By Matt Young, West Virginia Press Association
CHARLESTON, W.Va. – West Virginia Revenue Secretary Dave Hardy, on Wednesday, provided members of the media with a preview of Gov. Jim Justice’s $4.884 billion budget proposal
The preview, which came just hours ahead of the 2023 State of the State address, featured Hardy, along with Deputy Secretary Mark Muchow and Michael Cook, director of the State Budget Office.
“It’s clear that we are in historic times,” Hardy began. “Whatever adjective you want to use – unprecedented, jaw-dropping – whatever word you want to use, we’ve never had times like this before. And that was our starting point with this budget.”
The governor’s proposed budget for fiscal year (FY) 2024 represents a $248 million increase over last year. However, according to Hardy, the state’s record-setting revenue increases have created a “historic window of opportunity,” as the fiscal year 2023 surplus is expected to exceed $1.7 billion.
“I’m talking about our ‘big four’ revenue streams,” Hardy said. “The severance tax and consumer sales tax, personal income tax (PIT) and corporate net income.”
Regarding rising interest rates, Hardy said: “We’re very happy about that. A year ago we were six months into the fiscal year (2022) and our net interest revenue was $21,000. Now, we’re six months into the fiscal year (2023) and our interest income is $38 million. That is purely the result of interest rates going up.”
“With $25 million worth of pension funds, we pay very close attention to what our rates of return are,” Hardy noted, before adding that, “Inflation has continued, but it appears to be on the decline.”
The revenue increases, Hardy explained, reflect growth numbers which are “disconnected” from the surplus. Severance tax revenue has grown, year-to-date, by 112.8%. In that same period, consumer sales tax has grown by 5.8%, corporate net income has grown by 11.8%, and PIT has increased by 13.6%.
“That leaves room for a lot of discussion,” Hardy said. “The big conversation-piece in the budget this year will be the surplus.”
“The governor instructed us to build, what we call, an essentially flat budget,” Hardy continued. “[That] means we start off with the idea that we’re going to hold the line, and be very cautious about our base growth.”
The $248 million budget increase from FY 2023 is the result of an increase in the school aid formula, an increase in PEIA subsidies to meet the proposed reimbursement rates, and salary increases for state employees.
Muchow then provided a brief fiscal summary, highlighting the state’s strong economic growth and high inflation rates. According to Muchow, both coal and natural gas production were up from calendar year 2021 to calendar year 2022. Coal prices doubled in that period, while natural gas prices increased by 80%.
“The demand for energy across the globe went up relative to supply,” Muchow said. “And when demand exceeds supply, the price goes up.”
As a result of the COVID-19 pandemic, Muchow explained, West Virginia’s General Revenue Fund experienced a decline of 5.5% in 2020. However, since that time, the state has had three consecutive years of double-digit growth; 11%, 18.1%, and 21.2% respectively.
Between FY 2019 (last full fiscal year prior to the pandemic) and FY 2023, the average annual percentage in the state’s revenue growth was 8.1%, or $817,635 million. At $331,776 million, West Virginia’s severance tax revenue is the primary driver of that increase, followed by PIT at an increase of just over $214 million.
“When you look at inflation for that period of time, the rate is running right about 4.2%,” Muchow noted. “So the average growth rate is running a bit higher than the average inflation rate.”
“Usually when states have surpluses like that, those states cut taxes, and that might be happening here,” Muchow said, in reference to the governor’s later-announced proposed three-year plan to reduce PIT by 50% in the State of the State.
Hardy added: “[The governor] is introducing a bill with a very significant tax reduction. That would change projections going forward.”
“Let’s say you’re cutting taxes in calendar year 2023,” Hardy continued. “You’re not going to see the full impact in this fiscal year. It’s going to take place in fiscal year 2024. It will change certain parts of the budget.”Under the governor’s plan, PIT would be reduced by 30% within the first year, followed by 10% each year for the next two years. According to Hardy, should the legislature adopt the governor’s proposal, a revised budget will be released before the end of the session. However, it will only impact total revenue growth, as, “The expense side will remain untouched.”