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Tax cut trigger likely to be hit in August; could total $18M revenue drop for FY 2025


Tax cut trigger likely to be hit in August; could total $18M revenue drop for FY 2025

Jun 05, 2024 | 6:00 am ET
By Caity Coyne
Tax cut trigger likely to be hit in August; could total $18M revenue drop for FY 2025
Senate Finance Chair Eric Tarr, seen in the West Virginia Senate Chamber on May 21, 2024, said he expects to see a tax cut trigger hit at the end of fiscal year 2024. (Will Price | West Virginia Legislative Photography)

As August approaches, state leaders are still uncertain about what the impact could be of the impending trigger that could — depending on revenue collections — bring an end to the state’s personal income tax and, in turn, a budget deficit of unknown proportions.

Senate Finance Chair Eric Tarr, R-Putnam, said, based on recent revenue projections, he expects to see the trigger hit at the end of fiscal year 2024 at a rate that would mean about a $36 million decrease in revenue over the next two years ($18 million in each fiscal year).

“I’m fairly confident in that range, but until we get to the end of July, well I can’t say it’s 100% certain,” Tarr said. “We’re more confident now, though.”

According to a news release from Gov. Jim Justice, with one month to go in the fiscal year the state so far has collected $5.1 billion in general revenue for 2024. Of that, about $701 million is being classified as surplus dollars with about $63.7 million of those funds — “a record,” according to Justice — coming in May alone.

Fiscal analysts for the state initially projected to see about $600 million in surplus this year. In April, Deputy Revenue Secretary Mark Muchow told lawmakers that the forecast had increased to $800 million, making it more likely that the personal income tax trigger will be activated for next fiscal year.

The trigger is activated on a sliding scale, with the amount of the personal income tax reductions dependent on how high revenue collections are. The tax cuts will be implemented over the next two years, but economic circumstances for the second fiscal year are not considered in cuts for that year. On the highest end of the scale, the state could have seen a $250 million decrease in revenue over the next two years because of the decline in personal income tax collections.

“At this rate, I don’t think the cuts are something we can’t sustain,” Tarr said. “I’m glad to see us give an additional tax cut to West Virginians. What that means is West Virginia’s economy is growing faster than what the inflation is, and that is a good thing.”

But even with the trigger mechanism being adjusted for inflation, Kelly Allen, executive director for the West Virginia Center on Budget and Policy, said there is no way to project what the economy looks like in future years as those tax cuts roll over onto each other.

“It only takes hitting the trigger baseline one time to implement the tax cut for every year over. The theory on that would be yes, the economy has grown, we’re good. But it’s a fact that economies get worse and we can’t know when or how that will look,” Allen said. “We’re doing this every year. This uncertainty is going to be recreated every single year. This is going to be a situation legislators find themselves in year after year after year.”

Tarr acknowledged that there is a veil of uncertainty around the entire situation. To limit this, he would like to see a change to when the trigger would impact the tax reduction, moving it from August (the beginning of the fiscal year) to January (the middle of the fiscal year). This would mean the Legislature would adjust the budget mid-fiscal year depending on the revenue impact.

Allen said doing so would create more uncertainty for state agencies, which apply for grants and commit funding for programs based on the full year’s worth of a budget.

And, with May’s special session come and gone without any legislation considered to do so, it’s unclear how the Legislature could — if the will exists — change the trigger mechanism before it’s hit. There have been talks of another special session being called in August to deal with still underfunded state programs, like child care, but Tarr said he did not have any more information on what else could be included in that call or the potential for a call itself.

The Legislature could, with enough votes, repeal the tax trigger mechanism, though it’s incredibly unlikely that leaders will support doing so or that Justice would sign off on such a move.

Allen said that would be the ideal scenario. As state leaders tout record surplus collections, she said it’s not responsible to act as though the state is flush with funds while operating on a continuously flat and small budget while, simultaneously, new programs are starting that need additional funding to operate.

“Today, it’s not as if we were able to meet the state budget needs with the budget passed during session,” Allen said, referring to cuts to Medicaid, the lack of child care funding and low pay for some of the state’s largest sectors even after more money was allocated to programming during the special session. “To be even contemplating and prioritizing tax cuts when we’re not taking care of our own house, that is not fiscally responsible. It does not serve the people of West Virginia.”