1. 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
@WVCBP
@WVPolicywonk

2. 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?

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

4. 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

5. 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

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

7. 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

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

9. Tax Fairness & Prosperity

10. 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).

11. 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.

12. 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

13. 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

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

15. 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

16. 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

17. Extraction taxes and business taxes are highly exportable

18. 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.”

19. 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

20. 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, This is based on data averaged over three years 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 ; and a 2009 report by the Council on State Taxation, which estimates total state and local taxes paid by businesses, available at .

21. 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

22. 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

23. West Virginia’s Budget Crisis

24. 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

25. 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

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

27. 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 non-seasonally adjusted annual data 2012 to May 2017 Seasonally Adjusted

28. 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

29. 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

30. 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

31. 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