West Virginia University may soon feel the heat of the alarming budget shortfall the state is experiencing, largely due to market forces at work in the energy sector coupled with tax cuts made nearly a decade ago.

In October of last year, Governor Earl Ray Tomblin announced a 4 percent budget cut across-the-board for all state agencies—which includes West Virginia University—due to an unexpected drop in the state’s severance tax collections.

A severance tax is a tax imposed on the removal of nonrenewable resources and is imposed on the producer of the operations in the imposing state. Both the coal industry and natural gas industry pay a 5 percent rate in the state of West Virginia.

While it’s widely known that the southern coalfields of West Virginia are in an economic free fall—and are a large contributor to the state’s financial woes—the hidden economic downfall at work comes from the rising production of natural gas, coupled with its low price.

"A lot of what has happened—not just in West Virginia, but other states, and of course what’s going on globally with the oil market—it does seem to be an over-abundance of natural gas produced, which is grinding prices down and resulting in these budgetary problems," said Sean O’Leary, senior policy analyst for the West Virginia Center on Budget and Policy.

One of the main reasons behind the past year’s budget shortfall was the miscalculation of severance tax revenues that would flow from the natural gas industry.

"The price of natural gas has declined, and the severance tax that we get from natural gas is based on the price," said Rob Alsop, vice president of legal, governmental and entrepreneurial engagement for WVU. "So while the amount of gas that has been produced has grown, the price has sort of gone down so it’s intersected - the amount of revenue has not increased to outpace the decline in coal production."

However for West Virginia, this is nothing new. The budget has seen a shortfall for several years now, but according to O’Leary this repeated occurrence is the result of a series of tax cuts made about a decade ago.

"We’ve had budget shortfalls for several years now and those can be tied directly to a series of tax cuts that we passed back in 2006 and 2007," O’Leary said.

From 2007-14, the Corporate Net Income tax rate was cut from 9 percent to 6.5 percent. From 2007-15 the business franchise tax rate was cut from 0.7 percent to 0 percent, which resulted in $219 million per year in lost revenue, according to O’Leary.

During the same time period, the sales tax on groceries was cut from 6 percent to 0 percent, which cost the state $162 million a year once it was fully phased out in 2015, and there were also a number of smaller reductions to business and personal income taxes which cost the state roughly $44 million per year.

"When you add all those tax cuts up, that’s $400-425 million per year in lost revenue, and that’s directly tied to our recent budget problems," O’Leary said.

Around the same time these tax cuts were made, the natural gas industry began to soar. The state began seeing a surplus of severance tax revenue from the industry, which hid the loss of revenue from the imposed tax cuts. The more recent decline in price in natural gas prices has revealed their weight on the budget.

"When the price of natural gas collapsed, it blew a huge hole in the budget and we had nothing to fall back on since we were relying heavily on the severance tax," O’Leary said. "When that happens, you make yourself very vulnerable to the swings of the energy market."

This budget shortfall is expected to affect the University, yet it remains to be seen how the financial division will cope.

The upcoming West Virginia University Board of Governors meeting will be held on Thursday, Feb. 18. It is anticipated that they will discuss ways to handle the state agencies cut being imposed for this budget year.