When you run for governor in Virginia, you have to make promises, and when you make promises, the only ones that cut through the media clutter are vows to cut taxes or launch expansive new spending programs.
Thus, this year, Republican candidate Ed Gillespie has rolled out a plan to cut taxes by $1.25 billion (assuming tax-revenue forecasts allow it), Democrat Ralph Northam proposes to eliminate the sales tax on groceries at a cost of $500 million, Republic Corey Stewart pledges to abolish the income tax entirely, and Democrat Tom Perriello has touted spending proposals that would jack up spending by $1 billion. Republican Frank Wagner wants to ramp up transportation spending, but he at least proposes a gasoline tax increase to pay for it.
Amidst all these promises, Standard & Poor’s Global Ratings has issued a sobering warning. While the firm affirmed Virginia’s AAA bond rating, it has dialed back its outlook from “stable” to “negative,” writes Jeff Schapiro in the Richmond Times-Dispatch.
Schapiro paraphrases Secretary of Finance Ric Brown as saying:
S&P is worried about two things, both of which are inextricably bound: the cash cushion the state maintains against a reversal in the economy and doubts about Trump-era federal spending, which would significantly increase defense spending — and Virginia’s nagging dependence on D.C.
S&P cited the big withdrawal — about $600 million — from the so-called rainy day fund that Gov. Terry McAuliffe, a Democrat, and the legislature used to help close a $1.5 billion hole in the budget attributed to sequestration.
With a balance in the emergency account of only $281 million, the credit agency views “this as a low level of reserves relative to similarly rated peers and a situation which could weaken the commonwealth’s ability to respond to economic and financial downturns in the future,” said Brown.
Concern about the draw-down of the rainy day fund is easy enough to understand. Less comprehensible is S&P’s worries about the Trump budget, which includes a proposed $50 billion in increased defense spending. The budget may or may not be good for the nation (we can debate that another time), but it would be unquestionably good for Northern Virginia’s and Hampton Roads’ defense-heavy economies.
Whatever… S&P has its reasons. And state legislators are paying attention. When Schapiro asked Chris Jones, R-Suffolk, chairman of the House Appropriations Committee, if tax cuts and spending hikes are justified, he replied: “From my perspective, I have an obligation to the commonwealth to have a structurally balanced budget that is conservative and prudent.” In other words, Jones is extremely cautious regarding any big spending and tax-cutting plans.
Update: In a statement released today, Gillespie is using Standard & Poor’s announcement to double down on his tax plan. He regards his 10% across-the-board cut to state income tax rates as part of the tonic — along with changes to education and workforce training, regulatory reform and a new approach to economic development — needed to “spark the natural, organic economic growth our Commonwealth needs.”
I still like Gillespie’s tax plan, but spending pressure from Medicaid, K-12 schools, higher-ed, mental health and other sources is not abating. The news from S&P reduces Virginia’s margin for error.