Day four of the special legislative session on the West Virginia budget was marked by a rare Senate floor speech by Gov. Jim Justice.
The speech was intended to garner support for a Justice/Senate compromise plan that would raise sales taxes but lower income tax rates, while the House of Delegates intensified its pushback on including income tax cuts as part of any plan to close revenue shortfalls in the 2017-18 state budget.
Tuesday evening, Senate Democrats joined in that pushback, with an amendment to exclude the income tax cuts from the compromise revenue measure (Senate Bill 1007) — an amendment that was rejected 18-12 on a largely party-line vote.
Senate Minority Leader Roman Prezioso, D-Marion, urged support for the amendment, which would have eliminated income taxes on social security benefits, amounting to a $90 million tax break for retirees. Prezioso said House Republicans will not accept any revenue plan that includes cutting the income tax rates.
“It’s a nonstarter,” he said. “This at least gives them an option.”
The Senate passed the revenue plan on a 19-11 vote, with four members absent — down from a 32-1 margin of approval for a similar proposal passed on May 5, a bill that was summarily rejected by the House hours later.
With a similar fate likely awaiting the new version of the revenue plan when the House reconvenes this morning, there were discussions Tuesday of recessing the session until May 30 to allow House and Senate finance committees to continue negotiations.
The special session resumed Monday after a 10-day recess for negotiations intended to break the impasse between the House and Senate.
Before passage of the revenue plan, Justice addressed the Senate in an impromptu early evening appearance to urge support for the compromise.
“Do your job and do it well,” the governor said, “because today is a day of opportunity in West Virginia that is beyond belief.”
He reiterated his belief that the alternative involves severe cuts to human services, higher and public education, and other state programs.
Justice suggested that, with cooperation between the House and Senate, the budget impasse and the state’s revenue shortfall could be resolved with a fairy-tale ending: “The dead-last state in its darkest time could come up with a plan that’s just this good.”
House leadership, meanwhile, upped its call for “simplification” of the budget process by addressing income tax cuts separately, a position driven home Tuesday in the House Finance Committee.
Analysts from the Public Resource Advisory Group, an independent financial advisory firm, warned the committee that bond rating agencies would not look kindly on the proposed cuts of $360 million a year in state income tax rates, if those cuts create new budget shortfalls in future years, as projected.
“Any time a state or local government is in financial difficulty, there is some risk in restructuring its revenue,” Tom Huestis, senior managing director, said in a conference call. “Specifically with income tax, that’s something that is looked at as a strong revenue for the state.”
He said the three major bond rating agencies look at a number of factors when setting bond ratings.
“One of the largest factors is the operating budget and structural balance,” he said, adding, “They’re looking to see that you’re making progress matching ongoing revenues with ongoing expenses.”
He said rating agencies would want proof that there is new revenue or economic growth to replace the lost income tax revenue, stating, “How would the state say it is going to be able to fill these gaps — what’s the plan?”
In the past year, all three major rating agencies have downgraded West Virginia’s bond rating, citing a growing and ongoing structural imbalance between state revenue and expenses, resulting in large annual budget shortfalls.
Additional downgrades could cost the state millions in higher interest payments as the Legislature considers Justice’s plan to sell up to $2.8 billion in infrastructure bonds to finance more than 460 road-building projects statewide.
Afterward, House Finance Chairman Eric Nelson, R-Kanawha, said it was critical to get PRAG’s perspective on the impact of the proposed income tax cuts.
“They have worked with us on all our bond issues, and they fully understand our financial situation,” he said, adding that the analysts recognize that budget deficits caused by the income tax cuts, “could have a very negative effect on our state.”
Nelson said he supports studying income tax reform, but said it is “very problematic” to include it as part of the plan to balance the 2017-18 budget.
“We can’t have too many messages coming at the same time,” he said.
The Legislature will reconvene for a fifth day in special session this morning. Each day in session costs approximately $35,000.