On July 1, Gov. Jim Justice announced that in the 2021 fiscal year, which ended the previous day, West Virginia had a budget surplus of $413 million, topping previous expectations for the year.
“We’re in great shape in West Virginia,” Justice said, smiling.
But, the surplus may not be all it’s cracked up to be. And despite math that suggests a $413 million surplus is more like an $8 million shortage, lawmakers are planning expenditures based on this illusion.
An unprecedented year
Nearly half of West Virginia’s $413 million surplus — $192 million — was income tax from the previous year. The money, which would normally have been accounted for in the previous year’s revenue, was collected late because of COVID-related extensions in filing deadlines.
Moreover, the surplus is based strictly on how much higher revenue was than what the executive branch predicted when creating the budget. And officials lowered those predictions by $220 million from the previous year’s estimates, even before COVID-19 ravaged the national economy.
Removing income tax that would have typically been collected in a previous fiscal year, revenue for the 2021 fiscal year was actually lower than what had been predicted just two years earlier.
West Virginia’s tax revenue was also boosted by over $12 billion of federal aid pumped into the state economy, including over $4 billion in direct stimulus checks, though it’s difficult to measure the exact impact that the stimulus checks, as well as enhanced unemployment and Paycheck Protection loans, had on individual and corporate spending.
“We’re down 30,000 jobs,” said Sean O’Leary, an analyst at the West Virginia Center for Budget and Policy, who authored a report on the surplus. “It doesn’t make sense that we’d be running a big surplus if these estimates were done before COVID ever happened.”
A spokesperson for Justice didn’t return an emailed request for comment.
The surplus as a springboard
Still, lawmakers, as well as Justice, are celebrating the surplus and are using it to justify spending and future tax cuts based on the apparent windfall.
“You made an extra $200 million no matter how you look at it,” said House Finance Chairman Eric Householder, R-Berkeley, acknowledging the impact of delayed income tax collections. “I’m going to still advocate for tax reform.”
“I would like to see some tax cuts,” said Delegate Gary Howell, R–Mineral and co-chairman of the joint interim Economic Development Committee, when asked what the surplus meant for his legislative priorities. Howell acknowledged, however, that “there was some artificial growth there because of the stimulus.”
But rules set by the U.S. Treasury Department for states that received American Rescue Plan funding make cutting taxes a risk. According to the guidelines, governments that received federal funding, like West Virginia, can’t use that money to fund policies that cut revenue. If new tax cuts are put in place, the state would have to prove that they paid for it with their own money by keeping their revenue within at least 1% of the 2019 fiscal year, a pre-COVID baseline.
Most of the recent surplus money has already been appropriated for spending, including some that went to filling contentious holes in the previous budget, like making up for previous spending cuts in higher education.
The budget for the 2022 fiscal year, which will last until next July, has further cuts to higher education. Critics worry that such budget cuts will become enshrined, and in the future there may not be a surplus to backfill them.
“After we get back to whatever the new normal is going to be without influxes of federal money, where is our state going to be?” said Delegate Brent Boggs, D-Braxton, the ranking Democrat on the House Finance Committee. “Things like higher education money should be one of our first priorities, not just something we hold back because we think we’re gonna have a surplus.”
In recent special sessions before the end of the 2021 fiscal year, lawmakers also passed a number of expensive new priorities. These include a $30 million closing fund that can be used to lure businesses into West Virginia, tax cuts for small firearms and ammunition manufacturers, and paying remote workers thousands to relocate to West Virginia.
These new programs have gone into effect in spite of Justice’s office estimating $57 million less in income in 2022 than they had predicted for 2021, even before COVID hit. And unlike in previous years, this year’s budget report from the executive branch did not include projections of expenditures, an unusual absence.
“That’s something I have always expected, I have always asked for, and this is the first time I’m aware that we haven’t received it,” said Boggs, who has been in the Legislature since 1997. “Revenue estimates are vital in the budget process.”
With no expenditure projections and an inflated sense of 2021 revenue, lawmakers will be in an especially tricky position trying to pass new tax cuts without violating the terms of their American Rescue Plan funding and still ensuring a large enough surplus to backfill cuts to programs like higher education.