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Chapter IV: Government in West Virginia

As reported in previous sections, government is the largest employer in West Virginia, accounting for about one-fifth of all jobs in the state. [2] Further, total state and local government spending in the state is equivalent to more than 26 percent of West Virginia’s total personal income, and the US federal government transfers a significant amount of income into the state. Taken together, it is clear that government has a significant economic influence in the state, and as such, in this section we explore the role of government in West Virginia in two ways: First, we detail the size and composition of state and local government activity in the state. Second, we consider public assistance in West Virginia that is provided by the US Federal Government in conjunction with the State of West Virginia.

West Virginia Government

GOVERNMENT SIZE As illustrated in Figure 4.1, West Virginia ranks in the lower half of US states in terms of the size of overall state and local government when measured as total spending on a per capita basis. Twenty-one states have smaller state and local governments when measured by this metric. [3] However, it is also important to consider government spending measured relative to state personal income, especially since personal income per person in West Virginia falls below the national average. As reported in Figure 4.2, West Virginia’s state and local governments are larger than average when total spending is measured relative to personal income. Total state and local government spending in West Virginia is more than 26 percent of state personal income, compared to the US average of 22 percent; indeed, only eight states have larger governments by this metric. Overall, the answer to the question “How large is state and local government in West Virginia?” is mixed depending on the metric used: The absolute size of the government is relatively small, but a relatively large portion of the state’s limited resources are devoted to government expenditures.

State and Local Government Expenditure per Capita, 2017 Map showing that West Virginia is in the lower half of US states for per capita state and local government expenditures.

[Figure 4.1]

State and Local Government Expenditure as Share of Personal Income, 2017 Map showing that West Virginia is in the upper half of US states for government expenditures when measured as a percentage of personal income.

[Figure 4.2]

EXPENDITURE COMPOSITION In Figure 4.3 we report the composition of state and local government spending in West Virginia. As illustrated, West Virginia devotes the largest share of its government resources to social welfare programs, such as Medicaid and the State Children’s Health Insurance Program (SCHIP). West Virginia governments devote 32 percent of their overall spending to this category, compared with a national average of nearly 27 percent. West Virginia devotes nearly 30 percent of its overall government resources to education services, above the national average of around 28 percent. West Virginia governments direct 9 percent of their expenditures to insurance trust expenditures for public employees, which is slightly below the national average of nearly 10 percent. Further, governments in the state focus relatively heavily on transportation spending. In West Virginia 7 percent of total spending goes to transportation-related projects, compared to a national average of just under 6 percent.

West Virginia State & Local Government Expenditure Composition, 2017 Chart explaining the composition of West Virginia’s state and local government expenditures; social welfare programs constitute the largest share of state and local government expenditur

[Figure 4.3]

EXPENDITURE AND REVENUE GROWTH In Figure 4.4 we report the growth in state and local government expenditures per person in West Virginia over the past few decades. As illustrated, West Virginia governments have increased their aggregate size from around $5,700 in total spending per capita in 1990 to just over $10,000 by 2017, in inflation-adjusted terms. However, over the entire period, West Virginia governments have remained below the national average in terms of spending per capita. In Figure 4.5 we report revenue collection for the state government only. Here we see very steady revenue collection from 2012 through 2018 (not accounting for inflation), followed by a noticeable jump in the 2019 fiscal year and then some decline in the 2020 fiscal year.

Real State & Local Government Expenditures Per Capita Graph tracking and comparing the growth in West Virginia state and local government expenditures per person from 1990 to 2017 to the average for the United States.

[Figure 4.4]

: West Virginia Revenue Collection Graph showing the annual revenue collected by the West Virginia state government from 2003 to 2020.

[Figure 4.5]

OWN SOURCE REVENUE In Figure 4.6 we report state and local government own-source revenue per capita across the 50 states. Here West Virginia falls in the lower half of states based on this metric (10 other states have lower own-source revenue on a per capita basis). The fact that West Virginia is relatively low in terms of own-source revenue, compared to total expenditures per capita, is driven by the fact that West Virginia receives an above-average share of its revenues from the US Federal Government.

State and Local Government Own Source Revenue per capita, 2017 Map showing that West Virginia is in the lower half of US states for state and local government own-source revenue per person.

[Figure 4.6]

REVENUE SOURCES Figure 4.7 illustrates the sources of West Virginia state and local government revenue. West Virginia receives the largest share of its total revenue from the US Federal Government. Overall, 26 percent of total revenue received by West Virginia governments is a federal transfer, which is significantly higher than the national average of 18 percent. West Virginia governments are in alignment with most states in terms of their reliance on sales taxation: West Virginia governments derive 14 percent of their total revenues from sales taxation, which is slightly below the national average of nearly 15 percent. Similarly, West Virginia governments derive 9 percent of their total revenues from individual income taxation, slightly below the national average of nearly 10 percent. In slight contrast, the reliance on the property tax in West Virginia—less than 9 percent of total revenue—falls short of the national average of more than 13 percent.

West Virginia State & Local Government Revenue Composition, 2017 Chart explaining the composition of West Virginia’s state and local government revenue; the federal government constitutes the largest share of state and local government revenue.

[Figure 4.7]

STATE SHARE OF TOTAL SPENDING In Figure 4.8 we report the share of total state and local government spending in a state that is directed from the state government. As illustrated, West Virginia is fourth-highest among the states in terms of this metric. This indicates that West Virginia is a relatively centrally structured state with the state government taking on relatively more responsibility, and leaving relatively less responsibility to the local governments, compared to the national average.

State Government Spending as a Share of Total State and Local Expenditures, 2017 Graph showing state government expenditures for all 50 US states as a percentage of combined state and local government expenditures; West Virginia is in the top 10 percent o

[Figure 4.8]

Public Assistance in West Virginia

Total transfer payments made in West Virginia in 2019 amounted to around 29 percent of personal income in the state, as depicted in Figure 4.9. That figure has increased noticeably over the past decade or so. Further, transfer payments in West Virginia are substantially higher as measured against personal income when compared to the national average; for the nation as a whole, transfer payments were equivalent to 17 percent of personal income in 2019. Indeed, the 29 percent figure placed West Virginia highest among the 50 states in 2019 in terms of reliance on transfer payments.

Transfer Payments as a Share of Personal Income Graph showing and comparing the percentage of personal income that comes from transfer payments to the average for all US states during the period 1992 to 2019.

[Figure 4.9]

In Figure 4.10 we disaggregate transfer payments into various broader categories. As illustrated, social security is by far the largest individual program, accounting for over 36 percent of total transfer payments made in West Virginia in 2018. Medicare and Medicaid came in second and third, accounting for around 25 and 20 percent of total transfer payments, respectively. All other transfer programs pale in comparison to these three when represented as a share of total expenditures in the category. The Supplemental Nutrition Assistance Program (SNAP) in the state comes in a distant fourth in terms of its spending share, accounting for two percent of total transfers.

It is interesting to note how the composition of transfer payments has evolved over the past 25 years. Spending on Medicare and Medicaid has increased substantially since 1993 as a share of total transfer payments. Social Security spending has fallen slightly in relative terms, along with all of the various other government retirement and disability programs reported.

Distribution of Transfer Payments by Program, West Virginia Chart comparing the composition of transfer payments made to West Virginia residents as a percentage of total transfer payments in 2018 to those in 1993; social security constitutes the largest s

[Figure 4.10]

In Figure 4.11 we illustrate the composition of transfer payments nationally. The figure illustrates a significant degree of similarity to the pattern observed in West Virginia in terms of the size of relative programs and in terms of the evolution of spending patterns over time.

Distribution of Transfer Payments by Program, United States Chart comparing the composition of transfer payments made to residents in all 50 US states as a percentage of total transfer payments in 2018 to those in 1993; social security constitutes the lar

[Figure 4.11]

Figures 4.12 and 4.13 illustrate the size of specific public assistance programs in West Virginia. In Figure 4.12, we report the number of individuals who receive benefits from specific public assistance programs in West Virginia. In Figure 4.13 we report the share of the population receiving benefits from each program, and we offer a comparison to the national share. With 476 thousand recipients, Social Security benefits are enjoyed by the largest number of West Virginians, representing nearly 27 percent of the state’s population. This figure is substantially higher than the corresponding figure at the national level of 19 percent, largely due to the state’s older population.

The SNAP program has the second highest number of recipients at 321 thousand, or around 18 percent of the state’s population. This figure is also higher than the national figure of around 13 percent. Participation in all other transfer programs in West Virginia pales in comparison to these largest two. Supplemental Security Income comes in at a distant third with 72 thousand West Virginians participating in a typical month in 2018. A larger share of West Virginians participate in all of these transfer programs compared to the nation, with the exceptions of the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC).

Participation in Transfer Programs in West Virginia, 2018 Chart showing the total number of participants in each category of government transfer payments for the state of West Virginia in 2018.

[Figure 4.12]

Participation Share in Transfer Programs, 2018 Chart showing and comparing participation in transfer programs as a percentage of the population in West Virginia to the percentage of all US residents that participate in transfer programs in 2018; social se

[Figure 4.13]

Figures 4.14 and 4.15 examine the receipt of unemployment insurance benefits in West Virginia. As illustrated, the duration of unemployment insurance benefits fell significantly between 2010 and 2012, and again since 2017. As of the most recent data (before the COVID pandemic), the figure stands at the lowest level observed in nearly a decade. For 2017, the average unemployment insurance recipient received benefits was around 14 weeks, less than the comparable figure for the US of 15 weeks.

In Figure 4.15 we illustrate the average weekly unemployment insurance benefit amount. As illustrated, benefits have risen in nominal terms since 2001, except for a drop during 2009-2010 and again in 2017 as the economy improved. Overall, the typical West Virginian who received unemployment insurance benefits during 2019 received around $323 per week, compared to around $369 per week nationally.

Average Weekly Duration Collecting Unemployment Insurance Graph showing and comparing the average weekly duration that West Virginia residents collected unemployment insurance to the average weekly duration that all US residents collected unemployment ins

[Figure 4.14]

Average Weekly Unemployment Insurance Benefits Graph showing and comparing the average weekly dollar benefit that West Virginia residents collected from unemployment insurance to the average weekly dollar benefit that all US residents collected from unemp

[Figure 4.15]

Guest Insight: West Virginia Fiscal Forecast

By Mark Muchow, Deputy Cabinet Secretary, West Virginia Department of Revenue

The West Virginia economic expansion pace slowed in 2019 with estimated real GDP growth of 1.0 percent, 3.5 percent growth in personal consumption, and very little change in overall wage incomes. Trends of lower coal sales, lower energy prices, and lower exports of non-manufacturing goods weighed negatively on employment growth and wage growth. The value of non-manufacturing goods exported, mainly coal, rose by 32 percent in 2018 before declining by 47 percent in 2019 and by an additional 21 percent during the first half of 2020. A slowdown in the global economy resulted in softening demand for steel products and energy products. Excess supply relative to demand led to declining energy prices and financial distress for domestic energy producers. Natural gas prices fell by more than one-third over the year and West Virginia’s domestic steam coal market shrank by roughly 17 percent in 2019 and by more than 30 percent during the first half of 2020 due to the competitive price advantage for natural gas. Most other sectors of the economy were relatively stable with significant growth in public sector highway expenditures contributing to overall growth in economic activity despite a weaker energy sector.

Growth in the economy came to a sudden halt in March 2020 due to the onset of the Covid-19 pandemic and a partial shutdown of various economic sectors to minimize the spread of Covid-19 and to maximize public health safety. A deep two-month recession ensued with the nation’s unemployment rate rising from 3.5 percent in February to a peak of 14.7 percent by April. Policymakers quickly adopted significant fiscal and monetary stimulus programs designed to minimize both short-term and longer-term economic damages associated with the pandemic. On March 18, 2020, the President signed the Families First Coronavirus Response Act (FFCRA). Among other provisions, FFCRA provided for an enhanced Federal Medicaid Assistance Percentage (FMAP) of 6.2 percent retroactive to January 1, 2020. On March 27, 2000, the President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). In addition to various stimulus programs benefiting individuals, businesses, and certain public sector functions, the CARES Act provided direct general aid funds to state and local governments to offset pandemic related costs. West Virginia received an allocation of $1.25 billion for pandemic related expenditures. Economic recovery began in May with sharp gains in employment, personal income and consumption following in subsequent months. Nearly half of the initial loss of an estimated 92,000 payroll employment jobs in West Virginia were recovered by June.

West Virginia General Revenue Fund collections were on a path to meet or exceed year-end Fiscal Year 2020 estimates as of March 31st with cumulative collections of $3.3 billion ahead of prior year receipts, which was a 0.3 percent increase. In addition, the fourth quarter Fiscal Year 2020 revenue estimate was 6.2 percent less than actual revenues received in the prior year. The lower estimate was attributable to an expectation of lower year-end annual income tax payments following higher than usual income tax revenue gains in the prior year and lower severance tax revenues associated with a weakening energy sector. The combined revenues for the eight largest sources of revenue (i.e., personal income tax, consumer sales tax, severance tax, B&O Tax, corporation net income tax, insurance premium tax, tobacco products tax, and excess lottery fund transfers) were estimated to decrease by 7.0 percent from prior year receipts. Due to the economic impact of the pandemic and a related decision to defer payment of estimated and annual income tax return payments due between April and June to July, actual revenue collections for these revenue sources fell by nearly 27.5 percent from the prior year. As a result, the State suddenly faced a projected year-end budget gap above $300 million. Roughly one-third of the gap was due to revenue decreases associated with less economic activity and the remainder was due to the deferment of $200 million in income taxes due between April and June to July of the following fiscal year.

The implementation of a combination of various one-time revenues and expenditure authorization reductions resulted in the elimination of the projected budget gap. The major one-time revenues included $23 million from the Income Tax Refund Reserve Fund, nearly $16 million in accelerated retail liquor license renewal fees, and $57 million in CARES pandemic reimbursement funds. Expenditure authorizations were reduced by $199 million, including $13 million in funds that would have otherwise expired at year end and $186 million in Medicaid. The reduced general revenue allocation for Medicaid was replaced with funding from available reserve funds and funding associated with the enhanced FMAP. There was no reduction in any government services. These actions effectively closed the Fiscal Year 2020 budget gap. In addition, lower than anticipated government expenditures during the year resulted in a year-end budget expiration of nearly $28 million and a net budgetary surplus of the similar amount for Fiscal Year 2020. Half of the surplus was deposited in the State’s Revenue Shortfall Reserve Fund, $6 million was appropriated by the Legislature for the Milton Floodwall Project and $8 million remains for future appropriation.

Final Fiscal Year 2020 General Revenue Fund collections, inclusive of the one-time gap-fill revenues, totaled nearly $4.5 billion. Collections fell below original estimate by 4.2 percent and below prior year receipts by 5.5 percent. Severance tax collections fell by 42.3 percent due to lower coal sales and a sharp decline in natural gas prices. Personal income tax collections fell by 7.1 percent due to a shift of roughly $144 million in tax payments due in the April-June period to July of Fiscal Year 2021 and a 1.9 percent decline in wage withholding taxes. After rising modestly during the first nine months of the fiscal year, income withholding tax collections fell by 10.4 percent during the final three months due to temporary business closures and the sharp rise in unemployment brought on by the pandemic. Corporation net income tax collections fell by 23.3 percent due to a shift of roughly $56 million in payments due in the April-June period to July of Fiscal year 2021. Consumer Sales Tax collections finished the year up by 1.2 percent, but still $3.7 million below estimate. After rising by 2.3 percent during the first nine months of the fiscal year, sales tax collections fell by 7.8 percent in April and by 6.9 percent in May. However, federal stimulus payments helped boast May retail sales and resulting June sales tax collections by 6.5 percent. In addition, consumer spending shifted away from leisure and hospitality services, dining and apparel to food stores, and home improvement stores. There was also a greater shift away from local box stores to e-commerce shopping.

The official Fiscal Year 2021 General Revenue estimate of more than $4.56 billion, developed in November 2019 and updated in March 2020, is nearly $80 million above actual Fiscal Year 2020 General Revenue Fund collections. The Fiscal Year 2021 revenue estimate, established prior to the onset of the pandemic, does not account for the deferral of $200 million in income taxes from Fiscal Year 2020 to Fiscal Year 2021. Collections for key revenue components, including severance tax and income tax, will likely be less than originally projected in Fiscal Year 2021 due to changes in the direction of the economy as the result of the pandemic. However, the additional $200 million in deferred income tax collections should limit any potential revenue shortfall as compared with estimate to a manageable level. Due to continued weakness within the energy sector, the revenue estimate for this year is also nearly 4.1 percent below actual collections for Fiscal Year 2019. In addition to General Revenues, the state budget relies on roughly $463 million in the estimated state share of lottery funds deposited in either the Lottery Fund, the Excess Lottery Fund, or the General Revenue Fund in Fiscal Year 2021. The Lottery Fund projections are up more than $73 million from actual revenues in the prior year. The increase is largely associated with additional revenue expectations from the upcoming 10-year limited video lottery retail license rebid.

The West Virginia economy is expected to be on a gradual path of recovery from the pandemic recession in the coming year. Significant public highway construction activity funded with bond proceeds under the governor’s Roads to Prosperity Program will provide some stimulus, especially in the construction sector. Certain manufacturing industry expansions around the state should also provide some employment growth along with a rebound in the health care sector employment. Some employment recovery within the hard-hit retail and leisure and hospitality sectors should also occur, particularly with the anticipated development of vaccines and other effective treatments against the virus. However, tax revenue growth will continue to be constrained by low energy prices, sluggish exports, and the lower demand for domestic steam coal.

The base budget expenditures for Fiscal Year2021 from General Revenues and lottery revenues are $5.04 billion, $90 million less than the base budget expenditures included in the Fiscal Year2020 budget of $5.13 billion. The slight downward adjustment in base budget reflects some Medicaid savings associated with implemented managed care programs, some decline in Medicaid enrollment associated with an improving economy, and benefits from an enhanced FMAP. Over a four-year period, West Virginia’s FMAP rate increased from 71.80 percent in Federal Fiscal Year 2017 to 74.99 percent in Federal Fiscal Year 2021. The enacted Fiscal Year 2021 budget does not include additional federal Medicaid funds associated with the additional 6.2 percent FMAP as enacted by Congress in mid-March and made retroactive to January 1, 2020. The enacted budget includes a pay raise for corrections officers and additional funding for the Medicaid I/DD Waiver Program and social services.

The basis of the current budget outlook for Fiscal Years 2021 and 2022 is a forecast of gradual recovery in the state economy from the depths of a sharp two-month pandemic recession with a gradual rise in employment and wages to levels approaching or exceeding 95 percent of the base in place prior to the onset of the pandemic. The energy sector may pose some additional drag on tax revenues at least in the short-term due to falling prices and weak demand. However, some upturn in energy activity from the current trough is possible by the end of the forecast period. Some depreciation in the dollar combined with a gradual global economic recovery could be a boast to foreign goods exports. There remains significant uncertainty over the direction of the pandemic and its impact on the economy and future federal fiscal policy. Therefore, revenue volatility will remain above average over the next two years with greater propensity for both significant upward and downward collection trends within short periods.