Tax refunds hurt state revenue numbers
CHARLESTON, W.Va. - When economic times are good, income tax revenue flows into state coffers, accounting for about a third of its budget.
When times are tougher than expected, citizens get larger refunds and the state budget can seem leaky.
Such is the case for West Virginia this year: The state paid more than $45 million in tax refunds in March, compared to a little less than $29 million during the same month last year.
That certainly doesn't help when the state is already looking at a nearly $50 million revenue shortfall for the current budget year, according to a report released Monday.
After judging last year's tax refund payments, the state expected to hand out about $32 million this year.
"We were looking for an increase of about 10 percent. What we got was a 57 to 58 percent increase," said Mark Muchow, deputy revenue secretary for the state.
Muchow attributed the increase to a national trend toward larger tax refunds but also to struggles in the energy sector.
Last budget year the state paid $223 million in tax refunds and received $203 million in taxes owed as returns were filed, Muchow said. This year the state already has paid $159 million and received only $91 million.
While the state expects more money to come in from returns filed in April and May, Muchow said the numbers so far dwarf those of the past.
"In early 1990s, we'd probably pay out $50 to $60 million in an entire year," Muchow said.
More people are structuring their income tax payments throughout the year so that they receive larger refunds, but Muchow explained that many more businesses are structured so that their taxes are paid at an individual income tax level.
Called a "pass-through" structure, Muchow said it was far less common and more complicated to set up in the past.
"The use of pass-through entities has grown throughout the U.S. It's a national phenomenon," Muchow said.
As for the energy sector, he said a drop in production led employees to qualify for larger refunds.
It also led to a significant drop in severance tax collections, which remains the largest factor in the state's revenue hole.
The state has collected more than $49 million less than it had anticipated since the fiscal year started last July 1, according to the revenue collection report for March.
Severance tax collections actually were up $5.5 million during the month, but they still lag $34 million behind expectations for the year so far and $53 million behind what the state had collected by this time last year.
For March, collections were $14.2 million lower than expected. That falls within the 15 percent deficit the state has being experiencing in recent months, Muchow said.
He attributed the bulk of the monthly deficit to personal income tax collections. The state anticipated receiving $122.7 million in personal income tax revenue but actually collected $106.7 million.
The corporate income/business franchise tax remains the sole bright spot for the state, consistently coming in ahead of projections. The state collected $3.5 million more than expected from the tax in March, bringing total collections to $13.3 million more than anticipated for the year so far.
Collections for the tax are up $52.5 million compared to this point last year.
Last month Gov. Earl Ray Tomblin announced he was instituting a hiring freeze for the remainder of the budget year to help offset the revenue gap. Muchow said Monday any savings from the freeze wouldn't be realized until closer to the June 30 end of the budget year.