West Virginia Finances: Surplus Now, But Future Budget Strains Loom
West Virginia is poised to conclude the fiscal year on June 30 with a budget surplus, but state officials are closely monitoring potential challenges to future tax revenue. Members of the West Virginia Legislature’s Joint Standing Committee on Finance received a comprehensive report Monday on fiscal year 2025 budget matters from Peter Shirley, deputy secretary for the state Department of Revenue, during interim meetings at Stonewall Resort in Lewis County.
As of the end of May, tax collections for the current fiscal year totaled $4.9 billion, exceeding the $4.7 billion estimate by 5%, resulting in a $236.9 million surplus. However, a significant portion of these surplus funds has already been allocated.
According to Shirley, personal income tax collections and the consumer sales and use tax comprise nearly 80% of the state’s total general revenue. Personal income tax revenue surpassed expectations by $92 million, partially attributed to lower-than-anticipated claims for the motor vehicle tangible personal property tax credit.
Despite the current positive outlook, personal income tax revenue growth is projected to slow, decreasing by approximately $85 million, or 4%, from fiscal year 2024 to 2025. This decline is largely due to a series of personal income tax cuts enacted in 2023 and 2025, totaling over 27%.
“I will remind everyone that … is not entirely unexpected as we continue to have personal income tax cuts that took place last year, with the child and dependent care credit and as we continue to phase out Social Security (tax credits),” a senior official stated.
Lawmakers approved a tax reform package in 2023 that reduced personal income tax rates by 21.25%, including a trigger for further cuts. A 4% reduction took effect in January, and an additional 2% cut was implemented during a special session last fall. During that same special session, the legislature delayed the next potential income tax trigger from tax year 2026 to 2027.
The Department of Revenue assesses the possibility of additional tax cuts by comparing general revenue collections (minus severance tax revenue) to fiscal year 2019 levels, adjusted for the consumer price index. While state code allows for a maximum annual cut of 10%, officials currently anticipate no further reductions in the near term. “We don’t think there’s going to be a trigger for next year,” Shirley said.
The Legislature recently passed a balanced budget for fiscal year 2026, initially set at $5.318 billion. Governor Patrick Morrisey subsequently reduced the budget to $5.28 billion through 29 line-item vetoes. This budget will take effect on July 1.
However, the governor’s new revenue team identified a projected $400 million gap between spending and revenue in fiscal year 2026, stemming from the expiration of federal COVID-19 funding and a reliance on one-time revenue sources.
While the fiscal year 2026 budget is balanced, expenses are expected to exceed revenues starting in fiscal year 2027. A major driver of this projected shortfall is the Hope Scholarship program, which will be available to all West Virginia students – public, private, and home-schooled – beginning in fiscal year 2027.
The cost of the Hope Scholarship is projected to increase dramatically, potentially exceeding $300 million annually. The program’s budget for fiscal year 2026 is $110 million, a significant increase from $45 million in the current fiscal year, and could rise by an additional $190 million in fiscal year 2027. “I believe the deadline to apply for that and get full-year funding has recently passed,” Shirley said. “Hopefully, we’ll be able to refine those numbers in the not-too-distant future now that we know what the actual enrollment, at least to receive a full-year scholarship, will be going forward.”
Another significant financial pressure is the Public Employees Insurance Agency (PEIA), which provides healthcare benefits to state employees and those in participating local governments. The PEIA Finance Board recently approved premium increases of 14% for state employees, 16% for local government employees, and 12% for retirees, totaling approximately $113 million.
Furthermore, out-of-pocket maximums for state and local government employees have increased by 40%, and co-pays have also risen. The monthly spousal surcharge, previously set at $147, will increase to $350. Employer administration fees will also see a $2.50 increase. The six-year budget forecast estimates an additional $49 million in employer premiums for PEIA in fiscal year 2027 and $56 million in fiscal year 2028. A special legislative session is being considered this summer to address PEIA’s long-term financial stability. “PEIA is obviously something that there’s a lot of discussions regarding,” Shirley said. “A lot of work is being done to try and think about the long-term future of how we stabilize PEIA.”
These looming financial challenges underscore the need for careful fiscal management as West Virginia navigates a changing economic landscape.
