Gov. Earl Ray Tomblin unveiled a budget plan Wednesday that would close more than $820 million in funding shortfalls in this year’s and next year’s budgets, in part, by raising taxes on tobacco and putting a new tax on telecommunications.
Tomblin’s proposed 2016-17 budget bill does not provide any pay raises for state or public school employees — but would provide a total of $43.5 million for employer premiums for the Public Employees Insurance Agency.
That funding would help alleviate pending severe increases in co-pays, deductibles and other costs for employees insured by the state-managed health care plan, state Revenue Secretary Bob Kiss said.
Kiss said the funds would offset about 80 percent to 90 percent of the planned $120 million in benefit cuts proposed by the PEIA Finance Board — cuts that were called “draconian” by one board member. However, under a required 80-20 split on PEIA premiums, there still would be an $8.7 million increase in employee premiums under the governor’s plan.
“This will allow, for lack of a better term, dodging of the bullet which would have hit at a much greater magnitude,” Kiss said.
State revenue officials blamed a steep decline in exports as a major culprit in a projected $354 million revenue shortfall in the current budget year, followed by a $466 million budget gap in the 2016-17 budget year, which starts July 1.
A series of tax cuts over the past decade also have shrunk state revenue. Legislators have eliminated the business franchise tax and reduced the corporate income tax. Annual revenue from those two taxes dropped $184 million from 2008 to 2014. Also, the sales tax on food was gradually reduced, and then eliminated in 2013, which cost the state $170 million, officials have said.
To close the budget gap, Tomblin proposes two tax increases, along with redirecting portions of existing taxes.
Tomblin is calling for a 45-cent-a-pack increase in cigarette taxes, to $1 a pack, with comparable increases in taxes on other tobacco products, as well as a new tax on the liquids used in electronic cigarettes.
That would raise about $78 million a year, Kiss said. Tomblin’s proposal would make the tax increase effective April 1, which would provide about $18.9 million to help balance the current budget.
While many advocates of a cigarette tax hike proposed a $1-a-pack increase, Kiss said Tomblin was concerned that the higher rate could hurt retail businesses in counties bordering states with lower tobacco taxes.
“One of the things the governor was sensitive to was not to disturb economic activity in the border counties,” Kiss said.
Tomblin also proposed a 6 percent sales tax on telecommunications services, primarily cellphones and landlines, to raise about $60 million a year. The plan is to also start that tax on April 1, providing about $10 million toward the current shortfall.
Kiss said West Virginia is one of about 10 states that do not tax telecommunications services.
“It goes with the tradition of a broad-based sales tax,” he said of the proposal.
Tomblin’s budget plan also would redirect between $53 million and $83 million a year in severance taxes, insurance premium surcharges and income taxes imposed in 2005 to pay down a liability for workers’ compensation benefits.
That liability, left by bankrupt companies that did not pay workers’ compensation premiums, originally was more than $3 billion. It has been reduced to about $92 million.
Tomblin proposed redirecting — and then repealing — special severance taxes on coal, oil and natural gas that raise about $30 million a year for the workers’ compensation fund. Coal industry officials contend that repealing the 56-cent-a-ton tax would help West Virginia coal compete with other coal-producing states.
However, under the law, the tax can’t be repealed until the state can certify that the workers’ compensation liability is fully funded, something Kiss said could occur as early as October or November.
Meanwhile, Tomblin is proposing taking about $51.8 million out of the state’s Rainy Day reserve funds, which currently have a total balance of about $860 million, to balance the current budget. He would not raid the funds to balance the 2016-17 budget.
Overall, Tomblin is proposing a $4.69 billion general-revenue spending plan, which continues all spending cuts imposed in 2013, 2014 and last October.
Budget Office Director Mike McKown said the proposed 2016-17 budget would mark the second straight year that the budget reduced spending — including about a 3 percent cut for the coming fiscal year.
“That’s huge,” McKown said. “Normally, [the budget] grows 3 to 4 percent a year.”
Kiss called Tomblin’s budget plan a “courageous, responsible proposal,” and urged the Legislature to pass it or come up with a comparable alternative that will balance the current and 2016-17 budgets.
“What the administration didn’t do is stick our head in the sand,” Kiss said. “The easy thing to do would have been to say, let somebody else clean it up next year.”
Deputy Revenue Secretary Mark Muchow said a key factor in declining state revenue has been plunging exports. Exports of nonmanufactured goods, primarily coal, have dropped 74 percent since 2012, from $7.5 billion to $1.9 billion.
“Exports are like having rich uncles and rich aunts paying a significant portion of West Virginia government costs,” he said.
Reach Phil Kabler at email@example.com, 304 348-1220 or follow @PhilKabler on Twitter.