1 Secretary Robert S. Kiss Governor Earl Ray TomblinW E S T V I R G I N I A DEPARTMENT OF REVENUE Fiscal Forecast – FY 2017 DEPUTY REVENUE SECRETARY MARK B. MUCHOW West Virginia Economic Development Council January 27, 2016 Secretary Robert S. Kiss Governor Earl Ray Tomblin

2 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U EReal Gross Domestic Product Growth in U.S. Recovery in November 2015 Forecast – IHS Economics Base Pessimistic Optimistic Recovery Stalls Recovery Reignite % 1.6% 1.8% % 0.6% 4.1% % 2.5% 4.0% % 2.4% 3.6% % 2.4% 3.6% W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

3 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

4 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

5 Little or No Revenue Growth in FY2013-2014The West Virginia Fiscal Picture as of August 2013 – Retrospective Look Little or No Revenue Growth in FY Coal Mining in decline; Will Gas pick up slack? Foreign Exports key to growth – Declining in 2013 Baby Boomers now becoming senior citizens Transfer Payments growing Teacher Retirement System: Only 20 More Years Funding with 10%+ of Total General Revenue Workers’ Compensation Solvent by CY2016?

6 West Virginia Non-Manufacturing Good Exports Down 74% Since 2012 Trailing 12 Month Trend: November 2015 Source: U.S. Census Bureau Metallurgical coal exports continue to decline Weak international growth Competition from other markets: Australia Rising Relative Value of U.S. Dollar: Exchange rate indexes 15% to 20% above 2009 index W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

7 West Virginia Manufacturing Good Exports Up 4% Since 2012; Down 7% Last Year Trailing 12 Month Trend: November 2015 Source: U.S. Census Bureau Manufacturing Exports up 4% since 2012 Increasing value of the U.S $ & sluggish growth in foreign markets W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

8 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U EWest Virginia Electric Power Generation: Down 9.2% YTD in 2015 & 22.4% Below 2007 Source: U.S. DOE, Energy Information Administration WV Generation Down 9.2% YTD: In-State sales up 1.4% - exports – 55% W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

9 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U ENatural Gas Share of Electric Power Generation Rises at Expense of Coal as Natural Gas Prices Plummet Sources: U.S. DOE Energy Information Administration & WV Tax Return Data Price index peaks at 1.36 in March 2014 Share of coal-natural gas electric power generation attributable to natural gas is 39% in January 2013 Share falls to 35% as of February 2014 Price index falls to 0.28 in September 2015 Share of electric power generation attributable to natural gas rises to 53% in October 2015 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

10 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U EState Severance Tax Collection Trends Regular Tax on Gross Receipts Net of Local Tax Distributions Regular severance tax is based on gross receipts YTD-December down 33% Coal severance is down 26% Natural gas is down 41% Oil is down 58% & Other down 50% W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

11 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U EUnit Severance Tax Collection Trends Coal 56 cents per ton; Natural Gas 4.7 cents per Mcf WC severance tax is based on unit sales not price YTD-December up 1.1% Coal severance is down 18% Natural gas is up 25% W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

12 The Role of Exported Taxes in Government FinanceExamples of Exported Tax Revenues Out-of-State Tourists (Racetrack Video Lottery, Ski Industry, Whitewater) Coal Industry exports to other states and countries Natural Gas exports to other states and countries Electric Power Generation exports to other states Cigarette Sales to Out-of-State Residents Racetrack video lottery down nearly 50% since 2007 Coal industry exports to other states and countries falling from 80% + to less than 75% Electric power exports falling from 70% to 55% The Role of Exported Taxes in Government Finance W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

13 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U EExported Taxes: A Contributing Factor Toward Lower Than Average Individual Tax Burden In West Virginia Estimated Tax Burdens By Income Level: Non-Elderly Source: Institute on Taxation & Economic Policy: Who Pays? A Distributional Analysis of the Tax Systems in All 50 States January 2015 Institute on Taxation & Economic Policy 1/2015 Top 1% faces higher than average tax burden Next 19% faces tax burden near average Next 80% faces a lower than average tax burden Gap widens for lower income cohorts WV ranked 10th least regressive among 50 states and DC in the country W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

14 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

15 Closing FY2016 Budget Shortfall ($’s in Thousands)State of West Virginia Closing FY2016 Budget Shortfall ($’s in Thousands) FY 2016 How the Budget Gap is Closed (in thousands) FY 2016 Budget Gap @ 12/31/15 (381,039) $ General Revenue - End PIT funding of Old Fund as of 1/31/16 (OPEB begins FY17) 53,000 General Revenue - End Port Authority Revenue Transfers (2 payments remaining) 2,150 General Revenue - Increase Cigarette Excise Tax rate to $1.00/pack (April 1st) 17,400 General Revenue - Increase Other Tobacco Products Tax rate to 12% (currently 7%) 1,100 General Revenue - Impose a 7.5 cent per milliliter Tax on Electronic Cigarettes 400 General Revenue - Impose Sales Tax on Telecommunications Services (6%) 10,000 General Revenue - Continue Severance related WC unit taxes (4 months) 39,000 General Revenue - Use of current unappropriated surplus balance 250 Expire Special Revenue excess cash 33,400 Move GR Medicaid to FY16 Regular Lottery (balance from previous FYs) 9,810 Move GR Medicaid to FY16 Excess Lottery (balance from previous FYs) 8,090 Expire Regular Lottery Surplus (due to "modernization" change) to General Revenue 15,200 Move GR Medicaid to FY16 Excess Lottery (FY16 unappropriated balance) 2,000 Move GR FY16 Medicaid to FY17 Regular Lottery (FY16's anticipated surplus) 5,000 Move GR FY16 Medicaid to FY17 Regular Lottery Surplus (due to "modernization" change) 9,000 Move GR FY16 Medicaid to FY17 Excess Lottery (FY16's anticipated surplus) 20,000 Don’t appropriate FY16's General Revenue current unappropriated balance 9,136 FY16 Mid-Year Cut 94,318 Rainy Day 51,800 Estimated FY 2016 Budget Surplus after 6/30/16 15 1 15

16 Closing FY 2017 Budget Gap ($’s in Thousands)16

17 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U EState and Local Government Expenditures 2013 Source: U.S. Census Bureau Higher Education (FY 2013): WV per capita support 14% above average 43% above average as share of income 7% allocation in WV versus 5.8% average K-12 Education (FY2013) WV ranks 20th in per pupil spending WV ranks 13th in state funding per pupil WV ranks 5th in funding as share of income 29% above national average- income share Highways (FY2013) WV spends 26% more per capita than average WV spends only 90 cents per road mile W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

18 Share of Full-Time Equivalent Employees by Function7/31/2005 Versus 12/31/ (37,711 FTE; 15,851 General/Lottery) : 2,066 new FTE – 5.8% growth over 10 years 1,810 in higher education/technical colleges – 88% of total growth 394 in Corrections – 19% of growth 261 in Judicial – 13% of growth W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

19 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U ERich County & Poor County Governments in 2015 Natural Resources Play Major Role in Property Tax Yield County Per Capita Tax Yield 2015 (E rate) Average Annual Growth Per Capita Property Tax Rank in 2015 Voter Imposed Tax Rate Share Exclude City Per Capita Personal Income Rank 2013 Rich County Wetzel $898 16.3% 1 42% 20 Doddridge $845 14.9% 2 45% 54 Marshall $812 12.3% 3 43% 4 Monongalia $330 6.0% 16 37% 7 Poor County Berkeley $236 4.1% 38 46% 26 Cabell $230 3.2% 41 50% 11 Wood $223 1.2% 42 41% 13 Mercer $179 2.7% 52 40% 21 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

20 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U ECoal Severance Tax Distributions to Boone County Based on Production Share: Year Ending in July W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

21 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U ECounty Share of Gas & Oil Severance Tax Distribution Two-Thirds of $11.9 Million to Four Counties W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

22 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U EWV Ranks 29th Highest in Population Density Source: U.S. Census Bureau 2010 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

23 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U ERural Counties Versus Metro Counties Source: U.S. Department of Agriculture Employment Growth (2Q 2010 to 2Q 2014): Urban employment up 5.0% Rural employment: up 1.1% Most growth in oil & gas extraction counties (3%/year) : Rural employment fell 2% Labor Force Participation Declining ( ): Urban from 65.2% to 63.2% Rural: from 62.2% to 60.6% [52.8% in WV] Population Growth (15% live in Rural Areas [40% in WV]): 61% of all non-metro counties lost population between Falling birth rates and aging population = near 0% natural growth rate Net decline for all rural areas lessened by energy boom counties (ND, MT) Education Attainment: Share of population with at least 4 year college degree Urban areas: 32% Rural Areas: 18% [18.3% in WV vs 28.8% for U.S.] Greater growth in counties with better education “Many young adults leave rural areas to attend college, and many of these people remain in urban areas after college due to the higher earnings available to them in those areas.” WV 3rd highest share of residents living in rural areas Maine & Vermont Only 15% in Texas, 25% in Virginia W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

24 W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

25 Fiscal Outlook SummaryTax revenues expected to decline in FY2016 Modest recovery in FY2017 Energy prices gradually recover to levels significantly below recent historical averages Multi-year reconciliation of government service demand with taxpayer willingness to pay is underway Expect less fiscal support from the federal government over time States with strong local government partners likely to fair best in the future West Virginia hampered by real property tax limitations Home rule seems to be gaining momentum Will government service share responsibility increase at the local level? W E S T V I R G I N I A D E P A R T M E N T O F R E V E N U E

26 DEPARTMENT OF REVENUE Questions? W E S T V I R G I N I AMark B. Muchow | Deputy Secretary of Revenue | |