West Virginia's Own “Kansas Experiment”
West Virginia approved a 21.25% income tax reduction, with more in subsequent years, but it will unlikely spur substantial growth.
West Virginia has gone the way of Kansas … and it did not work out well for the Sunflower State.
In May 2012, Kansas enacted the largest income tax cut in its history (somewhat similar to what West Virginia has done), hoping to spur an economic revival. The result was years of budget shortfalls, including siphoning transportation fund revenues to its general fund, underfunding pension payments, and other temporary fixes, that turned into what The Atlantic called “an ongoing atmosphere of fiscal crisis.” An attempt to reduce taxes to promote economic growth proved disastrous in what is referred to as The Kansas Experiment.
West Virginia is taking a slightly different approach and expecting similar intended results. Hopefully it works, but should the West Virginia Experiment fail, they may similarly find themselves in a precarious position: forced to make dramatic expenditure reductions and employ other budget gimmicks undoing years of fiscal progress. Undermining the state’s fiscal stability would also exacerbate an enduring public health crisis.
A closer look at West Virginia and what’s at stake if this experiment fails.
The “Largest Tax Cut in West Virginia History”
“We put $750 million dollars back in our people’s pockets and think about what that’s going to do. The multiplier effect of just that, and not only that, it sends a message to the world that West Virginia is the place to come to.” -Gov. Jim Justice (R-WV)
An across-the-board income tax rate cut of about 21.2%,
Reduces the top rate from 6.5% to 5.12%
Reduces the lowest rate from 3.0% to 2.36%.
Further rate reductions automatically subject to revenue availability and other criteria in the legislation.
Creates a refundable income tax credit for local car taxes and a 50% credit against businesses’ property taxes on machinery, equipment, and inventory
The Governor has wanted to eliminate the income tax the past few years and proposed this legislative session a 50% reduction over three years, including 30% in the first year. Agreement was reached in early March on the 21.25% reduction the first year.
The West Virginia Center on Budget and Policy criticized the tax proposal as relying on “underfunded public services, temporarily high energy prices, and one-time Federal COVID-19 relief funding.” For decades, the state has relied on severance taxes which have proven volatile and resulted in mid-year spending cuts. As an impoverished state with a relatively small budget, West Virginia significantly benefited form COVID-related stimulus. Tax cuts are not the solution to long lasting change.
West Virginia’s Economic Progress has been Limited
West Virginia faces several demographic challenges that limit its economic growth compared to the rest of the U.S.
The state has a declining population, particularly among younger age groups, which has resulted in a smaller workforce and reduced consumer demand.
West Virginia has one of the highest rates of elderly residents in the nation, which places a strain on healthcare and other services.
The state has a low level of educational attainment, with a significant portion of the population lacking a high school diploma or post-secondary education.
In addition to demographic challenges, West Virginia's economic structure presents obstacles to growth. The state's economy is heavily reliant on industries such as coal mining and manufacturing, which have experienced significant declines in recent years. The state also has a limited number of large employers and a high concentration of small businesses, which can make it difficult to attract new investment and create jobs.
According to the West Virginia University Economic Outlook (2022-2026):
Economic performance is expected to remain extremely variable across West Virginia’s counties.
A positive shock to encourage in-migration is essential to lessen the severity of natural population decline.
Economic development strategies should focus on ways to improve health outcomes, lower drug abuse, and advance educational and vocational training opportunities in the state to make West Virginia’s workforce more attractive to potential businesses.
An important part of West Virginia’s future relies on reversing a severe public health crisis and demographic challenges. While the state has made progress in recent years, more work is needed.
West Virginia’s Enduring Public Health Crisis
West Virginia is one of the poorest states in the U.S. facing a long-term public health crisis. According to the U.S. Census Bureau, the poverty rate in West Virginia was 16.8% in 2021, which is higher than the national poverty rate of 11.6%. The state also has one of the highest rates of food insecurity in the nation, with about 1 in 8 West Virginians facing hunger. West Virginia also has a higher rate of Medicaid enrollment than the national average. As of October 2022, there were about 623,000 people enrolled in Medicaid within the state, which represents approximately 35% of the state's population.
The lack of economic opportunity, high rate of poverty, food insecurity, and opioid addiction have contributed to West Virginia’s “deaths of despair” crisis. The term “deaths of despair” refers to deaths caused by suicide, drug overdose, and alcohol-related causes. Opioid addiction is a major public health emergency in West Virginia and among states with the highest overdose death rate
Losses resulting from deaths of despair not only have a devastating emotional impact on families and friends, but also have negative repercussions on all sectors of society when considered as a whole. A recent study found West Virginia has the highest estimated annual costs for these deaths at $6,534 per person.
One researcher noted:
“Tragically, West Virginia has, by far, the highest estimated annual costs for these deaths at $6,534 per person. West Virginia’s increase in per capita costs is staggering at 263% … One of our previous studies would suggest that West Virginia desperately needs substantial investment in manufacturing employment to counter the economic shock from the enormous loss of high-paying coal jobs over the past two decades.”
West Virginia’s Finances are in Good Shape, but Could Easily be Undone
The past two years, the state has benefited from stronger than expected natural gas prices and Federal aid. But severance taxes in particular have been extremely volatile and, according to the Pew Charitable Trust, are more volatile than other major state revenues. In fiscal 2022, severance taxes from coal, natural gas, and other resources increased 133% above what was budgeted to $769 million. Severance taxes made up 13% of final revenues compared to 7% in the budget. Despite the decline in coal the past decade, the state has been able to collect additional revenue from natural gas, as was the case in 2022.
Despite the state’s slow economic growth and volatility in severance tax revenues, its finances are in good shape:
At the end of Fiscal 2022, it had $956.7 million in its two reserve funds or about 13.5% of general revenues (excluding Federal aid).
Starting in 2006, the state recently paid down its unfunded workers’ compensation program balances of over $3 billion.
Unfunded pension liabilities are extremely low, less than $500 per capita and less than 1% of personal income.
Debt levels are moderate even after the state issued $1.6 billion general obligation debt authorized in 2017 to invest in the state's road system.
The Mountain State Needs More Resources, Not Less
West Virginia needs more financial resources to address the numerous economic and social challenges the state faces. The state has struggled with high levels of poverty and unemployment, declining coal and manufacturing industries, and an opioid epidemic, which have all contributed to its overall economic decline.
The state’s high percentage of residents who rely on public assistance programs such as Medicaid and food stamps underscores a need for continued support. A lack of financial resources has led to a shortage of healthcare providers and limited access to medical care in some areas. To address these the state needs more resources to invest in infrastructure, education, healthcare, and job creation to create a more prosperous and sustainable future for its residents.
Any opinions expressed herein are those of the author and the author alone.