Budget Year Ends In Surplus

CHARLESTON (AP) – West Virginia ended its budget year over the weekend with an $87.6 million general tax revenue surplus, an amount considered healthy enough to satisfy Medicaid and other funding needs, according to state officials.

The state also remains on track to repeal the sales tax on groceries and whittle down the corporate net income tax, while fully funding its main emergency reserve, Deputy Revenue Secretary Mark Muchow and state Budget Director Mike McKown said Monday. Both tax cuts hinge on sufficient reserve balances.

General tax revenues in June reached $365.6 million, giving West Virginia $4.1 billion for the budget year, or $87 million more than expected. Once state agencies return money left unspent from the year, Muchow and McKown believe the surplus will exceed $90 million. Agencies will report unexpired funds over the next month, McKown said.

Around $24 million of the surplus should fully fund the state’s main emergency reserve. As recently amended, state law requires the deposit of up to half of any annual revenue surplus under that reserve, known as Rainy Day Fund A, equals 13 percent of general revenue spending. Paired with a second rainy day fund, the state’s emergency reserves are around 20 percent of that spending, McKown said.

West Virginia’s reserves are ranked among the most robust among the states.

Disasters and other emergencies are a key reason for keeping a rainy day fund. Though the violent storms that tore through West Virginia last week may eventually require the state to tap the reserve, McKown and Muchow noted that the state recently created a $10 million disaster relief fund for such purposes.

The officials also cited how that the state annually and temporarily withdraws funding – $62 million this year – at the beginning of each budget year to ensure government has enough cash on hand for day-to day expenses. That money is typically returned to the reserves by the fall. Investment earnings also affect the reserve balances.

For Medicaid, McKown and Muchow say $65 million of the surplus should ensure a balanced program budget as well as at least $11 million in reserve for the 2014 budget year.

The general revenue collections show that both personal income and sales tax revenues beat their estimates and exceeded what they brought in during the prior year. That reflects improved economic activity. The two tax categories together brought in $1.8 billion of the year’s total, and each had improved over the 2010-2011 budget year by about 6 percent.

Severance taxes, applied on coal and other extracted natural resources, brought in a record $467 million, Muchow said. These taxes played a key role in keeping West Virginia’s general revenue budget balanced during and immediately after the Great Recession. While collections beat the year’s forecast by more than $22 million, Muchow noted that coal production has declined in recent months and severance tax revenues are destined to follow.

Corporate net and business franchise taxes, meanwhile, while ahead of the year’s projection at $188 million, were down nearly 38 percent from the prior year. West Virginia’s tax system is coupled with the federal government’s, and Muchow said federal policies account for some of the shortfall. The state also cut the rates for both taxes this year.

“This is largely the result of tax changes,” Muchow said of the taxes’ performance.

West Virginia is scheduled to repeal the business franchise tax, which applies to net equity, by the end of 2014. The state will also continue to shave down the corporate net rate, to 7 percent on Jan. 1, because emergency reserves equaled at least 10 percent of general revenue spending. State law will cut that rate further, to 6.5 percent in January 2014, if those reserve levels hold.

Current reserve levels also keep the state on course to erase the so-called food tax. A series of scheduled cuts have reduced the sales tax rate on groceries, including by 1 penny per dollar spent on Sunday. The rate was 6 percent in 2005. The food tax will disappear July 1, 2013, if the state can keep the main emergency reserve equal at least to 12.5 percent of general revenue spending as of Dec. 31.