Update 7/20/22: Gov. Jim Justice has called lawmakers into a special session starting next Monday to consider his proposal to cut the state’s income tax.

Original story:

Days after the end of the fiscal year on July 1 showed West Virginia’s revenues well above official estimates, Gov. Jim Justice faced a camera in his Capitol office and announced his plans to keep West Virginia on the economic “rocket ship ride” he’s long promised: a 10% income tax cut.

Joining Justice was state Revenue Secretary Dave Hardy, who endorsed the plan. The $1.3 billion 2022 surplus, he said, was a sign that the state could weather the permanent income tax cut, which Justice said he expects to cost the state about $250 million annually. 

“We would not recommend this to the governor if we thought this would result in raising other taxes or this was not sustainable in the future,” Hardy said during the press conference. “We always look to the future. We’re always thinking two or three years out on all the projections that we do … $250 million is a safe number to do.”

But Hardy’s recent statement marked a reversal from his position just months ago, when he warned legislators that the current surpluses should not be interpreted as having any bearing on the state’s long-term economic health.

“Some of the things in our budget are just very difficult to understand,” Hardy told the Senate Finance Committee under oath in January. “I use the word ‘inexplicable.’”

Hardy was speaking about the massive revenue surpluses that the state enjoyed during the pandemic as one-time federal aid flooded into the state, even as the national economy more broadly took hit after hit. And he cautioned lawmakers not to use the numbers to draw conclusions about future incomes and base policy on the expectation that such surpluses will continue.

Now, Hardy is supporting a tax cut that would do exactly that: use an unprecedented surplus as justification for a permanent tax cut that would cut hundreds of millions in annual revenue permanently. He said the past six months of revenue trends have convinced him that the state can weather the loss of income in the long term.

But West Virginia is still benefiting from an economy fueled by federal aid and an increase in severance tax revenue as the war in Ukraine drives fossil fuel prices up. The state is also still facing the looming issues that, as recently as January, Hardy’s department’s most recent budget report warned could cost the state hundreds of millions of additional dollars in years to come. That budget report also predicted a slowdown in growth in the coming year.

Mark Muchow, the deputy secretary of the Department of Revenue, also reflected these views to lawmakers in January: “I’ll take everyone out to dinner if 2023 is as good as 2022,” he said. “I expect it’ll slow down.”

Hardy did not respond to questions about what had changed his views on the current surpluses, and why he is now advocating for a permanent revenue reduction in the form of a tax cut. Muchow and Justice also did not respond to requests for comment.

The fate of the tax cut will be up to legislators, whom Justice said he plans to call into a special session beginning Sunday. That, too, is up in the air: Lawmakers have said that the plan came as a surprise, and some Republican leaders have yet to commit to supporting it.

Unpacking the surplus

Since 2020, the billions of stimulus dollars paid directly to taxpayers, multiple federal aid packages, and rapid fluctuations in fossil fuel prices due both to the pandemic and the war in Ukraine, have bolstered the state’s revenues.

At the same time, inflation is rising, and impacts government spending much like it does individuals’. Plus, Medicaid costs are expected to balloon when an increased federal spending match, put in place because of the pandemic, expires. Moreover, Hardy’s department noted other looming costs to the state in his most recent budget report: school construction, repairs in jails, rising health care costs, and an aging population that is expected to rely more on state insurance and retirement benefits in the future.

Costs and revenues are fluctuating so much, in fact, that Hardy’s department stopped a decades-long tradition of providing six-year expenditure projections to lawmakers, beginning with their proposal for the 2022 budget.

“There are no models, when we talk about federal dollars, pandemic relief, [and] all the money that’s floating around,” Hardy said. “There’s no models to compare it to.”

Asked by one lawmaker why his department stopped providing the six-year projections, Hardy said, “We’re making assumptions that were just — I’m trying to think of the right word — they were wild guesses. I won’t even put the middle word in.”

After the pandemic hit in 2020, Justice accordingly lowered future revenue projections. Lowered expectations led to large surpluses, which are just a measure of how much actual revenue exceeds the expectation set by Justice’s office. 

The state’s revenues, though, are relatively close to the last projected target for the 2022 fiscal year, which was made in January 2020, before the pandemic hit. That’s because steep economic declines were buoyed by one-time federal aid, which Hardy has said contributed to the current surpluses.

But that hasn’t stopped Justice from using the recent surpluses to call for income tax cuts with no budget cuts or increases in other taxes to offset them. 

“We have this huge surplus, but is it really a surplus if we’re just where we thought we would be before the pandemic?” said Sean O’Leary, the senior policy analyst at the West Virginia Center for Budget & Policy. “Why are we acting like this is a new normal, and we can go ahead and cut all these taxes, cut the property tax, cut the income tax, when we know it’s a unique circumstance that led to this?”

While the Legislature considers Justice’s proposal to cut the income tax by 10%, further future tax cuts are being lined up. Justice said that, eventually, his goal is to eliminate the personal income tax entirely, but right now he can only cut 10% because of federal conditions on the use of American Rescue Plan funding. And in November, voters will get to choose whether to give the Legislature power to cut taxes on businesses and personal property. Senate President Craig Blair, R-Berkeley, said that such a property tax cut is his priority over Justice’s income tax proposal.

For now, Justice has said he wants the tax cut to be “pure,” meaning he won’t be increasing taxes elsewhere, or cutting the budget, to pay for it. His justification for this is the surplus. But the federal dollars that Hardy attributes at least some of the surplus to are unlikely to continue flowing with inflation and a largely re-opened economy. And severance tax revenues, which have skyrocketed in recent months, are unlikely to remain as high long-term since an increased demand for West Virginia coal and natural gas is a product of war in Ukraine.

“Conservative is good,” Muchow advised lawmakers six months ago. “It allows you the flexibility to make decisions in the future.”