2017 Summer Policy Institute ★ West Virginia University Budget & Tax 101 2017 Summer Policy Institute ★ West Virginia University presented by Ted Boettner, Executive Director West Virginia Center on Budget and Policy www.wvpolicy.org @WVCBP tboettner@wvpolicy.org @WVPolicywonk

Presentation Overview What does our state budget pay for? Where does revenue come from? How do tax and spending policies impact families and our economy? Is West Virginia’s in a budget crisis? If so, how do we get out?

State budget process (short version) VETO LETTER Source: West Virginia State Budget Office

The State Budget in West Virginia (FY 2016) Special Fund: $1.2B (Fees, Licenses, Permits, Earmarked Taxes) State Road Fund: $1.2B (Gas Taxes, DMV Fees, Federal $) General Fund: $4.2B (Main Operating Fund!) Federal Funds: $4B (Medicaid/Block Grants/Other) $11.1B Lottery Funds: $498M (Earmarked for Higher Ed, K-12, Seniors, General Fund, etc.) BILLIONS Source: West Virginia State Budget Office

General Revenue Spending – FY 2016 ($4.192 Billion) Colleges ($396.6M) Corrections/Public Safety ($362.3M) 9% 9% 3 Branches & Commerce/Other ($428.9M) 10% 12% 46% Schools ($1.9 Billion) Medicaid ($520.2M) 14% Other Health/Human Services ($576.4M) Source: West Virginia State Budget Office

Economic development tax expenditures (millions) 46% Source: West Virginia State Budget Office

General Revenue Collections – FY 2016 ($4.102 Billion) Other Taxes ($792 Million) 19% Income Tax ($1.8 Billion) Severance Tax ($276 Million) 7% 44% 46% 30% Sales Tax ($1.2 Billion) Source: West Virginia State Budget Office

Rainy Day Funds (millions) 46% Source: West Virginia State Budget Office

Tax Fairness & Prosperity

Principles of a strong & fair tax system Equity: A fair and equal tax system is one that demonstrates both “vertical” and “horizontal” equity. Vertical equity means people with a greater ability to pay should pay more. Horizontal equity means people in similar situations with the same ability to pay should pay equally. Adequacy: An adequate tax system raises enough funds to sustain the level of public services demanded by citizens and policymakers in the short and long-term. Two factors that contribute to adequacy of a tax are stability and elasticity. Stability means tax revenue grows at a predictable rate (e.g. property tax) and elasticity is whether growth in a specific tax keeps up with the economy (e.g. personal income tax).

Principles of a strong & fair tax system (continued) Simplicity & Transparency: A tax system should be easy to understand, accountable, and transparent. Taxpayers should not have to navigate through complex requirements. Simple tax systems have fewer loopholes. Exportability: Ensuring that individuals and companies based in other states who benefit from our state’s public services pay their fair share (e.g. Motor Fuel Tax). Efficiency: An efficient tax system encourages neutrality by staying out of the way of economic decisions. In other words, tax rules should not favor one industry or investment over another. For instance, a book purchased online should be subject to the same sales tax rate as a book bought at a local bookstore.

West Virginia Taxes: Who Pays? West Virginia State & Local Taxes Shares of family income for non-elderly taxpayers 46% Source: ITEP: Who Pays? A Distributional Analysis of Tax Systems in All 50 States, 2015

Regressive and progressive taxes in West Virginia Shares of Family Income by Type of Tax Shares of family income for non-elderly taxpayers 46% Lowest 20% Middle 20% Top 1% Lowest 20% Middle 20% Top 1% Lowest 20% Middle 20% Top 1% Sales Taxes Income Taxes Property Taxes Source: ITEP: Who Pays? A Distributional Analysis of Tax Systems in All 50 States, 2015

Is West Virginia a “high tax” state? state & local taxes per capita, 2013 Source: U.S. Census Bureau, State and Local Finances

Is West Virginia a “high tax” state? taxes (sales, income, property) as percentage of state personal income, 2013 Source: U.S. Census Bureau, State and Local Finances

Extraction states tend to have higher business tax rates business taxes (sales, income, property, excise) as percentage of private-sector GDP, 2013 Source: Council on State Taxation

Extraction taxes and business taxes are highly exportable

WV ranks 18th best in Tax Foundation Business Climate Index Exportability explains (in part) how extraction states have higher business tax rates but can have “competitive business tax systems.”

Academic research shows no clear impact of state tax levels on economic growth Source: West Virginia Center on Budget Policy and Center on Budget and Policy Priorities

Why business tax cuts can fail to boost economic growth SALT is a small share of business costs All state and local taxes on businesses as a share of total business costs, on average 1.8% State & local taxes on businesses combined (including corporate and individual income taxes, sales taxes, gross receipts, and local property taxes) 98.2% The real costs (occupancy costs, labor compensation, energy costs, machinery and equipment, transportation, and business support services) Many factors other than taxes can influence state economic growth and business investment, including climate, workforce, regulations, energy prices, economic recessions, federal and monetary policy, quality of life and amenities, consumer demand, public infrastructure and transportation, available sites, proximity to markets and suppliers, access to raw materials, and much more. SOURCE: Peter Fisher, www.gradingstates.org This is based on data averaged over three years 2005-2007 from two sources: U.S. Internal Revenue Service, Statistics of Income, Integrated Business Data for all U.S. Corporations, partnerships, and non-farm proprietorships, showing total deductions for business costs on tax returns, at http://www.irs.gov/uac/SOI-Tax-Stats-Integrated-Business-Data ; and a 2009 report by the Council on State Taxation, which estimates total state and local taxes paid by businesses, available at http://www.cost.org/Page.aspx?id=69654 .

Better “business tax competitiveness” doesn’t always correspond with better employment growth Employment Dropped by 44,000 from 08 to 17 Source: Tax Foundation and Bureau of Labor Statistics (LAUS). Tax ranking is for the year the report is released. *January to May 2017

The Kansas “real live experiment” in Supply-Side Economics Taxes raised on poor and low-income families, lowered on higher income families and businesses. Tax revenues plummeted by over $800 million Kansas rainy day reserve funds declined by over $600 million 3 Credit Downgrades Deep budget cuts to K-12 education, Higher Ed, Courts, TANF, local libraries and health centers Lackluster economic growth – jobs, GDP, and income growth behind neighboring states and national economy. GOP led Kansas Legislature rolled back Brownback 2012 tax cuts of $1.2 Billion

West Virginia’s Budget Crisis

Persistent budget gaps since 2014 (base budget) Expressed in Millions Source: West Virginia State Budget Office. * There are no official estimates of the FY 2018 budget gap

Tax levels at historic low due to large tax reductions 2005-2015 General Revenue Fund collections as a share of state personal income (economy) Over $425 million in tax cuts phased in between FY 2006 to FY 2015 Source: WV State Budget office and U.S. Bureau of Economic Analysis

Severance taxes declining, especially natural gas $243 million drop Source: West Virginia Department of Revenue

West Virginia has fewer jobs than before Great Recession Nonfarm and private sector employment down over 22,000 since 2012 THOUSANDS Source: Bureau of Labor Statistics, June 2017. non-seasonally adjusted annual data 2012 to 2016.. May 2017 Seasonally Adjusted

Over $425 million in tax cuts State Spending is down. $420 million down from 2012 (inflation adjusted) Non-Medicaid General Revenue Fund Expenditures Declining (Expressed in Billions) Over $425 million in tax cuts phased in between FY 2006 to FY 2015 Es Source: WV State Budget office and WV Legislature

Higher education investment down significantly (GRF) Expressed in Millions Over $425 million in tax cuts phased in between FY 2006 to FY 2015 Source: WV State Budget office and WV Legislature

To move toward a shared prosperity, state must address problems… Why Does West Virginia Lag Behind Other States? Low post-secondary educational attainment Outdated job skills Low population density Unhealthy Population Rugged topography Inadequate physical infrastructure Undiversified economy (“resource curse”) Over $425 million in tax cuts phased in between FY 2006 to FY 2015

To address problems, state will need new revenues… Tax things that make us unhealthy – tobacco, soda, and alcohol (perhaps carbon!). Expand tax base to more services – telecommunications, personal services, digital goods, etc. Raise income tax rate on high-income people who have seen most of the income gains since late 1970s. Raise natural gas severance tax to ensure state benefits from depleting natural resources. Reinstate business tax cuts that failed to boost economy and state estate tax. Levy additional tax on large landowners (over 1,000 acres), many of which live out-of-state Levy a low-wage employee fee on big box retailors that rely heavily on public assistance programs. Consider taxing recreational marijuana. Invest in programs that reduce future costs and increase revenues – Early Childhood, Criminal Justice Reform, etc. Over $425 million in tax cuts phased in between FY 2006 to FY 2015