With West Virginia’s creation in 1863, the question arose as to the new state’s responsibility to help pay the existing Virginia state debt. The founders of West Virginia recognized that their state owed a share of Virginia's pre-1863 public debt, in compensation for improvements made in the counties that now made up in the new state. The repayment obligation was specifically included in the West Virginia constitution of 1863 and, indirectly, in the constitution of 1872.

Determining the amount to be paid was much more difficult than recognizing the obligation to pay. The issue quickly became a political matter as Virginia and West Virginia also argued over the inclusion of Berkeley and Jefferson counties in the new state. After Virginia sued to have the two counties returned to Virginia, West Virginia officials hardened their attitude about the size of the debt owed to Virginia. Many different figures were suggested, with West Virginia's calculations resulting in a smaller debt, while Virginia authorities claimed much larger sums as due from West Virginia.

The argument dragged out, without resolution, throughout the 1800s. Though the issue was politically unpopular, West Virginia state officials desired to settle the matter to improve West Virginia's bond rating in order to fund much needed new public works in the state. The matter finally was resolved in the U.S. Supreme Court, where Virginia won a judgment against West Virginia in 1911. After continued wrangling, it was determined that West Virginia owed nearly $12.4 million as of 1915, with further interest to accrue after that date. The 1919 West Virginia legislature created a Virginia Debt Sinking Fund to sell bonds to pay off Virginia and authorized a tax on general property to retire the debt. The tax raised sufficient funds to retire the debt in 1939.