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Days Are Numbered For State’s Severance Tax Windfall, Expert Says

Higher coal and natural gas prices, and higher demand for both generated a severance tax windfall that fattened the state’s budget surplus last year.

Higher coal and natural gas prices, and higher demand for both generated a severance tax windfall that fattened the state’s budget surplus last year. But the prices for both fossil fuels have declined in recent months.

Sean O’Leary, senior policy analyst for the West Virginia Center on Budget and Policy, said the state could find itself with a shortfall instead of a surplus in the coming years. He spoke with Curtis Tate about the volatility of the severance tax.

This interview has been edited for length and clarity.

Tate: What’s happening with the severance tax right now? Will it result in another big surplus?

O’Leary: The difference is shrinking. We had a big increase over last year’s revenues in the first half of the fiscal year. That gap is starting to get smaller. And I think in February, we collected less severance tax revenue than we did last February. So we’re already starting to see that come back down to earth.

Just under half of the surplus that we’re running this fiscal year is from the severance tax. And we know that’s changing rapidly. It’s changing rapidly now. So when we’re basing a lot of policy on the fact that we have this big surplus, and that big surplus is being driven by the severance tax, and we know historically, and we can see it happening right before our eyes, that there’s a lot of volatility and what is there today might not be there tomorrow.

Tate: Can you describe where the severance tax fits into the tax revenue stream and what it provides for state and county government?

O’Leary: For the state budget, it’s one of the big four sources of revenue. You have personal income tax, the sales tax, severance tax, and business corporate income tax. So that’s one of our main sources of revenue for the general revenue fund.

It’s usually in the neighborhood of, you know, 10 to 15 percent of the total general revenue fund. And then a portion of that is sent back to the counties. So a portion of the cull is sent to coal producing counties, and then to all the counties. The same with natural gas, a portion is sent to the natural gas producing counties, and then another portion sent to all the counties.

It provides a source of revenue. And then, same for the counties. They have their coal fund where the coal money goes in particular, and it’s used for particular items. But they also just use it as a source of general revenue for the most part. It funds local services. At the state level, it funds state services. It’s not dedicated to any one particular agency or any one particular line item or anything. It’s just a general source of revenue for the state.

Tate: Where are we right now? Do you have some updated numbers?

O’Leary: So as of March, we were at $786 (million). Compared to this point last year, we were at $500 million. So yeah, we could easily go over $1 billion in severance tax revenue. So that’d be up about 30 percent compared to last year. But you know, we’re starting to slow down, too.

Tate: What are the risks that come with cutting the income tax and leaning on severance tax? What might happen under the next governor?

O’Leary: The more we eliminate the income tax, the more we’re going to be reliant on severance tax. And these past two years have not been normal. If we look back at the past 15 years, from 2020, you go back to 2005, the severance tax was the highest performing between 2008 and 2014. It was our best growing source of revenue. And then from ’14 to ’16, it was our worst growing source of revenue. And then it was the best again, from ’16 to ’19. And then the worst from ’19 to ’20. When you average all that out, income tax grows at three and a half percent per year, sales tax grows at two and a half percent per year. And the severance tax grows at half a percent per year. So we’re eliminating our strongest source of revenue growth and replacing it with our most volatile, and on average, one of our weakest sources of revenue growth. The only one that’s worse, of our big four, is the corporate income tax, but we were cutting that every year.

So we’re going to see the income tax look more like the corporate income tax and declining every year. If we’re cutting it every year, or do one big cut, and every other year, or however long it takes to hit those triggers, while relying more heavily on sales tax, which grows more slowly, and then relying on the severance tax, which sometimes grows real fast and sometimes grows the worst, that’s just going to make budgeting much harder. That’s going to make projections much harder. It’s going to make mid-year budget cuts probably more likely.

All of those things that we used to see back when the severance tax numbers started to collapse back in 2015, 2016. When Gov. (Jim) Justice came into office, that was the big problem was the severance tax numbers collapsed. And then they bounced back. And that solved the problem. And we all applauded him for that. But it was really bad energy prices bouncing back from a collapse a few years earlier.

Predicting West Virginia’s Budget This West Virginia Morning

Sean O’Leary, senior policy analyst for the West Virginia Center on Budget and Policy, said the state could find itself with a shortfall instead of a surplus in the coming years. He spoke with energy and environment reporter Curtis Tate about the volatility of the severance tax.

On this West Virginia Morning, higher coal and natural gas prices, alongside higher demand for both fossil fuels, generated a severance tax windfall that fattened the state’s budget surplus last year. But the prices for both fossil fuels have declined in recent months.

Sean O’Leary, senior policy analyst for the West Virginia Center on Budget and Policy, said the state could find itself with a shortfall instead of a surplus in the coming years. He spoke with energy and environment reporter Curtis Tate about the volatility of the severance tax.

How the state determines its revenue estimates itself is also a subject of debate. West Virginia’s annual budget is based on estimates that come from the governor’s office, with the current surplus coming from taxes collected above those estimates. Government reporter Randy Yohe has more on how those estimated amounts garner differing points of view of how they should be determined.

Also, officials say they have “positive momentum” toward restructuring the Department of Health and Human Resources, an offer from West Virginia American Water to purchase the city of Milton’s water system was rejected by city lawmakers Tuesday, the latest national assessment of academic ability shows a continued decline in student achievement nationwide and seven first responders received the state’s first round of Medal of Valor awards during a ceremony Wednesday afternoon.

West Virginia Morning is a production of West Virginia Public Broadcasting, which is solely responsible for its content.

Support for our news bureaus comes from Concord University, and Shepherd University.

Listen to West Virginia Morning weekdays at 7:43 a.m. on WVPB Radio or subscribe to the podcast and never miss an episode. #WVMorning

Setting State Revenue Estimates Subject Of Debate

Revenue Secretary Dave Hardy said executive branch revenue estimate settings are ingrained in constitutional code.

West Virginia’s annual budget is based on revenue estimates that come from the governor’s office. The budget surplus comes from taxes collected above those revenue estimates. How those estimated amounts are determined garners differing points of view.

Sean O’Leary is the senior policy analyst at the West Virginia Center on Budget and Policy. He said when the Justice administration pointed out that this April’s general revenue collection beat the estimate by $319 million, the base budget estimate of $509 million was $284 million below last year’s actual collections of $791 million. O’ Leary called the surplus ”smoke and mirrors.”

“You’d have to assume that the governor and the budget office thought that the economy was going to collapse,” O’Leary said. “So these revenue estimates were set intentionally low in order to keep the budget low, and to generate these large surpluses.”

Revenue Secretary Dave Hardy said executive branch revenue estimate settings are ingrained in constitutional code.

“In 1968, West Virginians voted on a constitutional amendment,” Hardy said. “We call it the modern budget amendment, even though now it’s not so modern. It allows the governor to set the revenue estimates for the state of West Virginia. So every year, our governor sets the revenue estimates and then the legislature can only budget up to the limit that he sets.”

O’Leary said, unlike West Virginia, many states open up their revenue estimate setting process, getting many parties involved.

“When they do revenue estimates, they do a consensus forecast,” O’leary said. “Most other states do this where they have the tax department, someone from the university, some economists and they’ll have the legislature involved as well. And then you get more realistic revenue estimates.”

Gov. Jim Justice said his revenue estimates and budget drafting have all the transparency and outside involvement in the world.

Hardy said the governor presents a budget on the first night of the legislative session. “We literally spend 60 days talking to the legislators and our constituents and stakeholders on whether that’s the proper budget that the governor’s proposed at the back end of this process,” Hardy said.

Responding to the question of possibly setting revenue estimates too low, Justice said he’s a conservative businessman who minds the store by not being frivolous and wasteful.

“We took care of our counties the right way,” Justice said. “We have given significant pay raises four times, and the state is cooking because we didn’t go throwing money away on frivolous projects. But we sure got a bunch of folks out there that we can still help.”

Justice said a priority is stemming the corrections crisis. He wants to allocate pay raises to keep corrections officers on the job without seeking significantly higher paying positions in border states. He has said he wouldn’t call a special legislative session without a plan that has house and senate consensus. When Hardy was asked why corrections pay increase wasn’t put in the budget, he said there is some movement right now.

“There’s a plan that’s being formulated now in consultation with the legislature to meet that head on,” Hardy said. “But it can be done in a very intelligent way and it can be done through our base budget in fiscal year 2024.”

Hardy said, “throwing money at a problem is not the answer, having a plan and thinking it through is what you need to do.”

State Budget Surpluses Continue To Rise

For the 2022 fiscal year, the state had a budget surplus of $1.3 billion. Cabinet Secretary for the Department of Revenue Dave Hardy said he expects to surpass $1.7 billion in budget surpluses for the year.

Gov. Jim Justice celebrated budget numbers for the month of April that were $319 million above estimates at a Monday press conference. That brought the budget surplus for all taxes to $1.585 billion for the year so far.

“The April general revenue numbers are the tax collections, are all the different collections that are coming into the state, have surpassed all of our wildest imaginations,” Justice said. “It’s hands down, the single largest collections, I guess in our history.”

April is typically a big revenue month with personal income tax collections and quarterly tax collections for small business. During the last legislative session, the state passed personal income tax reductions which went into effect for April.

Personal Income Tax collections totaled $192.8 million above estimates for April, which is also a new all-time record for a single month despite those reductions. Record year-to-date collections of more than $2.277 billion were $439.5 million above the official estimate and 9 percent ahead of prior year receipts.

April General Revenue Fund Severance Tax collections totaled nearly $35.6 million. Monthly collections exceeded the official estimate by nearly $17.6 million. Record year-to-date general revenue fund severance tax collections of $822.5 million were 48.1 percent ahead of last year and $622.5 million above estimate.

Hardy noted that 65 percent of those severance tax revenues are from natural gas with coal only amounting for about 35 percent.

Consumer Sales Tax collections of $129.2 million were $18.8 million above estimate in April and 5.3 percent ahead of prior year collections. Cumulative collections of more than $1.398 billion were $189.6 million above the official estimate and 6.6 percent ahead of last year.

Corporation Net Income Tax collections totaled nearly $98 million in April. Monthly collections were nearly $65 million above estimate. Year-to-date collections of $330.8 million were $205.8 million above the official estimate and 17.8 percent ahead of prior year-to-date collections.

The surplus comes at a time when the state also faces unbudgeted financial needs in the West Virginia Department of Corrections and Rehabilitation system for infrastructure and payroll. Corrections needs approximately 1,000 more staff members. One proposal is to offer significant pay raises to make them competitive with surrounding states. That alone is expected to cost the state between $40 and $60 million.

Similarly, staffing issues in schools statewide are often traced back to pay. A proposal to raise the pay of new teachers that failed in the most recent legislative session had a cost of $24 million.
The departments of Child Protective Services and Adult Protective Services are also severely understaffed within the Department of Health and Human Resources and libraries across the state have millions in deferred maintenance costs.

Governor Talks Budget Surplus & Future of Higher Education System

West Virginia ended its 2018 fiscal year with a budget surplus of almost $30 million, according to Governor Jim Justice. Next, the governor said he’ll look to improving the state’s higher education system.

The governor said Monday in a press conference, 2012 was the last time West Virginia ended a year with a surplus without mid-year cuts.

He said tax revenues were up across the board this past fiscal year, including both income and coal severance taxes. Justice also noted companies are doing well and generating increased income for the state. He also said construction jobs had increased significantly.

Following the revenue update, the conversation shifted onto higher education.

Justice announced the creation of the Blue Ribbon Commission on Four-Year Higher Education – intended to study all of the state’s four-year institutions and figure out what’s working and what’s not. The commission will review things like redundant programs, and look at how to help the schools thrive in the most efficient way.

The governor said there are several schools in the state on, “the brink of closure.”

“I don’t want us to lose those institutions in those communities,” he said, “because those institutions are vital to those communities, and those schools need to thrive and move forward.”

Co-chairs on the commission are Gordon Gee; President of West Virginia University, Kendra Boggess; President of Concord University, and Jerry Gilbert, President of Marshall University.