Are tax cuts coming? It’s complicated. Here’s how West Virginia’s income tax trigger works, and why it’s causing confusion

When West Virginia lawmakers passed a wide-ranging tax cut in 2023, much of the attention focused on the immediate 21.25% income tax reduction. But in recent months, the main topic has turned to a “trigger” added to the law as a way to cut taxes even more in the future if the state hits certain revenue goals.

That trigger, which could eventually eliminate West Virginia’s income tax entirely, has already added new wrinkles to the state’s budgeting process, fueling calls by some lawmakers to tighten the purse strings. That’s despite the state already maintaining relatively flat budgets that have not accounted for inflation or increased agency needs in the past few years.

A review of the trigger and what it means for the state’s budget could be a topic of a May special session, which the governor is expected to call on Sunday. In the meantime, it is still unclear if the state will hit the first trigger in August. If it does, the state will either need to collect more revenue next year to maintain a balanced budget or potentially cut expenses, a challenge that could arrive as other parts of the 2023 tax cuts continue to go into effect.

Here’s what you need to know about the tax trigger and how it might impact the state’s revenue moving forward.

What does the tax trigger do?

In 2023, West Virginia lawmakers approved a tax cut package that included an immediate  21.25% cut in the personal income tax, a series of property tax cuts, and a vehicle tax rebate.

But it also had a tax trigger, which is set to go into effect any time the revenue in a given year passes the general fund revenue collected in 2019, adjusted for inflation.

If the state clears that benchmark, the income tax rate would automatically be cut by a certain percentage, depending on the current excess collections and how much personal income tax revenue the state collected the year before. It can’t exceed 10% in any given year. But the law also allows the state to “march to zero” on the income tax — so if the state were to consistently hit the trigger, the income tax could eventually be totally eliminated.

Lawmakers argued last year that the tax trigger is smart policy, allowing the state to keep an eye on revenue and only cut taxes more when it has money to spare.

But critics of the trigger argue that this isn’t exactly how things would work, pointing out that the state has now automatically dedicated excess revenue to tax cuts, even when there might be more pressing matters .

What does the trigger mean for the state budget?

The tax trigger creates a situation where the state will ultimately be forced to keep spending at or relatively close to current levels, even if there are increased needs.

The initial wave of tax cuts was already estimated to remove $750 million in revenue from the state. And if the tax trigger does fully eliminate the income tax in the future the state will be taking almost $2 billion in personal income tax revenue off of the table, with no dedicated source to replace it. This could give lawmakers a reason not to increase funding for key services like higher education, child care access, and Medicaid, which have already been stretched thin .

“What’s becoming clear now is that the mechanism of the triggers being automatic, like no additional action has to be taken for tax cuts to be triggered, it puts those at the front of the line in front of spending needs,” said Kelly Allen, the executive director of the West Virginia Center on Budget and Policy. “So it doesn’t matter that child care providers are saying that they’re at risk of closing their doors, it doesn’t matter that we are facing down a Medicaid shortfall.”

Similar criticisms have been raised against other states that have recently passed tax triggers. In 2017, the Center on Budget and Policy Priorities noted that income tax cut triggers were becoming increasingly common at the state level, allowing state leaders to gain political popularity for cutting taxes in the future without actually having to deal with the resulting budget issues that could result. The organization has also argued that more broadly, income tax cuts benefit wealthy earners, and “will weaken state revenues by large and growing amounts over time, limiting these states’ ability to maintain support for schools and other vital public services.”

“States nationwide have been on a tax-cutting spree over the past three years coming out of the pandemic and subsequent recovery,” Wesley Tharpe, the organization’s senior advisor for state tax policy, told Mountain State Spotlight last year . “Many of these cuts are extremely costly and benefit houses at the top of the income scale, and West Virginia is really a cornerstone example of this trend.”

Why are lawmakers disagreeing over the trigger after passing it?

The exact impact of the trigger is somewhat unclear. This August will be the first test of whether the state will hit the trigger and what, if any, further tax cuts will result.

“There’s too many variables out there to make a good, firm analysis on the trigger,” Mark Muchow, the deputy secretary of the state Department of Revenue, told lawmakers during interim meetings in April, adding that the state won’t have final numbers until June.

Even so, the trigger has already had a significant impact in the state Capitol. Earlier this year, several key debates over the state budget revolved around the need to keep finances tight for the sake of avoiding any conflict with future tax cuts that could hit in the middle of the year. That push was largely led by Senate Finance Committee Chairman Eric Tarr, R-Putnam, who argued that the state needed to keep spending in check with the trigger on the horizon.

When it comes to the trigger: “we’re going to have a decision to make: Do we go ahead and pay that tax cut out to West Virginians, or do you postpone it?” Tarr told West Virginia Watch last month. “If we hit that trigger, I’m not inclined to say ‘no’ to giving a tax cut we promised.”

Tarr did not respond to emailed questions about the income tax trigger and if the issue should be revisited in a future special session, as some lawmakers floated earlier this year.

But other state officials, including the governor, haven’t been as cautious.

“Let’s do it again,” Gov. Jim Justice said last month , calling for additional tax cuts. “I mean, let’s just keep doing it. The more money we put in the hands of our people — it’s their money in the first place — but the more money that we put in the hands of our people, the better things happen.”

With so much uncertainty around the potential impact of cutting the personal income tax — which contributes roughly 40% of the state budget, there’s concern that the state might be digging itself into a hole that will be tough to escape. If that happens, it will be after Justice leaves office early next year. The governor, who is term-limited, just secured the Republican nomination for U.S. Senate running on a platform that includes his state income tax cuts.

Are tax cuts coming? It’s complicated. Here’s how West Virginia’s income tax trigger works, and why it’s causing confusion appeared first on Mountain State Spotlight , West Virginia's civic newsroom.