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. [3] Further, total state and local government spending in the state is nearly 25 percent of West Virginia’s total personal income, and the US federal government transfers a significant amount of income into the state. Taken together, 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. Eighteen states have smaller state and local governments when measured by this metric. [4] 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 about 25 percent of state personal income, compared to the US average of 21 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.
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 30 percent of their overall spending to this category, compared with a national average of nearly 27 percent. West Virginia devotes more than 28 percent of its overall government resources to education services, above the national average of nearly 28 percent. West Virginia governments direct 9 percent of their expenditures to insurance trust expenditures for public employees, which is comparable to the national average of 9.4 percent. Further, governments in the state focus relatively heavily on transportation spending. In West Virginia 8.6 percent of total spending goes to transportation-related projects, compared to a national average of just under 7 percent.
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 just under $6,000 in total spending per capita in 1990 to nearly $10,500 by 2019, 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, a decline in the 2020 fiscal year, and then strength in the 2021 fiscal year.
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 bottom fourth of states based on this metric (7 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 West Virginia receiving an above-average share of its revenues from the US Federal Government.
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, more than 27 percent of total revenue received by West Virginia governments is a federal transfer, which is significantly higher than the national average of nearly 19 percent. West Virginia governments are in alignment with most states in terms of their reliance on sales taxation: West Virginia governments derive 16 percent of their total revenues from sales taxation, which is about the same as the national average. Similarly, West Virginia governments derive 11 percent of their total revenues from individual income taxation, also comparable to the national average. In contrast, the reliance on the property tax in West Virginia—nearly 9 percent of total revenue—is well below the national average of more than 14 percent.
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 far less responsibility to the local governments, compared to the national average.
Public Assistance in West Virginia
Total transfer payments made in West Virginia in 2020 amounted to nearly 34 percent of personal income in the state, as depicted in Figure 4.9. That figure has increased noticeably over the past decade or so, with a rapid spike in 2020 due to the COVID recession. Further, transfer payments in West Virginia are substantially higher as measured against personal income when compared to the national average; for the nation, transfer payments were equivalent to nearly 22 percent of personal income in 2020. Indeed, the 34 percent figure placed West Virginia highest among the 50 states in 2020 in terms of reliance on transfer payments.
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 2019. Medicare and Medicaid came in second and third, accounting for around 25 and 18 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 just under 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 1994 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.
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.
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 478 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 304 thousand, or around 17 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 71 thousand West Virginians participating in a typical month in 2019. A larger share of West Virginians participates in all these transfer programs compared to the nation, with the exceptions of the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC).
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. For 2020, driven by the COVID-19 pandemic, the average duration of the unemployment insurance benefits received was at a historical low of 12.3 weeks, which is almost identical to the US average of 12.5 weeks.
In Figure 4.15 we illustrate the average weekly unemployment insurance benefit amount. As illustrated, benefits have risen in nominal terms since 2000, 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 2020 received around $335 per week, compared to around $383 per week nationally.
By Mark Muchow, Deputy Cabinet Secretary, West Virginia Department of Revenue
Following a sharp two-month recession associated with the Covid-19 Pandemic during the Spring of 2020, West Virginia’s economy largely recovered to its pre-Pandemic levels by the end of FY2021. The strong recovery was attributable to West Virginia’s early success in health vaccinations, an influx of federal stimulus funding, and a sharp rebound in energy prices and energy markets from a trough at the end of CY2020. Employment levels at both the National and State level recovered at a slower pace than the rest of the economy. Two-thirds of the roughly 90,000 West Virginia nonfarm payroll jobs initially lost during the Spring 2020 economic shutdown were recovered by the end of FY2021 and the State’s seasonally adjusted unemployment rate fell to 5.0 percent as of July 2021. According to the household employment survey, total employment bounced back to within 1.5 percent of its pre-pandemic heights. Employment recovery slowed in recent months due to fewer workers in the labor force and the renewed threat posed by a Covid-19 variant.
According to published data from the U.S. Bureau of Economic Analysis, West Virginia personal income grew at an annual rate of 88.3 percent in the first quarter of CY2021, second only to Mississippi. The sharp rate of growth was reflective of growth in transfer payments, inclusive of the $600 economic impact payments to individuals by the Coronavirus Response and Relief Act, the $1,400 economic impact payments provided by the American Rescue Plan Act (ARPA), and the temporary $300 increase in weekly unemployment benefits also provided by ARPA. Net earnings, including wages and salaries and proprietor income, rose at a rate of 8.0 percent in comparison with a national average rate of 6.1 percent. Enhanced personal income growth led to strong growth in consumer sales tax receipts in CY2021. After rising by 5.7 percent during the last six months of CY2020, consumer sales tax receipts surged by 15.9 percent over prior year receipts during the first six months of CY2021.The average annual growth rate over the past two years of more than 5.9 percent was evidence of a full Pandemic recession recovery for the West Virginia consumer.
West Virginia economic performance was also enhanced by a significant recovery in the energy sector led by a strong rebound in energy prices since the beginning of CY2021. The regional natural gas hub price hit a trough of just $1.03 per million BTU in November 2020 before rising to a monthly median price of $2.33 per million BTU through the first eight months of CY2021. Current natural gas prices are nearly triple the price of one year ago. Natural gas production was up more than 10 percent from last year through the first five months of this year according to U.S. Energy Information Administration (EIA) estimates. Higher natural gas prices also stimulated greater demand for steam coal due to competitive price fuel switching. Coal-fired electric power generation rose 35 percent in West Virginia and by more than 40 percent in the twelve states using West Virginia steam coal during the first half of CY2021. Natural gas-fired generation fell by a collective 6.2 percent in the same twelve states.
A trend of higher steel demand associated with global economic recovery is now beginning to stimulate greater demand for metallurgical coal. Average taxable coal prices fell from more than $70 per ton in CY2019 to slightly less than $61 per ton in CY2020. However, average price greatly rebounded over the past four months to more than $74 per ton. After bottoming out at slightly more than 67 million tons in CY2020, year-to-date West Virginia coal production is up nearly 18 percent from last year with most of the growth in the Northern Appalachian Region according to data compiled by the EIA. In its August 2021 Short-Term Energy Outlook, EIA expects some gradual softening of natural gas prices beginning in CY2022 along with some retreat in overall coal production following estimated production growth of 13 percent in CY2021. Due to energy industry changes, severance tax collection patterns reversed course from a year over year decline of 42 percent ($82.9 million) during the first half of FY2021 to a year over year increase of 45 percent ($66.5 million) during the second half of FY2021. After falling by 4.8 percent in FY2021, year-to-date severance tax collections are up more than 150 percent ($46.7 million) after the first two months of FY2022.
Following an extended period of decline, foreign exports of West Virginia goods are on the rebound. The value of foreign good exports sourced to West Virginia dropped from a recent peak of $8.1 billion in CY2018 to a trough of less than $4.6 billion in CY2020. The annualized value of foreign good exports subsequently rebounded to nearly $5.3 billion as of June 2021. Non-manufacturing good exports, mainly coal, rebounded sharply since January and manufacturing good exports rebounded sharply since March. As global economic growth continues to rebound, exports are expected to be on an upward trajectory at least through CY2022.
Public sector infrastructure investment on highways and other infrastructure remains at a high level due to various ongoing multi-year projects funded by various Roads to Prosperity Bonds totaling roughly $2.5 billion and the infusion of significant general revenue fund appropriations in both FY2019 and FY2021 for road maintenance totaling an aggregate amount of more than $254 million. The Legislature also recently appropriated $42 million in capital improvement funding for State parks and $15 million to rebuild a correctional center. The State has an ARPA Fund allocation of more than $1.35 billion that could be partially used for additional infrastructure improvements. In addition, Congress is currently considering an additional $1 trillion bipartisan infrastructure bill with significant additional federal funding possible for State infrastructure needs. These funding sources will help modernize our infrastructure with the added benefit of additional employment and tax revenues for the State.
The original Official West Virginia General Revenue Fund estimate of $4,574,514,000 for FY2021 was set in November 2019 with minor adjustments for legislation enacted in early March 2020. The partial shutdown of the Nation’s economy began after the FY2021 budget was enacted by the Legislature. In addition, decisions were made to delay various income tax return filing and payment deadlines from April 15th through June 15th of FY2020 to July 15th of FY2021. The Federal Reserve Board took immediate action to lower short-term interest rates to near 0 percent and to adopt aggressive liquidity measures to support economic stability.
Between March 2020 and March 2021, Congress enacted six separate stimulus bills with an estimated aggregate cost of $4 trillion to help support the U.S. economy during the Covid-19 Pandemic. The two biggest stimulus packages were CARES and ARPA. Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES) by the end of March 2020, a massive $1.8 trillion aid package to businesses, individuals and subnational units of government. In March 2021, Congress enacted the $1.9 trillion American Rescue Plan Act (ARPA) with significant aid to subnational governments and $1,400 stimulus payments to individuals among numerous other provisions. State governments also received significant aid through an enhanced 6.2 percent federal Medicaid assistance match that was made retroactive to the beginning of CY2020 and will likely extend through at least the end of CY2021. None of these post-Session changes were reflected in West Virginia’s Official FY2021 General Revenue Fund estimate.
Not surprisingly, final FY2021 General Revenue Fund collections deviated significantly from the original estimates. Revenue collections of more than $5.0 billion were $458 million above original estimate. Personal income tax collections of nearly $2.3 billion were $143.1 million above estimate due to an estimated $144 million in deferred collections associated with the delayed due dates from fourth quarter of FY2020 to the first quarter of FY2021. Corporation net income tax collections of more than $320 million were $176 million above estimate and more than 110 percent above prior year receipts partially due to an estimated $56 million in deferred collections associated with the delayed due dates from fourth quarter of FY2020 to the first quarter of FY2021. Collections also benefited from soaring corporate profits as larger firms were better often able to adjust to Pandemic conditions than some competing smaller businesses. Consumer sales tax collections were $115.4 million above estimate and roughly 11 percent ahead of prior year receipts due enhanced consumption associated with large federal stimulus payments to individuals. A typical family of four received total federal stimulus payments of $11,400 during a single year period generally between April 2020 and April 2021. Families with one or more unemployed individuals also received additional enhanced unemployment benefits.
Severance tax collections were $23.3 million above estimate due largely to inflating natural gas prices during the second half of the fiscal year. Individuals consumed more cigarettes and alcohol and less gasoline during the year. As a result, tobacco and alcohol related taxes were a collective $18.7 million above estimate. Demand for residential real estate rose relative to supply with property transfer tax collections rising by 30.8 percent over the prior year. Not all revenue sources performed beyond expectations. Insurance premium tax collections fell $13.2 million below estimate and 8.7 percent below prior year receipts partially due to lower auto insurance premiums associated with less road travel. In addition, motor fuel excise tax collections fell roughly $50 million below normal due to less road travel over the past year.
During two separate special sessions held in June 2021, the Legislature appropriated a total of $403.8 million of the $458 million revenue surplus. Major appropriations included $150 million to the State Road Fund, $58.7 million to various budgetary items originally dependent on year-end surplus, $42 million for State park improvements, $38.9 million for Homeland Security, $30 million for a Development Office Closing Fund and $50 million to the Revenue Shortfall Reserve Fund. The State also transferred $45 million in personal income tax collections to the Income Tax Refund Reserve Account to replenish funds previously used to pay tax refunds when collections were short of estimate.
Final FY2021 General Revenue Fund collections totaled nearly $4.988 billion. Collections exceeded appropriations by nearly $9.3 million. Lower than budgeted government expenditures during the year and additional expirations resulted in a year-end budget expiration of $21.5 million. The final unappropriated General Revenue Fund surplus for FY2021 equaled $30.8 million. Half of the surplus was deposited in the State’s Revenue Shortfall Reserve Fund and $15.4 million remains for future appropriation.
The official FY2022 General Revenue estimate of nearly $4.57 billion, developed in November 2020, is nearly $418 million below actual FY2021 General Revenue Fund collections. FY2021 collections included $200 million in one-time deferred income tax receipts but did not include $45 million of collections allocated to the Income Tax Refund Reserve Account. Even after these adjustments, the official FY2022 General Revenue Fund estimate is still nearly $263 million or 5.4 percent lower than actual adjusted receipts for FY2021. The FY2022 revenue estimate, established prior to the enactment of ARPA, does not account for any potential revenue enhancement associated with ARPA or with pending stimulus bills now being considered by Congress. These estimates were developed under the assumption that current federal stimulus programs would gradually fade away over the coming year.
Collections for key revenue components, including personal income tax and consumer sales tax, will likely rise more than originally anticipated due to stronger economic growth, a longer than originally expected downward glide path for federal stimulus programs and higher inflation. If current natural gas prices are largely sustained through the coming year, severance tax collection growth will easily exceed the 16.6 percent increase associated with the current estimate. Despite some remaining concern about the Covid-19 variants and a possible short-term slowdown in economic growth, West Virginia’s finances are well positioned at this time despite such uncertainties.
The base budget appropriations for FY2022 General Revenue and lottery revenue are $5.05 billion, $70.5 million less than the base budget appropriations included in the Fiscal Year 2021 budget of $5.12 billion. The slight downward adjustment in base budget reflects changes to education funding levels associated with lower pupil enrollment.
The basis of the current budget outlook for FY2022 and FY2023 is a forecast of continued expansion in the State economy with a gradual rise in employment to levels approaching or exceeding 98 percent of the base in place prior to the onset of the Pandemic. The energy sector outlook greatly improved over recent months with growth in prices and sales expected at least in the short-term due to enhanced demand in a recovering global economy with increasing liquified natural gas 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.
West Virginia remains fiscally strong due to conservative budgeting and conservative revenue estimates during this time of uncertainty. The State is also well positioned to handle the coming transition toward lower future federal funding available for State government service needs.