The West Virginia Legislature’s 2023 regular session had been over only a matter of hours when the state was contacted by the Public Resource Advisory Group (PRAG), the state’s bond advisors. PRAG was following up on requests it had received by two of the nationally recognized bond rating agencies—Moody’s and Fitch.* They wanted details on the tax cut.
Governor Jim Justice and the Legislature had come to agreement late in the session on a historic tax reduction plan. The proposal reduced each personal income tax bracket by 21 percent and created a full rebate on vehicle property taxes and a 50 percent rebate on the personal property taxes small businesses pay on equipment and inventory.
Collectively, the state estimates taxpayers will save between $600 and $700 million annually between 2024 and 2028 just on the income tax reductions. Add in the property tax cuts and by fiscal year 2028, the tax cuts will amount to $881 million.
But every dollar that the taxpayers save is a dollar that the state won’t collect, and the rating agencies wanted to know whether West Virginia could handle the substantial decline in revenue. After analyzing the tax cut, along with the state’s budgeting and economic growth projections, Moody’s has signed off on the fiscal soundness of the cut.
“While large, permanent tax cuts can limit a state’s financial flexibility, West Virginia’s conservative spending practices coupled with a trend of significant revenue growth in recent years will support the tax reduction—as well as other tax cuts included in the law—without causing structural imbalance,” Moody’s concluded in its recent analysis.
Accordingly, Moody’s will continue the state’s Aa2 stable bond rating, which is viewed by the agency as “high grade” and ranked in the second highest investment grade category.
(West Virginia’s Aa2 rating is higher than Kentucky and Pennsylvania at Aa3. Maryland and Virginia have the highest Moody ratings at Aaa. Ohio’s is Aa1.)
West Virginia Revenue Secretary Dave Hardy said the Moody’s rating is an independent validation of the tax reduction. “The significance of the positive feedback in the report is that it establishes that our tax cut was done in a responsible and careful manner that does not threaten the structural integrity of our budget,” Hardy said.
Moody’s pointed out that the key to the ongoing structural stability is to keep spending under control. “The state’s conservative budgeting will, however, allow it to remain in structural balance for the forecast period,” the report said.
However, there was a cautionary note. West Virginia has enjoyed significant revenue growth that boosted surpluses to historic levels—almost $1.4 billion in fiscal year 2022. But an economic downturn “increases the risk that the state will face budgetary challenges,” Moody’s said.
Many of the tax cut advocates in Charleston, including Governor Justice, hope the state is on the path to eliminating the income tax completely, and there is a trigger in the tax cut law that allows for a gradual reduction if certain revenue growth benchmarks are met.
Much of the debate during the legislative session was not only where to cut taxes, but by how much. Reducing too much would put the state in a financial bind. A tiny cut would have been inconsequential to taxpayers.
The Moody’s analysis indicates Justice and the Legislature may have found a sweet spot.
*(Secretary Hardy said, “Fitch was satisfied with our information, but issued nothing formally.”)