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June 16, 2017

West Virginia Legislature Reaches Budget Agreement

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If the government of West Virginia had a nickel for each tax and budget proposal unveiled this year, the state’s revenue problems would have been taken care of a long time ago. At times, even veteran legislators struggled to keep track of the flurry of bills and amendments, consulting notes and requesting forbearance as they attempted to distinguish the features of the legislation in front of them from those considered previously. The Department of Revenue flatly stated that it could not keep up with the constant stream of revisions and lacked the capacity to provide a revenue score for each new innovation.

When this all began, the State Senate coveted aggressive reductions in the individual income tax, while the House was eager to broaden the sales tax base and use the additional revenue this would generate to pay down sales tax rate reductions. Various hybrid plans were considered, prioritizing one goal or the other, but in the end the deal was a simpler one: they would do neither.

This evening, as the special session inched closer to key deadlines and ultimately a government shutdown, the two chambers came together on a $4.225 billion budget which contains no tax increases, cuts, or swaps, or for that matter, any semblance of tax reform. (The legislature did, however, approve a gas tax increase for the transportation fund through separate legislation.) But the budget does ensure—should the governor sign it—that the state will meet its Monday deadline for processing state employee paychecks for the next pay period. It avoids furloughs. It keeps the government open. And in the end, that may have been enough.

Dreams of tax reform were derailed early on by projections of a budget shortfall and sharply contrasting priorities, and efforts to pair revenue increase proposals with structural reform never found significant bicameral support. A revised estimate, showing improving revenues, expanded the legislature’s options but failed to bridge the increasingly sharp divides, marked more by chamber than by party affiliation.

It would almost be easier to enumerate the taxes the legislature didn’t consider as possible solutions to the budget shortfall over the past few months. Governor Jim Justice (D) championed a gross receipts tax modeled on the Ohio commercial activity tax, and at times promoted a new high earners’ tax. A soda tax was contemplated, as was an increase in the state’s cigarette tax, just hiked last year.

Sales tax rate increases and base broadening (often to new business-to-business transactions rather than final consumer sales) figured in most plans emerging from the Senate, coupled with various proposals to bring down individual income tax rates. The House, to the extent that it contemplated new revenue (at least in the first year), preferred to provide it through sales tax base broadening alone, and to make the sales tax rate the primary focus of any future tax relief. And who even knows how many different revenue trigger designs were considered?

By this point, even those at the center of the action probably can’t remember every iteration.

For many, today’s budget vote is a frustrating result. Hopes for improving the state’s tax structure have been dashed, at least for this year. Still, after the drama of the past few months, walking away without adopting a new gross receipts tax—an antiquated form of taxation the state abandoned three decades ago—is a minor miracle.

The governor may yet veto this budget, but should he sign it into law, it is likely to represent a pause and little more. None of the concerns legislators and the governor brought into this debate—about tax structure, revenue needs, or economic growth—have been resolved. For now, though, it looks like West Virginia might just have a budget. It wasn’t pretty and no one is entirely happy, but through a mix of transfers and an improved revenue outlook, a deal was reached by the legislature tonight. Now it’s up to the governor to decide how to proceed.

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