CHARLESTON — West Virginia’s heavy reliance on sales taxes and personal income taxes to fund state government gives the state relatively stable sources of revenue, a Pew Charitable Trusts analysis of state revenue volatility released Tuesday shows.
West Virginia tax collections have a volatility rating of 4.7%, below the national average of 4.96% and 19th most stable rate among the 50 states, the analysis determined.
That means in any given year, state tax collections are unlikely to vary more than 4.7% from the prior year, making it relatively easy to balance state budgets.
The analysis notes that having revenue stability is essential currently, as the COVID-19 pandemic’s impact on state economies is increasing volatility for tax collections.
“The coronavirus pandemic is causing sharp, unpredictable swings in tax collections, confounding state lawmakers’ efforts to balance budgets,” the analysis states. “Sudden fluctuations present challenges even under less extreme economic conditions, with some states experiencing far higher levels of tax revenue volatility than others, depending on their tax mix.”
States with the highest volatility rates — Alaska (36.9%), North Dakota (16.4%) and Wyoming (13.3%) — are all natural resource-dependent states that rely heavily on severance taxes for revenue, a revenue source affected by boom-and-bust cycles for energy production, the study noted.
Pew researchers found that in West Virginia, severance tax collections are also very volatile, with a 19.1% volatility rate.
However, as Gov. Jim Justice noted at a state budget briefing earlier this month, the decline of the state’s coal industry has caused state severance tax collections to fall to a “20- to 25-year low,” to the point where they are no longer a major component of state revenue collections.
Personal income taxes and sales taxes account for about three-fourths of West Virginia’s $4.57 billion general revenue budget, and the Pew study notes both sources of taxes are relatively stable.
State income tax collections have a volatility rate of 4.6% — lowest in the U.S. — and sales tax collections have a volatility rate of 3.1%, among the lowest of the 50 states.
For the study, Pew researchers measured the year-over-year variation in state tax collections for 10 years, from budget year 2008-09 to budget year 2018-19.
A low percentage rating means that revenue collections were similar from year to year, while a high percentage reflects dramatic swings in revenue growth or declines from year to year.
While West Virginia’s revenue collections are less volatile than other states, a 4.7% variation in state tax collections in a given year could leave the state with as much as a $215 million surplus — or as much as a $215 million budget deficit.
To that end, a companion study also released Tuesday by Pew Charitable Trusts analyzed revenue reserve funds, informally known as Rainy Day funds, in the 50 states.
Pew researchers found that 10 states tapped into Rainy Day funds to balance their 2019-20 budgets, and at least seven others to date have authorized withdrawals from their Rainy Day funds to help fund state pandemic responses.
However, the analysis notes that several states have made contributions to their Rainy Day funds since the pandemic began, including West Virginia, which put $14 million of 2019-20 budget year surplus into the fund, as required under state law.
The analysis found that 30 states have grown their Rainy Day funds since the Great Recession of 2007-09, including West Virginia.
Pew researchers also determined that West Virginia is one of five states with Rainy Day funds large enough to cover more than 100 days of operating costs for state government.
Those states are: Wyoming (352.7 days), Alaska (170.8 days), Oregon (138.8 days), Texas (116.6 days) and West Virginia (100.7 days).
At the opposite extreme, researchers found, Illinois’ Rainy Day fund would only be enough to operate state government for 4.7 days and Pennsylvania’s Rainy Day fund would only cover the costs for about one-third of a day of state government operations.
According to the state Budget Office, as of Sept. 30, West Virginia’s two Rainy Day reserve funds contained a total of $902.48 million.