A Governor Proposes Slashing His State's Income Tax by Half

West Virginia Gov. Jim Justice is proposing a 50% cut in the state's income tax, a move that critics say would knock out a sizable chunk of budget revenue in the years ahead and hurt already struggling parts of government like education and public health.

The Republican governor, now in his second term, says that a budget surplus provides room for the reduction. He also suggests that slashing the tax would put more money in residents' pockets and, in turn, drive economic growth. The plan could eventually erode $1.5 billion or more in annual income tax collections, an amount equivalent to over a quarter of the total $4.6 billion in general fund revenue the state expects in the current 2023 fiscal year.

"I am proposing the biggest tax cut in the history of this state," the governor said during his state of the state address on Wednesday evening, explaining his plan would phase in the reduction, with a cut of 30% in the first year and 10% in each of the two following years. 

"Think of how much, if I were to walk into you and say, 'I'm going to put a billion dollars back into our economy' tomorrow and the people will spend it. What will be the multiplier effect of that?" he added. "You will become your own stimulus package."

But skeptics point out that large tax reductions often don't spur enough economic growth to replace lost government revenue and prevent service cuts, and they assert that the benefits tend to skew toward higher earners. (The median household income in West Virginia is around $50,000, compared to about $69,000 nationally, according to Census Bureau estimates, and nearly 17% of residents are in poverty.)

Critics also argue that the surplus is somewhat illusory given that West Virginia's budget has been mostly flat for years, allowing for staffing shortfalls across agencies and a gap in public employee insurance funding on track to grow to $376 million by 2027. Adding another layer is that high energy prices have fueled tax revenue gains in the state from natural gas production. Volatile energy markets could mean that the extra income is short-lived.

Justice touts a $1.3 billion budget surplus in fiscal 2022. But Kelly Allen, executive director of the left-leaning West Virginia Center on Budget and Policy, said if general fund spending was adjusted to keep pace with inflation over the past four or five years, it would be up above $5 billion. For fiscal 2024, the governor has proposed a $4.8 billion budget.

Allen also warned that the surplus is shaky ground on which to build a permanent tax cut because it is likely due to temporary factors like the surge in natural gas taxes. Additional revenue that is more durable, she said, "should be built into our base budget and it should be going to programs and agencies that are really severely underfunded right now, and that's having major impacts for West Virginia."

"What we're seeing," she added, "is programs and services that are having to do less and less every year."

Allen said the state has significant staff vacancies in correctional facilities, schools, and health and child welfare agencies.

Republicans have a "trifecta" in the state, with huge majorities in the House and Senate. (Justice switched his affiliation from Democrat to Republican in 2017). But what lies ahead for the governor's plan in the legislature is somewhat unclear. 

The state has a short, 60-day session this year that began on Wednesday. Lawmakers in the state Senate have indicated they could take a different approach to cutting taxes—one that mirrors a failed November 2022 ballot measure designed to exempt certain business holdings like machinery and inventory from state property taxes. It's possible that policy could be paired with a smaller income tax cut.

On Thursday evening, the House Finance Committee approved the governor's plan, sending it to the full House for consideration. But the top lawmaker on the state Senate finance panel has described the proposal as "risky" and "unsafe."

"There's a political question of whether everybody gets on the same page that, I think, remains to be seen," said Allen.

Allen noted that she spends a lot of time talking to legislators and that "they recognize all these needs." She added: "I think there's a real tension and them understanding that we've been kicking the can down the road for many years on issues that are really coming to a head now. And it's really a choice between solving those problems, or addressing those problems, and doing this tax cut."

West Virginia has a tiered system of income tax rates, with brackets that start at 3% for income up to $10,000 and top out at 6.5% for income over $60,000. A fiscal note for Justice's plan posted on Thursday shows that if those rates are chopped in half, it would lower general fund revenue by about $1 billion in fiscal 2024, $1.2 billion in 2025 and nearly $1.5 billion in 2026.

"The decline in General Revenue Fund collections would continue to increase in subsequent fiscal years due to underlying tax base growth," the note says.

Justice's proposal is reminiscent of the "Kansas experiment," a tax reduction package that originated about a decade ago, pushed by former Republican Gov. Sam Brownback. The plan led to sharp budget shortfalls and cuts to education and other services before lawmakers overrode the governor and scrapped the policy. But groups like the conservative-leaning Tax Foundation now say that it's misguided to apply Kansas criticisms too broadly to other tax plans.

The West Virginia governor said in his speech that the message he heard in discussions with top lawmakers about how to approach the income tax was "either don’t do it or make a big splash."

"So here comes me," Justice said, "cannonballing into the pool."