The
tremors that shook California last week were mere teacup
rattlers compared to the earthquake that buckled the
political landscape in Richmond Friday. If you relied
upon the political seismographs of Virginia's Mainstream
Media, you might not
have noticed the shifting of the tectonic plates. But the aftershock will reverberate
through November's House of Delegates election and well
into the 2006 General Assembly.
The
Washington Post buried the 12-paragraph story,
"Virginia Tax Revenue Outpacing Forecast," on
page B-4 Friday. While The Richmond Times-Dispatch gave
front-page coverage to Rep. Robert C. Scott paying off
some $80,000 in credit card debt, it apparently
overlooked the testimony
of John M. Bennett, the state's finance secretary, to
the Senate Finance Committee. I couldn't find news
coverage anywhere in Friday's newspaper or on the T-D's
website.
But
here in the Bacon's Rebellion insurgency command
bunker, it's very big news when the
Warner administration's budgetary point man acknowledges
that, for 11 of 12 months of the current fiscal year,
state revenues are running 15.2 percent ahead of last
year -- and 4.9 percent ahead of forecasts.
There
are two reasons why the Incredible Expanding Budget
Surplus is very big news. The first is that it vitiates
the justification for the $1.4 billion in tax increases
passed in 2004 by the General Assembly at the behest of
Gov. Mark R. Warner. The second is that it induces a
healthy skepticism of the long-term forecasts that
Senate Finance Chair John H. Chichester is using to
justify another tax increase to fund expanded
transportation spending.
The
Warner administration, as you may recall, had done a
creditable job of handling Virginia's financial affairs
through the recent recession. Warner, Bennett and the
rest of his financial team acted quickly and
aggressively to stem the rising tide of red ink, and
they reformed accounting systems, especially in the Virginia
Department of Transportation, to give a much more
accurate picture of how revenues and expenses were
matching up. If Warner
had topped off those achievements by completing the nitty-gritty work of cutting costs by streamlining government,
he could have completed his term as governor
as an hero indisputably worthy of national office. But he
didn't. He chose to expend his political capital on
increasing taxes--taxes that we now know we didn't need.
Although
the budgetary situation had stabilized by late 2003 and
early 2004, Warner and Chichester raised the specter of
a looming, long-term "structural budget deficit." Revenue
increases from economic growth, they argued, would prove
insufficient to cover the state's pressing needs in
education, Medicaid, transportation, mental health,
etc.
I
didn't buy their logic. As I wrote in "The
Horror! The Horror!" back in February 2004:
Thanks
to stronger-than-forecast economic growth, Virginia
will carry over a larger surplus and have a broader tax
base than forecast ... [in Warner's] proposed 2005-2006
budget.
...
The
Warner administration based the current, fiscal 2004
budget on the assumption that General Fund revenues
would grow by 4.6 percent. According to the secretary of
finance’s December
2003 monthly revenue report, the administration now
is projecting 6.7 percent revenue growth. That means
Virginia is on track to run up a surplus of approximately $250
million this year.
Secretary
of Finance John Bennett has built equally conservative
assumptions into his budget forecasts for General Fund
revenues for the next two years. Under a no-tax-increase
scenario, revenue growth looks like this:
Fiscal
2005 – 5.3 %
Fiscal
2006 – 5.1 %
These
rates of growth represent a deceleration from this
year’s growth, even though Virginia, like the nation as a whole, is in the expansionary phase
of the business cycle. These estimates also are much
lower than rates Virginia
experienced during the last economic expansion, which
reached levels -- admittedly unlikely to be
repeated -- of 14.7 percent in 1999 and 11 percent in
2000.
However,
there is a good chance of seeing better-than-anticipated
revenue growth in 2005. In just the past month,
economists have revised their growth forecasts sharply
upward. The Warner budget for fiscal 2005 is predicated
on real growth in domestic product of 3.8 percent. The
Conference Board Economic Forecast has projected that U.S.
growth could reach 5.7 percent this calendar year, which
overlaps six months with Virginia
’s fiscal 2005.
In
a $12 billion budget, every extra percentage point of
revenue growth translates into $120 million. If the
Warner administration has underestimated near-term
economic growth –- based as it was on now-obsolete
information -- Virginia could run up hundreds of millions of dollars in
unbudgeted revenues over the next two years.
Please
forgive me for quoting myself at such length, but I do
believe that I have been totally vindicated by events
and, therefore, write with some credibility on the
topic. If anything, I was too tempered in my criticism: The gusher of
black ink was even more bountiful than I had dared
predict.
The
foreseeable result of these surging revenues was a
massive budget surplus this fiscal year. On
the eve of the 2005 General Assembly session, the
ballooning size
of the surplus was evident to all. By December 2004, Warner
was forecasting that FY 2004 revenues would exceed
the budget by $918.7 million. He neglected to mention that those additional revenues exceeded the roughly $700
million a year in revenues that the new taxes were
expected to yield on an ongoing basis, and that he could
have financed his entire spending plan, including the
goal of pumping hundreds of millions of dollars into
education, simply by leaving well enough alone.
To
his credit Warner did not funnel the funds into expanded programs, but used them mainly to eliminate jinky
budgetary practices left over from the recession years,
and to fund mainly one-time expenses, primarily in
transportation. The General Assembly, for the most part,
went along.
But
it seems that Warner's bean counters have underestimated
revenues yet again, meaning that, even after spending
nearly an extra billion extra dollars this year, the
Commonwealth still will be floating in surplus funds in
June when the 2005 fiscal year ends. Further, it is
predictable that, although this year's 15 percent
revenue growth is not sustainable, revenues still will
come in way ahead of Bennett's conservative forecast for 2006.
The
surplus is massive -- equivalent to a year's worth of
the kind of modest economic growth that Bennett was
plugging into his budget models back in 2004. When
Bennett closes the books on FY 2005, Virginia will have
pulled in more revenue than he had forecast for FY 2006!
Even if revenue growth slows from its torrid pace, as
surely it must, it still will be faster than Bennett was
assuming when he was supplying the numbers and charts
that Warner used to scare legislators and public into
passing the tax increase.
For
that and other reasons, I would argue that the
structural budget deficit of Warner's fears now has
become a structural surplus. In fact, economic
growth has been so strong that Virginia would be
enjoying chronic budget surpluses even if it had never
passed the $1.4 billion biennial tax increase at all.
This
new fiscal reality should have far-reaching political
repercussions. Luckily for a half dozen Republican House
of Delegates incumbents who faced challenges from the
low-tax wing of the GOP, the news of the Incredible
Expanding Budgetary Surplus did not surface until after
the primary elections. Had the news broken a couple of
weeks earlier, the challengers surely would have used it
to flagellate the incumbents who'd broken ranks with the
GOP House leadership and capitulated on the 2004 tax
hike.
As
it is, the Incredible Expanding Budget Surplus is so
huge that it cannot be swept under the rug. It will
generate big headlines in June when the state closes out
its books. Most GOP candidates can use that surplus to
flay Gov. Warner and his Democratic allies running for
election in the House. The facts have shifted so
strongly in favor of the low-tax movement that we
actually may see a revival of discussion about which
taxes need cutting.
The
Incredible Expanding Budget Surplus also undercuts those
who want to raise taxes in 2006 to pay for more road and
transit projects. The case for increasing taxes is built
on two long-term projections.
One
widely
disseminated chart projects that highway maintenance
costs are increasing at such a rapid rate that there
will be no state funds--not one dime--left over for new
road construction by 2019. Indeed, maintenance costs are
projected to start eating into federal highway
construction dollars
allocated to Virginia.
Now,
I don't know who generated these numbers or who prepared
this chart. But the Virginia public may be forgiven if,
after witnessing the difficulty of the Warner
administration had in forecasting General Fund revenues
one year out, it mistrusts a chart forecasting fiscal
calamity 15 years out. Such forecasts are
essentially political
documents embedded with unstated assumptions and fine
print designed to make the case for higher taxes.
The
other long-term projection is the VTrans2025
study of Virginia's transportation needs for the
next 20 years. Page 14 of this report asserts that
Virginia faces $108 billion in "unmet
transportation needs" -- mostly highway and public
transport projects which cannot be funded from currently
existing revenue sources. Proponents of a tax increase
have bandied about this number uncritically
and, to this point, no one in the low-tax movement has
seen fit to question it.
But
such numbers are based on econometric models loaded with
assumptions that are never made public. Among those
assumptions are projections of population growth,
economic growth and driving habits. Again, given the administration's
dismal track record in projecting
budget revenues one year out, the public can be forgiven
if it treats 20-year forecasts of complex demographic
and economic phenomenon with a soupcon of suspicion.
I
would humbly suggest that Gov. Warner needs to spend
less time leading the National Governors Association
and thinking about his bid for the United States
presidency, and more time tending to developments back
home. If he doesn't do some fancy maneuvering, he may
find that the signature accomplishment of his term--the
2004 tax hike--will be repudiated shortly after his
departure from office in January 2006.
I
also would caution Sen. Chichester and his allies in the
state senate. It may be two more years before they face
the wrath of Virginia voters in another election. But if
they press for another massive tax increase on top of
the 2004 levies and two years of enormous surpluses,
their credibility will be shredded. There will be
electoral payback.
Apologists
for an ever-growing government will do their best to
change the subject away from the flawed budgetary
projections by reciting the usual litany of unmet needs, from
underpaid teachers to inadequate mental health
facilities. Some of these concerns are legitimate, and
there are ways to address them, which I will enumerate
in future columns. But the case is building that the
General Assembly should give taxpayers their money back.
The Incredible Expanding Budget
Surplus has decisively altered the terms of political
debate.
--
June 20, 2005
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