget, largely because of having a revenue shortfall and having to make hard choices,” said Meg Wiehe, state tax policy director for the Institute on Taxation and Economic Policy.

“There have been many states in recent years that have had to go into special session after special session. So the fact that it’s taking a little longer, I don’t think is totally out of the norm.”

Max Behlke

Max Behlke, director of budget and tax policy for the National Conference of State Legislatures, similarly tracks state governments as they wrestle with their budgets.

“A lot of states had budget problems this year. 31 or 32 had revenue gaps. It was a mix across the board,” Behlke said.

“Most of the time when I call legislators or staff and ask about the budget I just hear a sigh. ‘Lemme tell you how it is.’”

After a 10-day break, West Virginia lawmakers are set to return to a special session Monday to work out a state budget for the coming fiscal year.

Their focus has been not just balancing the budget but also whether to act on the strong desire by the Republican majority in the state Senate to reduce the personal income tax with the goal of phasing it out over time. Gov. Jim Justice has come to express enthusiasm for that idea.

The Republican majority in the House of Delegates has expressed more skepticism. They are concerned about increases in the consumer sales tax that would be necessary to reduce the income tax and keep the budget balanced for the coming fiscal year. Models have shown deficits in the years to come.

A bill passed 32-1 by the Senate during the first two days of the special session earlier this month would have cut the personal income tax by an average of 20 percent the first year while raising the sales tax from 6 percent to 7 percent.

The plan would have raised the sales tax on July 1 but wouldn’t have cut the income tax until Jan. 1, 2018, resulting in a fiscal cushion to help the budget balance. It also would have eliminated exemptions on some economic sectors, particularly telecommunications.

The Republican majority in the House twice voted to kill the plan during the two days of special session.

Some of the negotiations during the 10-day recess focused on a sales tax increase of 6.5 percent with a slower rollout of the personal income tax reductions, averaging 20 percent over a three-year span.

These kinds of talks are unusual for a state facing a budget shortfall, Wiehe said in a telephone interview last week.

“What I do think is out of the norm is the type of tax reform they’re talking about — the idea that you have a revenue shortfall, couldn’t agree on a budget because of the severity of the cuts that would have to be put I place, yet you’re still talking about this idea of shifting your tax structure from the income tax to the sales tax,” Wiehe said.

“You’re going to put lawmakers in a bind pretty much every year. They’re going to have to hike that sales tax every year or find serious cuts.”

Mike Hall

Whatever resolution is reached, Senate Finance Chairman Mike Hall said he is urging those involved to avoid any situation that would put the state right back into fiscal problems next year.

“My main concern, and I’ve expressed it many times today is that whatever we do that we do not create a budget crisis for next year, that we try to get this thing stabilized so as we leave this process today that we’re not creating a problem for us in six or seven months when we come back here,” Hall, R-Putnam, said last week at the state Capitol.

“The governor has got to make a revenue projection for next year’s budget, and he’s got to do that in six or seven months. We come back here in January. We started late last year. It’ll seem like we just got this done and we’re back here. I’m very much an advocate that you just can’t do something in a cavalier manner and you walk in here in six or seven months and you’re $300 million short for next year.”

The horror story most often used by those who urge caution is Kansas.

Lawmakers there have been debating whether to roll back tax cuts that began under Gov. Sam Brownback to boost the state’s revenue by more than $1 billion over two years.

Just last week, Kansas’s Senate narrowly rejected a bill that would have brought back a third income tax bracket, raised individual income tax rates and discontinued a 2012 tax cut for business owners.

“I think Kansas is the most important state to consider in this context,” Wiehe said. “The revenue gap that’s been caused by those tax cuts never materialized with the promised economic growth. They need to find about a billion dollars in revenue.”

In Louisiana, the House of Representatives passed a budget that spends $237 million less than the revenue the state takes in, prompting Gov. Gov. John Bel Edwards to say it would send the state “tumbling backwards.” House leaders said revenue estimates run high every year, forcing mid-year cuts.

Senators in Louisiana, where budget bills originate in the House, say the Legislature seems headed into a special session for the second year in a row.

“Their budget woes started really two years ago, but their revenue problems are a combination of being a state with dependence on the energy sector but also because back in the early 2000s they drastically cut the income tax,” Wiehe said.

“The key difference is they’re talking about tax reform but trying to figure out how to improve their tax system in its fairness and adequacy.”

Alaska legislators have been debating whether to reinstate the income tax. The Democratic majority in that state’s House sees the income tax as a way to deal with a deficit of around $3 billion.The Republican majority in the Senate prefers cuts to education and higher education and the use of reserves.

“It’s an example of a state mostly having revenue problems because of its reliance on the energy sector, but Alaska got rid of its income tax in 1990 thinking they would never need it again, Wiehe said. “Now they need it.”

Oklahoma lawmakers have gotten to the point where they’re seriously considering raising the tax rate on oil and gas production. Oklahoma is facing a budget shortfall of about $900 million — its third consecutive shortfall — as the state comes down the home stretch of its legislative session.

Oklahoma had economic triggers for tax cuts built into state law, but the Republican-led Legislature approved a bill last month repealing what would have been the next automatic cut and keeping the top rate at 5 percent.

The last triggered tax cut in Oklahoma took place in 2016, prompted by a prediction that state revenue would grow sufficiently. Instead, the price of oil declined, causing a plunge in state revenue.

“So this is kind of another good warning on these triggers,” Wiehe said.

North Carolina is dealing with a projected budget surplus of $581 million. It’s the state’s third year of surpluses in a row, following tax reforms in 2013. The conservative-leaning Tax Foundation gives North Carolina credit for broadening its tax base along with fiscal restraint.

Behlke with the National Conference of State Legislatures also credits North Carolina with preparing for its tax reductions by simultaneously preparing to spend less.

“North Carolina had one of the largest tax reform packages but they also understood,” Behlke said. “North Carolina understood that when they cut rates they were going to bring in less money so they also cut spending. They’ve hit their budget targets ever since.”

Behlke warns that reducing the income tax is not a cure-all for state economies.

“When it comes to tax cuts and growth, I think most economists will agree that tax policy has an economic impact on economic growth. Where the debate comes is the size of an impact on economy,” Behlke said. “The bigger the change the more of a potential impact it could be.

“Significant changes to the personal income tax, regardless of the size of what the impact might be, it’s a much longer period of change rather than overnight. It could be 10 years down the road.”

Individual workers paying the personal income tax may be tied to their communities by other factors such as friends, family, housing or schools.

“I get frustrated because these discussions are talked about as if tax policy is the only thing people care about or that drives behavior. There are other circumstances to take into account in what’s going on,” Behlke said.

The Republicans in West Virginia’s Senate are embracing personal income tax reductions with faith that doing so will lead to increased economic activity.

“I’ve never seen a personal income tax cut pay for itself,” Behlke said. “I’ve never seen a tax cut make people say ‘We dropped it 10 points but so much activity was created we got it back.'”

Balancing West Virginia’s budget while reducing the income tax has meant the possibility of sales tax increases. Behlke warned that reliance on the sales tax can create headaches too.

A memo he wrote to members of his organization concluded: “Overall, the states that rely on the personal income tax as a larger share of their revenue have had more stable revenues since the Great Recession. Sales tax growth will continue to be weak until states are able to collect the tax revenue they are owed from online sales.”

In the telephone interview, Behlke expanded on that point.

“The sales tax is just not keeping pace,” he said. “More and more people are shopping online, and those dollars are just not keeping up. If you can’t collect all those you’re really going to hurt your budget,” he said.

“For the sales tax to remain viable, in addition to collecting for tangible products, the sales tax base will have to be broadened to collect all these things people are buying digitally.”

That would include not only the products that people buy online and have shipped but also downloads of information, such as tax programs or e-books.

“Increasingly, governments are going to say ‘You know what we’re just basically going to tax everything that’s sold,'” Behlke said.

Another alternative is to go the way of Illinois, where there’s been a budget stalemate for two years running.

“It’s a mess,” Wiehe said.

 

 





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