Severance Tax Story Archives - West Virginia Public Broadcasting

January State Revenue $13.8 Million Below Estimates

As fiscal concerns flare entering the legislative session, January’s Senate finance revenue report shows the state took in at least $13,800,000 less than the State Budget Office anticipated for the month.

West Virginia collected nearly $478,000,000 in general revenue last month, 2.8% below the roughly $491,000,000 revenue estimated by the State Budget Office.

The revenue report represents collections from three major tax sources: personal income tax, consumer sales and the use tax and severance tax — which comes from companies extracting natural resources in the state. It fluctuates depending on the market.

	Actual Revenue	Expected Revenue	Percent Difference
Personal Income Tax	$217,556,057	$220,500,000	-1.34%
Severance Tax	$19,922,372	$48,000,000	-58.50%
Consumer Sales and Use Tax	$163,585,412	$158,200,000	3.40%

Table of revenue difference for the three major taxes the Senate finance report listed in detail. Credit: Caelan Bailey/West Virginia Public Broadcasting; Source: Budget Analyst Chris DeWitte, West Virginia Senate Finance Committee

With less severance tax revenue than expected, West Virginia’s corporate income tax revenue came in as the state’s third highest-revenue tax for January — totaling $27,603,000 in revenue and outpacing Budget Office estimates by 313.67%.

The state’s general revenue is behind last January’s general revenue performance and total revenue.

In addition to the major taxes, general revenue collections also represent corporate net income tax, tobacco tax and other taxes collected by the state. Lottery revenues are cataloged separately and reported at a delay; for December, lottery collections totaled $114,804,000, $16,576,000 above estimates.

Table of January revenue. Credit: Budget Analyst Chris DeWitte, West Virginia Senate Finance Committee

The fiscal year began July 1. The state is still ahead of estimates, with year-to-date collections ahead of predictions by nearly $28,000,000, or 0.89%.

For the next fiscal year, Gov. Patrick Morrisey says the state faces a $400 million deficit if West Virginia’s budget structure stays the same. This comes after years of personal income tax cuts and a lack of long-term projections from the governor’s office, which has exclusive access to some detailed state financial information.

Morrisey will propose a new budget with his State of the State on Feb. 12.

$400 Million Cliff: Morrisey Projects Wide-Ranging Budget Cuts

Gov. Patrick Morrisey laid out the specifics on “belt-tightening” as he said the state budget faces a fiscal cliff in the upcoming fiscal year.

Today, Gov. Patrick Morrisey held his promised first-week press briefing on the budget, laying out the specifics on “belt-tightening” as the budget faces a fiscal cliff in the upcoming fiscal year, which starts in July.

“The state will have a projected deficit of approximately $400 million and that number is projected to rise more and more in the out years,” Morrisey said.

In contrast to now Sen. Jim Justice’s portrayal of strong state revenue during his final months as governor, Morrisey said his administration “inherited” structural budget issues.

“It took a while to get to this problem,” Morrisey said. “We’re going to have to do a lot of work to change it.

Morrisey said, based on his administration’s analysis of the state of the budget upon assuming office Jan. 13, those issues centered on relying on temporary sources for ongoing costs and not accounting for increasing demand for state funds towards social services.

“For example, in this year’s budget, there’s approximately $252 million in one-shot revenue to pay for ongoing obligations. Of that $252 million, $153 million is from Medicaid [state match] alone,” Morrisey said. “It’s a significant part of that shortfall in this year’s budget is temporarily being replaced by a one time provider tax cash balance.”

Morrisey also proposed consolidating and restructuring portions of state government to create more “efficiencies.”

Morrisey also said he would bring back six-year budget projections. The Justice administration stopped publicly releasing those projections. During last fall’s special session, lawmakers cited a lack of long-term projections as a sticking point in passing a final personal income tax rate cut during Justice’s term. That final tax cut passed at 2%, down from Justice’s initially proposed 5%.

Morrisey said his team would keep the public updated about proposals to decrease standing government costs through restructuring and balance the budget ahead of the legislative session in February.

Morrisey has campaigned on energy sector growth as a means to provide a stronger state economy, in his inauguration speech on Monday saying, “We’re going to leverage those [energy] resources like you’ve never seen before.”

When asked if current budget discussion involved any changes to severance taxes – a volatile funding source that taps energy sector revenue, one that Sen. Justice said had the potential to plug PEIA’s funding hole during his tenure as governor – Morrisey said his administration is “looking at every single item” but largely pointed to his interpretation of the potential of the energy sector in creating more jobs.

Morrisey maintained his commitment to continuing state tax personal income cuts, part of his economic “backyard brawl” initiative to reach a lower rate than surrounding states.

“I do believe that West Virginia needs to continue to emphasize reduction in taxes to become the lowest in the region,” Morrisey said. “I’m just pointing out that we have a lot of challenges in front of us in order to get to that point.”

Many of the changes Morrisey proposed on Thursday hinge on lawmaking during the legislative session starting in February, a collaboration that Morrisey said he is “looking forward to.”

Justice Outlines Senate Agenda, Points To Energy Market Potential

In his briefing on Wednesday, Gov. Jim Justice committed to continuing to cut taxes when he assumes his office in the U.S. Senate next year. He pointed to expanding the energy market as the “key to the whole situation” to raise nationwide revenue.

“We need to cut taxes. Okay, now. How can we raise revenue?” Justice said. “The only way in the world that I can see we are sitting on energy like you can’t imagine.”

Later in the briefing, Justice explained he was unable to create long-standing revenue from energy markets within the state.

“I went to the legislature 14 times about the tiering of natural gas and the tearing severance tax on coal,” Justice said. “All of a sudden, prices shot off like a rocket.”

Justice said the additional severance tax revenue could have provided a long-term funding solution for PEIA. However, severance taxes are based on often volatile markets, bringing in less revenue when markets drop.

“Right now, to be perfectly honest, our gas and coal companies are having a rough go of it, so we need to be supportive of them in every way,” Justice said.

Justice also said he had met with some of president-elect Donald Trump’s cabinet picks on a recent trip to D.C.

“Now, we want to be objective, and I’m going to surely be that,” Justice said. “But at the same time, I want him to have his team too.”

Justice said he intended to “try to be as supportive as I possibly can.”

“If it doesn’t go well, blame him, you know?” Justice said. “If he picked the wrong person, he picked the wrong person, but really and truly, at the end of the day, I’ve got all the trust in the world in Donald Trump.”

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.

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.

Why Keeping Pleasants Idle Doesn’t Add Up For State, Local Government

The coal it does not consume will not generate severance tax revenue for state and local government.

Keeping the Pleasants Power Station in operating condition, as Mon Power proposes to do, has a downside for state and local government.

On Monday, the West Virginia Public Service Commission gave Mon Power and Potomac Edison the go-ahead to negotiate a deal to keep the Pleasants plant from shutting down next month.

If an agreement is reached with the plant’s owner, ratepayers will pick up a surcharge to keep the plant’s workers on the payroll, the equipment in operating condition and the tax revenue going to Pleasants County.

The plant would not produce electricity. Which means it will not burn the 3 million tons of coal a year it receives mostly from Marion, Marshall and Ohio counties.

And the coal it does not consume will not generate severance tax revenue for state and local government. Idling Pleasants will cost the state millions of dollars in severance tax.

Severance tax revenue was a large part of the budget surplus the state accumulated last year.

Coal prices have recently been over $100 a ton. The severance tax is 3.95 percent. If the plant consumes 3 million tons a year, the state should receive $11.85 million in severance tax.

Local governments receive a 10 percent share of that, so $1.85 million at that price.

Even at the current $75 a ton price for Northern Appalachian coal, the state would still lose $8.9 million in severance tax, and local governments would lose nearly $1 million.