CHARLESTON, W.Va. -- West Virginia is one of 22 states citing increasing costs of Medicaid as the top budget challenge facing it in the 2012-13 budget year, according to the National Conference of State Legislatures' new update on state budgets.

Additionally, eight states cite increased Medicaid spending as the second-biggest budget challenge, while three states listed it third among budget issues, according to the NCSL report to be released Tuesday.

For West Virginia, the state's share of Medicaid costs will increase by about $80 million in the current budget year, a result of reduced federal matching funds and increased costs for health-care services.

West Virginia is also one of several states trying to determine whether it can afford to expand Medicaid coverage to families with incomes up to 133 percent of the federal poverty level, an option under the federal Affordable Care Act.

The report, "State Budget Update: Summer 2012," also projected that state tax revenues will grow at a rate of 1.1 percent for the budget year, below the national average of 3.7 percent, and that West Virginia will be one of six states to reduce state spending compared to its 2011-12 budget, by 3.2 percent.

Deputy Revenue Secretary Mark Muchow said Monday the slow growth in revenue is the result of a combination of tax cuts, and slowdowns in major revenue sources.

"A good part of it is technical, related to the Lottery's downturn, and related to what's going on in the energy sector, and also related to the phase-down on the sales tax on food," he said.

For budgeting purposes, state Lottery profits are counted as general revenue, and Muchow said competition from casinos in Ohio, Pennsylvania and Maryland is projected to cut Lottery profits by $35 million in 2012-13, amounting to nearly a 1 percent cut in the overall budget.

Likewise, severance tax collections, which had grown $160 million in the past seven years, are projected to decline slightly, he said.

"We have lower energy prices with natural gas, and less demand for coal," Muchow said.

Meanwhile, sales-tax collections are expected to be flat, primarily because of a drop in the sales tax on food from 3 percent to 1 percent that will save consumers more than $50 million in tax payments this year.

Among top budget strengths, the West Virginia's reserve funds, or Rainy Day, remain among the strongest in the nation, according to the NCSL report.

West Virginia finished the 2012 budget year with a reserve equal to 34.1 percent of its general revenue collections, ranking fourth overall, and making it one of only 10 states to have more than 10 percent of general revenue funds in reserve. The national average is 7 percent, according to the report.

Reach Phil Kabler at ph...@wvgazette.com or 304-348-1220.