Uncertainty remains high as special session, personal income tax trigger looms

Lawmakers have only a few weeks left until they will return to Charleston for a special session focused on the state budget, but with revenue numbers changing month by month until July, it remains unclear what action they may take to ensure a balanced budget and funding for currently unfunded programs and initiatives.

The special session was originally promised by Gov. Jim Justice to deal with a potential “clawback” of about $465 million in federal funds meant for education during the COVID-19 pandemic. 

As the threat of that clawback has shrunk — during the regular session, lawmakers reallocated millions in funding to education with hopes to satisfy the federal Department of Education, and officials there have said on background that demanding a return of any funds is a last resort option — it seems the gist of the special session will actually be what to do with the potential trigger that would, if hit, eliminate the state’s personal income tax without adding a revenue replacement.

Those cuts came from legislation passed in 2023 and would activate in August depending on revenue collections from fiscal year 2024. If hit, the state could see a $250 million decrease in revenue over the next two years.

According to a Monday presentation from Deputy Revenue Secretary Mark Muchow, state revenue collections are significantly higher than anticipated so far this year, as fiscal analysts currently predict they will total about $800 million in general revenue surplus come July compared to the $600 million initially forecast.

Muchow also said, however, that it was still too soon to tell whether or not the personal income tax trigger will be hit or what the impact of it will be. 

“I do believe that the income taxes are going to trend lower during the April-May period, it may come up in June, but there are too many variables out there to make a firm analysis on the trigger,” Muchow told lawmakers on the Joint Committee on Finance on Monday.

The potential for further personal income tax cuts was complicated during the regular session, as lawmakers approved 5% pay raises for certain state employees and a phase out of the remaining social security personal income tax. With those initiatives in place and coupled with potential losses from the personal income tax cuts, the state in fiscal year 2025 would need to significantly increase revenue collections to keep a balanced budget.

In March, as he reflected on the passed narrow budget after the end of the regular session, Senate Finance Chair Eric Tarr, R-Putnam, said lawmakers were in a difficult position come fiscal year 2025: “We need to make sure that we don’t hit that trigger, or we need to postpone that trigger in some way,” he said.

Tarr, in an interview on Thursday, said deciding the course of action will be simplest if the tax cut trigger — a tool he heavily and repeatedly advocated for as part of a tax cut package in 2023 — wasn’t hit.

“That’s an easy decision; we would just be postponing it so it lines up and we’d be able to make decisions on the fiscal year ahead knowing that,” Tarr said. “But if we do hit that trigger? And to what degree we hit that trigger? Well, we’re going to have a decision to make: Do we go ahead and pay that tax cut out to West Virginians, or do you postpone it?

“If we hit that trigger, I’m not inclined to say ‘no’ to giving a tax cut we promised,” Tarr continued.

In what has been a difficult and complicated year for the state budget process, Tarr said he did not believe May was the best time to be making financial decisions. 

“To me, the best time to have those discussions would be when we have our next regular session [which starts in February 2025],” Tarr said. “We’d have six months of fiscal year 2025 available to us to analyze, and nothing, no agency, would be hurting because we already have that revenue coming in, there wouldn’t be a shortfall because we’d only be six months in and we’d just have to adjust mid-budget year. It used to be done like that for years and years.”

There are massive changes to the state budget already coming in 2025 as the state health department — previously the largest agency in the state in both personnel and funding — was split into three separate agencies, adding more than a dozen new and large budget line items to the overall budget.

While this means more transparency to track where money is going in the departments for the first time, it also means there is not a clear picture available for what baseline funding needs are line-by-line, Tarr said. Several notable programs — Medicaid, services for people with disabilities and child care, to name a few — that remained either unfunded or underfunded in the budget passed by lawmakers in March fall under the health agencies’ umbrellas.

For months, disability rights and Medicaid advocates have been decrying the passed budget and demanding a concrete solution come sooner rather than later before people are potentially harmed by relying on underfunded services.

It’s unclear what the real effects would be if changes are made mid-budget year for people and agencies that rely on funding. Tarr said he did not believe delaying amendments lawmakers promised for the previously passed “skinny budget” this spring would affect those underfunded and unfunded programs.

“They’d still go ahead on the budget they had, then adjust that spending depending on the Legislature for the remainder of the fiscal year,” he said.

Come May, Tarr said he expects questions will remain for lawmakers on how to move forward while balancing the needs of West Virginians and a large, looming potential budget shortfall.

“The things that create uncertainty will be part of that discussion in May,” Tarr said. “Have we [as lawmakers] created our own uncertainty? That is a legitimate question. If we have, we can fix that. But then you have to ask, what’s the value of fixing that? What’s the cost?”