West Virginia's surplus is misleading, state budget center says

KEYSER, W.Va. — The record surplus touted by state leadership isn’t all that it seems, Seth DiStefano of the West Virginia Center on Budget and Policy told a group of citizens at the Mineral County Courthouse on Wednesday evening.

DiStefano, who previously visited the courthouse in October for a presentation on the now-defeated Amendment 2, spoke for roughly an hour about the way the state’s surplus has been presented versus the Center for Budget and Policy’s interpretation of the data.

While state leaders, including Gov. Jim Justice, have boasted of a record $1.308 billion surplus, DiStefano said that figure is “a mirage.”

“It’s built on high energy prices and unaddressed needs,” DiStefano said. “Our budget and economy are underperforming pre-pandemic trends. This is not to say things are terrible in West Virginia, but things are not as gangbusters as folks who brag about the surplus would want you to believe.”

Based on data from the state budget office and the federal Bureau of Economic Analysis, DiStefano said, WVCBP analysts found that “our budget keeps shrinking, and its shrinking is failing to keep up with inflation.”

Through the revenue estimate process, West Virginia governors “hold a lot of the cards” when it comes to setting the budget, DiStefano said. Revenue estimates are common in governments statewide, he said, and in West Virginia, the governor has sole determination over that figure.

“Governors throughout history in West Virginia have tended to lowball that number, at least a little bit,” DiStefano said, likening it to underbidding when playing spades. Legislators can’t exceed the governor’s estimate for the budget, he said.

Both Republicans and Democrats have contributed to the state’s current budget situation, DiStefano said, noting U.S. Sen. Joe Manchin’s corporate net income and business franchise tax cuts imposed during his tenure as governor.

“I don’t want to just lay this at the feet of Governor Justice, because he’s not the only person to have done this,” DiStefano said.

The state has also faced a slower recovery from the pandemic than other parts of the country, said DiStefano. Data showed that West Virginia’s non-farm employment rates have not risen the same as in other states, and cumulative tax revenue between the first quarters of fiscal year 2020 and 2022 has decreased when adjusted for inflation.

The touted surplus, DiStefano said, is based on higher-than-average severance tax revenue in light of “extraordinarily high global energy prices,” high inflation and “a failure to adequately invest into programs, specifically state jobs.”

When workers quit jobs at agencies like the Department of Highways and the Department of Health and Human Resources, DiStefano said, the positions often remain unfilled. In particular, more than half of fiscal year 2023’s surplus results from $433 million in severance taxes, he said, which aren’t commonly paid by individuals.

Between 2005 and 2020, DiStefano said, severance taxes had a negative 0.2% growth rate, rising high for a few years before plummeting in others.

“The bottom line is when you look at severance taxes, they are by nature boom and bust,” said DiStefano. “… It is only a matter of time before it goes back down. This will not last forever.”

Inflation has driven up costs in general, DiStefano said, leading to increased sales tax revenue.

“The thing is that just like the demand for coal and natural gas, inflation is a temporary thing. Inflation doesn’t last forever,” said DiStefano.

Flat budgets like the ones passed in the state for the last five years make it “a little more tricky” for things like the state Public Employees Insurance Agency to remain affordable. Both DHHR and the regional jail system are “chronically underfunded,” DiStefano said, creating unsafe environments for employees at both, as well as the populations served.

“If you don’t staff agencies properly, you can ‘save money,’” DiStefano said. “If you do that with a flat revenue estimate, you can show surpluses, but there is a cost to both.”

Cutting the state’s income tax could lead to further issues, DiStefano said, as regressive taxes like sales tax could be raised, impacting lower-income families by having larger portions of their finances consumed by the raises.

An analysis the WVCBP did in conjunction with the Institute on Taxation and Economic Policy, DiStefano said, showed that cutting 10% of the state’s income tax would benefit the most households earning more than $443,000. The poorest 20% of residents, he said, would see about a $15 difference on average.

The temporary severance tax boost, DiStefano said, could be used to fund critical infrastructure improvements statewide. He also said the budget drafting process would benefit from having “more sunlight” on it through a review process involving legislators and voters.

“It is not wise, it is not fiscally responsible to make permanent changes to how much revenue you’re taking in based on money that is simply not going to be around much longer,” DiStefano said.

Asked whether he thought the data showed the state’s progress would continue to weaken if no action is taken, DiStefano said he felt the data showed a lack of investment in the public sector would continue doing harm.

“That’s one of the biggest parts of the problem we have right now, and that’s just the dollars and cents part of it,” DiStefano said. “The human cost is very significant.”

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