Chapter IV: Government in West Virginia

As reported in previous sections, government is the largest employer in West Virginia, accounting for more than one-fifth of all jobs in the state. [1] Further, total state and local government spending in the state is equivalent to more than 25 percent of West Virginia’s total personal income, and the U.S. 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 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 U.S. 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. [2] 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 25 percent of state personal income, compared to the U.S. average of less than 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.

Figure 4.1 utilizes a US state-level map comparing the per capita expenditure of state and local governments in 2020. West Virginia is below the national average of $12,760. Figure 4.2 is a US state-level map that compares the level of state and local government spending to personal income in 2020. West Virginia's state and local government spending ranks among the highest states in the US.

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 29 percent of their overall spending to this category, compared with a national average of 27 percent. West Virginia devotes 28 percent of its overall government resources to education services, above the national average of 27 percent. West Virginia governments direct 10 percent of their funds to insurance trust expenditures for public employees, which is slightly below the national average of 11 percent. Further, governments in the state focus relatively heavily on transportation spending. In West Virginia nine percent of total spending goes to transportation-related projects, compared to a national average of just under 6 percent.

Figure 4.3 provides a breakdown of how state and local government expenditures were made during 2020 using a pie chart. Social welfare programs and education services account for 57 percent of total spending. 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 $6,000 in total spending per capita in 1990 to over $11,000 by 2020, 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 both the 2021 and 2022 fiscal years.

Figure 4.4 is a two-line chart that follows the trajectory of real per capita levels of state and local spending for West Virginia and the US. Per capita spending in West Virginia has always been below the national average but the difference has fluctuate Figure 4.5 utilizes a column chart to analyze the level of tax revenue collections for West Virginiaís state government between fiscal years 2003 and 2022. Tax collections were flat between fiscal years 2011 and 2018, before strong increases in fiscal yea

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 (3 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 federal government.

Figure 4.6 features a US state-level map that shows the level of revenue generated by state and local taxation on a per capita basis. West Virginia is among the states with the lowest per capita tax burden. 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 U.S. Federal Government. Overall, 34 percent of total revenue received by West Virginia governments was a federal transfer for 2020, which was significantly higher than the national average of more than 21 percent. However, 2020 was an anomalous year due to federal support associated with the COVID-19 pandemic. In the prior year, 27 percent of the revenue received by West Virginia governments was a federal transfer. However, West Virginia was still highest among the 50 states by this metric. The national average for federal transfers was 19 percent in 2019.

West Virginia governments are in alignment with most states in terms of their reliance on sales taxation: West Virginia governments derive just under 15 percent of their total revenues from sales taxation, which is comparable to the national average of more than 15 percent. Similarly, West Virginia governments derive under 10 percent of their total revenues from individual income taxation, about the same as 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 14 percent.

Figure 4.7 uses a pie chart to break down specific avenues in which state and local governments in West Virginia generate revenue in 2020. The largest source for state is the federal government, which provides for 34 percent of revenue. 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.

Figure 4.8 provides a state-by-state ranking of the state government share of overall state and local government spending in 2020. West Virginia saw 82 percent of all state and local government spending coming from the state government, which is fourth hi

Total transfer payments made in West Virginia in 2021 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-19 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 2021. Indeed, the 34 percent figure placed West Virginia highest among the 50 states in 2021 in terms of reliance on transfer payments.

Figure 4.9 shows transfer payments as a share of total personal income for West Virginia and the US over the 1993 to 2021 time period using a two-line chart. West Virginia has consistently received a higher share of income from transfers, rising to nearly In Figure 4.10 we consider the composition of transfer payments for West Virginia and the U.S. As illustrated, both West Virginia and the U.S. have a very similar pattern with regards to the composition of transfer payments. Social Security is by far the largest individual program in 2020, accounting for 31 percent of total transfer payments made in West Virginia, well above the U.S. average of around 26 percent. Medicare and Medicaid came in second and third. The two programs combined accounts for around 38 percent of total transfer payments in West Virginia, compared to around 36 percent nationally. All other transfer programs pale in comparison to these three when represented as a share of total expenditures in the category.

Spending on unemployment insurance came in as the fourth highest category in 2020, accounting for 7 percent in West Virginia, well below the national share of more than 13 percent. However, both figures are typically much lower than what was observed in 2020. Unemployment insurance spending in 2020 in the U.S. overall was greatly increased due to the COVID-19 pandemic. The Supplemental Nutrition Assistance Program (SNAP) in the state comes in a distant fifth in terms of its spending share, accounting for just under two percent of total transfers.

Figure 4.10 shows the distribution of transfer payments to West Virginia and US residents by program during 2021 via a horizontal bar chart. Social Security, Medicare and Medicaid are the largest sources of transfer payments in West Virginia, accounting f Figures 4.11 and 4.12 illustrate the size of specific public assistance programs in West Virginia. In Figure 4.11, we report the number of individuals who receive benefits from specific public assistance programs in West Virginia. In Figure 4.12 we report the share of the population receiving benefits from each program, and we offer a comparison to the national share. With 479 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 just under 20 percent, largely due to the state’s older population.

The SNAP program has the second highest number of recipients at 306 thousand, or around 17 percent of the state’s population. This figure is also higher than the national figure of around 12 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 69 thousand West Virginians participating in a typical month in 2020.

Figure 4.11 breaks down the average monthly level of participation in specific transfer programs in West Virginia during 2020. Social Security averages the largest number of participants at 479 thousand, reflecting the stateís older-than-normal population Figure 4.12 compares the share of total population in West Virginia and the US that participate in government transfer programs. West Virginia tends to have an appreciably higher share of residents in these programs, with more than one fourth receive soci

Figures 4.13 and 4.14 examine the receipt of unemployment insurance benefits in West Virginia. As illustrated in Figure 4.13, the duration of unemployment insurance benefits fell significantly between 2010 and 2012, and again since 2017. For 2020, driven by many people entering the unemployment rolls due to the COVID-19 pandemic, the average duration of the unemployment insurance benefits received was at a historical low of between 12 and 13 weeks, which is almost identical to the U.S. average. Duration figures rose substantially for 2021 as workers left the unemployment rolls and as the unemployment rate fell to near historic lows. As such, many of the men and women who remain on unemployment are long term cases.

In Figure 4.14 we illustrate the average weekly unemployment insurance benefit amount. As illustrated, benefits have generally risen in nominal terms since 2000. However, the figure fell significantly for 2021 as the economy recovered from the COVID pandemic. Overall, the typical West Virginian who received unemployment insurance benefits during 2021 received around $277 per week, compared to around $352 per week nationally.

Figure 4.13 uses a two-line chart to compare the average number of weeks unemployed workers receive unemployment insurance benefits in West Virginia and nationally. Unemployed workers in West Virginia typically receive UI benefits for one to two fewer wee

Figure 4.14 uses a two-line chart to compare the average weekly benefit amount received by workers in West Virginia and the US since 2000. Benefits have been consistently lower on average in West Virginia, though the deficit has generally been the same ov

Guest Insight: West Virginia Fiscal Forecast

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

The external shock of the COVID-19 pandemic and government responses designed to minimize economic damages continue to impact current economic activity. Fiscal and monetary stimulus programs successfully propped up consumer demand during a period of temporary suspension of at least some supply-related economic activities. A major unintended consequence of such policy decisions was the emergence of various demand and supply imbalances with a resulting rise in inflation. After averaging less than two percent annual increase in the prior decade, general consumer price inflation began accelerating in early 2021 to a recent year over year peak level of nearly 9.1 percent as of June 2022. Commodity price inflation generally exceeded overall inflation due to the demand-supply imbalances and due to pollical instability in Eastern Europe and elsewhere. As of June 2022, producer prices for energy were up more than 54 percent from the prior year. Overall West Virginia tax collections benefited from the higher energy prices with a strong 152 percent increase in severance tax collections and greater than normal growth in income tax collections in Fiscal Year 2022.

The Federal Reserve responded in recent months to continuing high inflation concerns with four separate federal fund interest rate increases totaling 225 basis points thru July 2022. The higher interest rates were intended to slow economic activity, particularly consumer demand, over time. Further significant interest rate hikes are likely during the balance of this year and into next year, as the Federal Reserve seeks to bring future inflation rates down to its target range around two percent. The combination of higher interest rates and a significant recent deceleration in the growth of money supply from double digit growth in 2021 to a slight decline as of June 2022 should eventually choke off inflation possibly at the expense of a future recession.

West Virginia’s economic expansion continues in 2022 with growth in employment, wages, consumer sales and economic output. Payroll employment levels are rising at an annual pace of roughly 2.8 percent this year following a 1.7 percent increase in 2021. The State’s unemployment rate is near a record low of just 3.7 percent. Even though non-farm payroll employment remains roughly 1.7 percent below pre-pandemic levels, household employment levels have fully recovered. Wage and salary disbursement growth of more than 10 percent is due to a combination of higher average wages and higher employment. Even though real disposable personal income is down by more than 6 percent from the prior year due to the end of fiscal stimulus payments, retail sales growth continues at a brisk pace in 2022. As of June 2022, West Virginia’s foreign goods exports are up 39 percent over the prior year.

A significant portion of the recent nominal growth in exports, income and consumption was attributable to inflation. According to recent U.S Bureau of Economic Analysis estimates, nominal West Virginia gross state product rose by 15.2 percent and real gross state product grew by 4.0 percent in 2021. The huge gap between real growth and nominal growth is largely attributable to energy sector inflation.

West Virginia economic performance continued to be enhanced by strong energy demand complete with historic price increases. 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 nearly $7.00 per million BTU in recent months. Current natural gas prices are more than double the price of one year ago. Higher prices failed to stimulate any significant increase in production. West Virginia natural gas production was up less than 3.3 percent from last year through the first six months of this year according to U.S. Energy Information Administration (EIA) estimates, the lowest rate of growth since 2010. Regional growth has been limited by inadequate pipeline infrastructure necessary to transport product to growth markets. An ongoing energy supply crisis in Europe has been the major factor in higher global energy prices and increased demand for liquified natural gas exports. In addition, natural gas used in U.S. electric power production is up 5.6 percent over last year for the first half of this year. An increase in global steel demand and a general energy supply shortage contributed to a tripling of metallurgical coal prices and a doubling of overall West Virginia coal prices in the past year. Year-to-date West Virginia coal production is up nearly 3 percent from last year with most of the growth in the Southern Appalachian Region according to data compiled by the EIA. West Virginia coal production growth accelerated a bit in recent weeks with year over year growth of nearly 13 percent during the last full week of August. After peaking in May, average coal prices retreated along with average oil prices over the past couple months. After rising by 18.7 percent in 2021, coal-fired electric power generation declined by 18.4 percent in West Virginia during the first half of CY2022. EIA expects the retreat in use of coal for electric power production to continue with this loss of domestic demand partially offset by higher coal exports.

Foreign exports of West Virginia goods continued growing for the second consecutive year. The value of foreign good exports sourced to West Virginia rose 39 percent over the past year to nearly $7.3 billion as of June 2022. The value of manufacturing good exports was up 6 percent and the value of non-manufacturing exports, mainly coal, was up 95.4 percent. Most of the growth in export value was due to higher prices as opposed to higher volume. An anticipated global economic slowdown and the growing appreciation of the U.S. dollar relative to foreign currencies both pose some potential headwinds for future exports. However, EIA forecasts greater exports of energy products in the coming year.

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. The State has an American Rescue Plan Act (ARPA) Fund allocation of more than $1.35 billion that could be partially used for additional infrastructure improvements. In addition, Congress enacted an additional $1 trillion infrastructure bill with significant additional federal funding for State infrastructure needs earlier this year. 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 nearly $4.57 billion for FY2022 was developed in November 2020 with a minor upward adjustment made in early January 2022. The conservative estimate reflected continuing uncertainty regarding the direction of an economy still recovering from the Pandemic and failed to incorporate the possibility of additional federal fiscal stimulus beyond programs established in 2020. However, in March 2021, Congress enacted the $1.9 trillion American Rescue Plan Act (ARPA) with significant aid to subnational governments and stimulus payments to individuals among numerous other provisions. In addition, inflation rates began accelerating to levels well beyond recent norms and forecast range. Depressed energy prices quickly recovered and then accelerated toward record highs. Labor shortages led to higher-than-expected growth in wages. Higher prices spread broadly to most producers and ultimately to most consumer purchases.

Not surprisingly, final FY2022 General Revenue Fund collections deviated significantly from the original estimates. Revenue collections of more than $5.9 billion were $1.3 billion million above the official estimate and 22.1 percent above prior year adjusted collections (prior year numbers were adjusted to remove one-time deferred income tax payments). Due almost exclusively to higher energy prices, State General Revenue Fund severance tax collections rose 180.3 percent to a record high of $768.8 million. Personal income tax collections of more than $2.5 billion were 16.8 percent above prior year adjusted collections. Corporation net income tax collections of more than $366 million were 38.5 percent above prior year adjusted collections. Income tax collections benefited from a huge upswing in 2021 capital gain realizations and soaring natural resource royalty incomes along with strong business profit growth and enhanced wage incomes. Consumer sales tax collections grew by 7.7 percent due to enhanced consumption associated with higher employment, higher wage incomes and higher commodity prices. Higher premiums led to a 15.1 percent jump in Insurance Premium Tax collections.

During the Regular 2022 legislative session, the Legislature appropriated from the General Revenue surplus section a total of $793.4 million of the $1.3 billion revenue surplus. Of those surplus appropriations, $600 million was for economic development. As a result, the State was able to transfer $15 million in personal income tax collections to the Income Tax Refund Reserve Account to replenish funds that are used to pay tax refunds when collections are running short of estimate.

Final FY2022 General Revenue Fund collections totaled nearly $5.889 billion. Collections exceeded appropriations by nearly $515.7 million. Additional fiscal year-end expirations resulted in $34.6 million of FY2022 unspent appropriations. The final unappropriated General Revenue Fund surplus for FY2022 equaled slightly more than $550 million. These surplus funds remain available for future appropriation.

The official FY2023 General Revenue estimate of 4.636 billion, developed in December 2021, is more than $1.25 billion below actual FY2022 General Revenue Fund collections. The official FY2023 revenue estimate was designed to match the amount necessary to fully fund the Governor’s proposed General Revenue Fund budget for FY2023. An unofficial revenue estimate developed in November 2022 of nearly $5.456 billion was also presented to the Legislative finance committees during the first week of the 2022 Regular Session. The conservative unofficial FY2023 revenue estimate was developed under the assumption that a recession would occur in 2023 with a gradual reduction in inflation and energy prices. Collections for key revenue components, including severance tax, consumer sales tax and income taxes, will likely rise more than originally anticipated due to a prolonged imbalance between energy supply and energy demand, especially for natural gas. If current natural gas prices are largely sustained through the coming year, severance tax collections should easily exceed the 37.9 percent decrease associated with the current unofficial estimate. Collections will most likely exceed the unofficial revenue estimate, an estimate that is roughly $820 million above the official revenue estimate. As a result of conservative budgeting and conservative revenue estimates during this period of unusual turbulence, West Virginia’s finances are well positioned despite the prospect of a prolonged period of slow economic growth or the possibility of a near-term recession with a decrease in energy prices.

The base budget appropriations for FY2023 General Revenue and lottery revenue are $5.418 billion, $375.4 million more than the base budget appropriations included in the Fiscal Year 2022 budget of $5.043 billion. The increase in base budget reflects salary enhancements of nearly $109.5 million, nearly $46.7 million in additional funding for corrections, nearly $22.5 million in additional higher education funding and roughly $200 million in unanticipated infrastructure-related appropriations.

High inflation produces both greater revenue collections and greater upward pressure on government budgets. Policymakers will be faced with significant expenditure policy decisions in coming months due to the ill effects of inflation on various government programs. When revenues exceed budget needs, state governments tend to cut tax levels. Policymakers are currently debating various tax cut options, including a possible reduction in personal income tax rates or possible changes to tangible personal property taxation.

The basis of the current budget outlook for FY2023 and FY2024 is a forecast of a slower rate of expansion in the State economy due to the impact of higher short-term interest rates, a deceleration in the money supply growth rate from more than 10 percent in 2021 to near 0 percent, and a gradual slowing of overall inflation rates with some pullback in energy prices toward the end of the forecast period. During this period, West Virginia may be in a better economic position than many other states due to its energy-based economy. The highly uncertain energy sector outlook has great bearing on the future direction of state revenue collections. At this time, energy demand appears very strong relative to supply with high prices in place despite the prospect for some demand destruction associated with possible recession in Europe and elsewhere. In this climate, revenue volatility will remain above average over the next couple 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.

[1] This percentage includes federal government employment in West Virginia, in addition to state and local government employment.

[2] Census data on state government finances are for the 2020 fiscal year. Data for the 2021 fiscal year are not scheduled for release by the U.S. Census Bureau until late-Fall 2022.