Officials considering Gov. Jim Justice’s proposed $5.22 billion general revenue budget will also need to take into account a few variables. Those could have such weight that officials are projecting state revenue will dip slightly over the next several years.
One factor is the possibility that West Virginia could hit a trigger to further reduce personal income taxes. The state instituted a 21.25% cut this year in a package that included further automatic reductions under certain economic conditions. The first trigger could occur this year, and officials are already assessing what size that cut could be.
Additional factors are quirks of tax collection that could be affected by the calendar.
First, that refers to a new state law providing a workaround to a federal $10,000 cap on state and local tax deductions, often called SALT. The workaround allows partnerships and other pass-through businesses to pay West Virginia income taxes as entities rather than passing the tax responsibility through to individual owners.
The upshot could be more of those tax collections up front and more tax credits and refunds in the second half of the fiscal year.
Another potential factor in tax collections is the credit for property taxes on automobiles that went into effect Jan. 1.
So the state revenue estimates that are a key aspect of budget planning aren’t exactly a straight shot but, this year, require some consideration of wind direction. Although state officials have described stable tax collections so far this fiscal year, there’s still half a year to go.
A revenue presentation before finance committees this week showed -1.5 percent revenue growth anticipated for 2023 to 2029.
“The reason it’s negative 1.5 is because we embarked on a multi-year tax cut plan,” Deputy Revenue Secretary Mark Muchow said during the revenue presentation to senators on the finance committee.
“The first tax cut phase is this year, 21.25 percent. Next year in fiscal ’25 will be the property tax crediting coming into play. So that’s multi-year tax cuts coming into play that slows those numbers down.”
That compares 8.1% state revenue growth from 2019 to 2023.
The trigger to cut personal income taxes again would measure general revenue collections in a fiscal year minus severance collections compared to 2019 as a base year, adjusted for inflation. If collections are ahead of the base year, that would activate the trigger.
“If the revenues grow faster than what these projections are, then you’re going to have a trigger,” Muchow told senators. “If they grow slower, no trigger.”
Muchow said the trigger will be measured this August. If it hits, then the reduction would take effect Jan. 1, 2025, several months into the next fiscal year.
The maximum cut under the trigger is 10 percent, but the state’s acting revenue secretary thinks the percentage is likely to be significantly smaller than that for the coming year.
“It’s a little bit early to calculate that, but at this point in time we think it may be a minor to maybe a small tax cut, but we’re thinking it might be in the 1 to 2 percent rage. It’s a little bit early in the fiscal year to determine that, but it’s possible that it will be a small tax cut,” acting Revenue Secretary Larry Pack said last week on MetroNews’ “Talkline.”
Pack said the incremental approach is deliberate.
“The triggers were put in very conservatively to give us the opportunity to really give the Legislature and future administrations the opportunity to look at it. They could always accelerate the triggers or put them back,” Pack said.
Those factors make confident budgeting a challenge, said Kelly Allen, executive director of the progressive West Virginia Center on Budget & Policy.
“Because of the drawn out implementation of 2023’s tax bill and the timing issue the SALT bill created, we aren’t yet seeing their full impacts on the state budget. The property tax rebates and additional tax trigger could reduce revenues a combined up to $400 million in FY 2025,” Allen said.
“And because the SALT workaround bill boosted personal income tax collections in the first half of this fiscal year, lawmakers might have a false impression that the personal income tax cuts haven’t reducing revenues, when revenue officials expect to end the fiscal year down 10-15 percent compared with FY 2023 income tax collections.”
The result of all that, she said, is uncertainty.
Senate Finance Chairman Eric Tarr said the state needs to carefully consider the effect of possible additional personal tax cuts against spending proposals.
“We have to be extremely mindful of our spending going forward relative to that tax cut if we’re going to give the tax cut we promised the people of West Virginia,” Tarr, R-Putnam, said on MetroNews’ “Talkline.”
He continued by saying, “the revenue that comes in kicks that trigger in one way or the other. As our revenue comes down with our collection of personal income taxes — which, that’s over $2 billion of our budget — as you start triggering that down, you can’t ramp up your spending as you’re bringing that down.”