Senate Finance Committee Chairman Eric Tarr (left) asks Deputy Finance Minister Mark Muchow questions about future tax revenues and spending during the House’s midterm session on Monday. (Photo courtesy of WV Legislative Photography)

CHARLESTON – Gov. Jim Justice this week decided against calling a special session to pass another 5% income tax cut, even though lawmakers are already in the state. However, lawmakers expressed concerns about cutting taxes too quickly and taking funds from an income tax reserve fund. Justice said he would call the Legislature into special session either in August or later in the fall to pass legislation that would cut the income tax another 5% and return an additional $115 million to taxpayers in calendar year 2025 if the Legislature approves it. That proposed cut would be in addition to a 4% income tax cut that takes effect Jan. 1, 2025, as the state meets a trigger formula for another income tax cut each calendar year. House Bill 2526, passed during the 2023 legislative session, cut the income tax by 21.25%, which would return about $483 million to taxpayers. The bill included a trigger formula that would require the IRS to determine the percentage of income tax cut each August by comparing the previous fiscal year’s general tax revenues minus severance tax revenues to the base year of fiscal year 2019 and tying it to the non-seasonally adjusted Consumer Price Index. HB 2526 caps the maximum cut that can occur in a single calendar year at 10%. Justice first urged lawmakers to pass an additional 5% income tax cut in July after the state finished fiscal year 2024 with more than $5.7 billion in tax revenues for the general budget, giving the state more than $826 million in additional tax revenues. If lawmakers pass a 5% income tax cut, it would increase the percentage cut in income taxes since 2023 to over 30%. While Republican lawmakers have expressed support for phasing out the income tax, some have raised concerns that the elimination would happen too quickly and fail to account for future state spending and the natural growth of tax revenues. State Senate Finance Committee Chairman Eric Tarr (R-Putnam) asked Assistant Treasurer Mark Muchow about the state’s six-year revenue and spending forecast and whether finance officials are taking into account future costs that could hurt tax revenues in later years. Tarr pointed to future spending, such as the $33 million-a-year Third Grade Success Act.
“Have you put together anything that shows the change in revenue available to the state, both with spending and revenue for tax cuts that we are phasing in and with spending that we may have that is required by law?” asked Tarr. “If I see a forecast that’s really, really close to a decline in our surplus, with revenue changes in subsequent years exceeding $600 million, then I can expect over the next few years that expenses will go up and revenues will go down, and our bottom line will be $600 million less than we are now.”
Muchow said the days of ending budget years with record-breaking tax surpluses are likely over. The state ended fiscal year 2023 more than a year ago with $6.483 billion in tax revenue for the state general fund, which was 40% more than the estimated revenue of $4.636 billion, giving the state a $1.8 billion surplus that year.
“Large revenue surpluses like those in recent years are unusual,” said Muchow. “There are a lot of factors that have produced these huge revenue surpluses, including trying to keep the budget fairly stable and a whole host of other things. But in the long run, your revenues are going to be more in line with expenses and you’re not going to see a $400 or $500 million surplus every year.”
The MPs also complained that they were completely blindsided by the governor’s call for a further tax cut because the leading politicians in Parliament had not been consulted.
“If there is further discussion about accelerating a tax cut beyond the economic growth of the state of West Virginia, taking into account these expenses, could you provide that statement or ask someone from the governor’s office to provide that statement to this committee at some point before the meeting?” Tarr asked. Other lawmakers had questions about tax revenues for the first month of the new fiscal year, which began in July. According to data from the state Department of Revenue and the Senate Finance Committee, July tax revenues topped $335.3 million for the first month of fiscal year 2025. July revenues were more than 1% above the department’s revenue estimate for the month and 0.1% above revenues a year ago. However, income tax revenues in July were nearly 6% below the $151.8 million estimate, coming in at $142.9 million for the month. Income tax revenues in July were also nearly 2% below revenues at the same time last year. More than $7.1 million from the income tax reserve fund was used to pay out tax refunds in July, skewing income tax numbers, according to the Senate Finance Committee report. According to the report, if the income tax reserve funds had not been used, actual income tax revenues would have been $16 million lower than expected, and total revenues would have been more than $2.2 million lower than estimates. Secretary of the Treasury Larry Pack explained that these funds came from the emergency fund due to the usual cash flow problems that arise at the start of a new fiscal year. Instead, however, the state took the needed funds from the $400 million income tax reserve fund, created in 2023 by HB 2526 in case of problems due to future cuts in income tax rates.
“When the fiscal year ends, we do not have the authority to spend the surplus or the money left over from the previous fiscal year,” Said Pack. “The first month or the first few months of a fiscal year, cash flow is tight. So we just use a little bit of extra money to improve our cash flow. We pay that back in September as well.”
The state allows the governor, by executive order, to borrow funds from the emergency fund between the start of the new fiscal year and Oct. 31 to pay the state’s bills until tax revenues for the new fiscal year come in. The funds must be repaid within 90 days. Pack said $78 million has been borrowed from the emergency fund.
“What was the rationale for taking the money from two different buckets instead of simply taking it from the rainy day program as we have done in the past?” Del asked. Paul Espinosa, R-Jefferson.
“As far as I know, there is a limit on the amount we can withdraw from the emergency fund,” Said Pack. “We just wanted to make sure we had enough comfort. That was all, nothing bad. We didn’t think it was unusual. The legislature gave us the opportunity to do that, but we just wanted to make sure we had enough comfort so we could pay our bills on time.”
Steven Allen Adams can be reached at [email protected]