The Northam Administration’s Top Budget Priorities: Medicaid, Rainy Day Fund

Secretary of Finance Aubrey Layne

The biggest obstacle to enacting a state budget is the disagreement between the Senate and the House of Delegates over Medicaid expansion. But even if legislators could resolve their Medicaid differences tomorrow, Finance Secretary Aubrey Layne said earlier today, they still would have to resolve a $400 million gap over other programs.

The second largest funding disagreement revolves around higher education, Layne told members of the State Council of Higher Education for Virginia at a monthly meeting at Christopher Newport University.

According to data SCHEV distributed at the council meeting, the House Appropriations Committee has budgeted $218.8 million in additional dollars for education over the biennial budget between 2018 and 2020, while the Senate Finance Committee has allocated only $94.7 million in new dollars. Most of the gap can be traced to differences in three areas: funding for the Cyber X cyber-security education initiative, faculty pay raises, and financial aid.

Layne voiced no preference for either the House or Senate higher-ed budgets, but did say that Governor Ralph Northam’s two top priorities are funding the Medicaid expansion and setting aside reserves to bolster Virginia’s precarious AAA bond rating.

While the budget outlook for the current fiscal year, 2017-18, is improving, Layne said he is not willing to bridge the funding gap by assuming stronger revenues for 2018-19. Year-to-date personal income tax revenues are up about 6% this year, considerably ahead of the forecast 3.5%. The federal tax cuts appear to be having a stimulative effect on income. December saw a $200 million revenue jump, but he doesn’t know if that reflects a surge in income or a burst of early payments to take advantage of the state-and-local tax deduction before the new tax law eliminates it.

Other signs are favorable — revenue from the sales tax is up, as is the recordation tax on home sales — but Northam wants to dedicate any surplus funds to building up the state’s rainy-day fund.

The Standard & Poor’s rating agency has given Virginia a negative outlook on its AAA bond rating. “They don’t like to see one-time revenues pay for ongoing expenses,” said Layne. Also, he said, “they like to see bigger financial reserves” — 3% to 8% of revenues. The budget introduced by former Governor Terry McAuliffe put an additional $270 million into the reserve for a more than $100 billion two-year budget. The House budget would do less; the Senate budget would do more than the House’s.

Bottom line: However the economy performs for the rest of the fiscal year, there won’t be any loose purse strings to paper over the differences between the House and Senate versions of the budget.

In other remarks, Layne opined on his philosophical approach to the budget. A big concept in the private sector is “fiduciary responsibility,” said Layne, who had been president of Virginia Beach-based Great Atlantic Management before joining the McAuliffe administration four years ago as secretary of transportation. If he violated the highest standards of care for a client, he could get sued or fired. He applies the concept of fiduciary to his job working for state government. His duty is to the citizens of Virginia.

Virginia citizens are paying federal taxes to pay for the Medicaid expansion enabled by the Affordable Care Act. To live up to his fiduciary responsibility and get that money back, Layne supports expanding Medicaid as allowed by the law. One argument he’s heard against expansion is that the federal government can’t afford the program, it’s going bankrupt. To the contrary, said Layne, the federal share of Medicaid expansion is paid by taxes enacted by the Affordable Care Act. It’s not deficit spending. A second argument he’s heard is that the feds can’t be trusted not to renege on its payments. But that possibility is covered by a codicil in the budget that says if the feds back out, the state can back out of the Medicaid expansion, too.

Layne suggested that there is a serious mismatch between Virginia’s tax base and its spending priorities.

Drawing upon his experience as transportation secretary, he noted that the Commonwealth collects roughly $2.5 billion a year in revenue for transportation. Of that sum, only 20% or so pays for new construction; the rest goes to maintenance and operations. The reliance upon the gasoline tax has eroded the transportation revenue stream. As cars get better gas mileage — and as electric vehicles phase out the internal combustion engines — gasoline consumption and revenues decline. In theory, Virginia could switch to a Vehicle Miles Traveled tax, a true user fee. But that creates privacy concerns. To raise revenue, the state has resorted instead to increasing tolls. Nobody likes tolls, but they are a user fee, and they do expose the true costs of transportation.

Once upon a time, transportation funding did not compete with General Fund priorities. said Layne. Now transportation gets a share of the state sales tax, which puts pressure on priorities like education and health care, both of which are funded through General Fund revenues like the sales and income taxes.

What’s the answer? Update the tax structure, which is based upon an 20th-century industrial economy, to one that is based upon a 21st-century knowledge economy. Internet sales are not taxed — although that may change, depending upon an upcoming U.S. Supreme Court ruling. Services are not taxed. Perhaps they should be.

At a broader level, Layne said that Virginia needs to adopt a rigorous approach to formulating the state budget. What kind of services do we need?  What money do we need to fund those services? And where does that money come from? “That’s the kind of analysis that not just us, but the country, will have to go through.”

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8 responses to “The Northam Administration’s Top Budget Priorities: Medicaid, Rainy Day Fund

  1. re: ” Virginia citizens are paying federal taxes to pay for the Medicaid expansion enabled by the Affordable Care Act. To live up to his fiduciary responsibility and get that money back, Layne supports expanding Medicaid as allowed by the law. One argument he’s heard against expansion is that the federal government can’t afford the program, it’s going bankrupt. To the contrary, said Layne, the federal share of Medicaid expansion is paid by taxes enacted by the Affordable Care Act. It’s not deficit spending.”

    This is the truth of the matter.

    If we REALLY wanted to follow the GOP argument – we’d ALSO not take money for defense spending nor transportation.

    It’s total ideological hypocrisy.

    Further – it’s clear – if we don’t take the MedicAid expansion – we do endanger our AAA rating – because as Lane says – ” there is a serious mismatch between Virginia’s tax base and its spending priorities.”

    so this is irresponsible…

    if you don’t want to take the MedicAid expansion – and you are “conservative” what do you do? You cut spending.

    What’s being suggested? ” Update the tax structure, ” … a euphemism for raising taxes… so much for that “Conservative” viewpoint, eh?

    One more time. The Medicaid expansion is NOT funded from general revenues. If the “ideas” is that money is “fungible” and we can’t trust the Feds – then if you are going to be consistent and honest – you’d have to take that same approach for other Federal Funding…

    This is the State of the GOP these days. deficit spending for tax cuts – but no Medicaid expansion because it’s “deficit spending” and we “can’t trust the Feds”.

    The simple way to maintain our AAA and our rainy day fund? Take the Expansion. If it goes away -deal with that issue when it happens – the same way we’d deal with less transportation funding or less DOD funding.

    what is wrong with people? This is not a hard thing!!!

  2. The ability to impose a sales tax on Internet sales should have a tough row to hoe. It’s an incredible burden for a small business to comply with all the state sales tax laws, plus the huge number of local sales taxes. That’s a key reason why SCOTUS has prevented a state from forcing an out-of-state business withhold and remit sales taxes unless it has sufficient contacts with the state. And selling something in interstate commerce is not a significant contact with a state.

    At a bare minimum, Congress would need to require a state to have a single tax rate and uniform set of rules governing taxable sales if it wants to impose sales taxes. I’d go further and require a single set of national rules defining taxable sales. Alternatively, Congress could allow the state where the merchant is located to impose its state tax on interstate sales. That would put more pressure on states to have business friendly climates to attract merchants.

    Congress should also repeal the existing taxes imposed by the AFCA and raise money by limiting the deductibility of compensation for highly paid employees and officers to the percentage of a health care company’s revenues not deriving from government sources. And forcing nonprofits to pay a tax based on the compensation for highly paid employees and officers to the percentage of a health care company’s revenues derived from government sources. Stop crony capitalism and drain the swamp.

  3. “Nobody likes tolls, but they are a user fee, and they do expose the true costs of transportation.”

    The only thing tolls expose is the wallets of Northern Virginians. Tell me again about the extensive improvements to I66 that brought about the tolls on that road? Oh yeah, there were no improvements.

  4. I’m agnostic on the sales tax to a certain degree and I’d rather we have sales taxes than income or property taxes… i.e. a consumption tax..

    sales taxes are how schools fund their needs.. it’s how NoVa get transportation revenues….

    in terms of tolls. If the Feds cut funding from the Federal Gas tax – back to only what it generates – it will roll back on Virginia. Tolls are what happens when people oppose the gas tax but more than that – tolls are now being used to manage congestion – the very same way that the airlines price tickets higher at high demand periods .. the same way that Uber works and gasoline prices…. supply/demand.

    I support them. I think they are actually a better user fee than gas taxes because gas taxes do not adjust according to demand/congestion. You can drive in the middle or rush hour for no more than at 2AM.

  5. The vested interests in the flawed tax system we have will make it very, very hard to improve it. For several decades various administrations and legislative leaders have made noises about giving it a try, bills are put in from time to time, but inertia remains a huge barrier. Virginia has considered and rejected joining the interstate compact that would make it easier to impose an interstate sales tax.

    Every single locality wants to keep every single penny of existing revenue, and every possible local tax – impossible in a broad reform approach. The business groups are divided, with several pushing higher taxes on services in order to lower taxes on property or gross receipts. The recent federal changes create an opportunity to try again, but it is just too easy for the elected folks to kick the can another decade. We’ll see….

    And a minor point, Larry, but drive in the middle of rush hour and you will burn more gasoline covering ground you would cover much more quickly at 2 am – hence paying less gas tax. Works just like a congestion price. It also imposes a higher cost on those monster trucks and SUVs with their higher weights and lower mpg. I am a big fan of that particular user fee, as Bacon’ remembers….but there is also a role for tolls WHEN (to note Rippert’s complaint) they are tied to new roads or bridges or actual upgrades.

    • Steve – the gasoline “penalty” for fuel efficient cars is likely a wash – as rush hour driving you drive much slower and use less fuel.. but you’re there longer.

      in congestion periods, the “bigger” bite is time – that’s more costly that the fuel for many,

      and the point of congestion tolling is to do the same thing that airlines do ,,,, when the demand is high and there is not enough capacity – you convince some to shift their trip – if they can or will.

      It’s not about paying for bridges and roads. That’s a lack of understanding. It’s about NOT having to build more roads and bridges when you don’t have the dollars or right-of-way to do it and that’s a direct result of less and less gas tax revenues. The money to build new roads and bridges is just not there at the current gas tax rates.

      There are three costs to roads – initial construction, operation and maintenance. Right now there is enough money for maintenance and operations – and not near enough for construction and that’s going to get worse because Virginia uses the Fed money for construction and Congress is currently subsidizing the Federal gas tax revenues by half – and they want to go back to level funding which will effectively cut Federal transportation dollars by half.

      Some new bridges and roads ARE funded from tolls but more and more in places like Washington – the tolls are dynamic – to discourage demand at rush hour… You can still drive at rush hour – it’s just going to cost you more – either in time if you use the free lanes or in dollars if you use the toll lanes.

      That’s the big complaint. People don’t like the idea of dynamic tolls at all. But if you ask those same people if we should increase the gas tax by a quarter – they go ape-crap. So the DOTs are doing what they have to do .. and that’s tolling and dynamic tolling.

    • re: exurban solo commuting in the Washington Metro Area.

      Myth #1 – that people are driving “monster” trucks and SUVs.

      Nope.

      there might be a few – but the vast majority of the exurban solo commuters drive smaller more fuel efficient cars – they drive them until they get 100K on them , then they go get a new one for 20K or so.

      These same folks used to drive Hybrids so they could use the HOV lanes.

      DJ may realize this or maybe not since he lives already in NoVa and may not “see” I-95 and I-66 commuting at rush hour morning and afternoons.

      The simple reality is that way too many people want to commute solo from the exurbs at rush hour. If you actually could afford to buy more right-of-way for more free lanes – those lanes would be almost instantly filled up from more folks that would commute solo at rush hour.

      There really is no way to fix this because human behavior – if given a choice – will drive solo to/from work – at rush hour -and we simply do not have the available right-of-way nor money to fulfill the demand. It’s literally the issue of whether or not you can “build your way out of congestion” – and the answer is that we do not have the money nor the right-of-way… and that’s led directly to dynamic tolling – to convince people to commute in higher occupancy vehicles, to shift their work window if they can – or be willing to pay a dynamic toll that is set according to demand.

      Aubrey Lane – the man who is now the Gov budget guy – is the one who led VDOT to dynamic tolling – and Smart Scale – successfully.

  6. On the sales tax side – there are about 7 states that have no income tax but instead rely on sales tax.

    In Virginia – because the Feds did not pass enabling legislation for states to collect sales tax from all internet sellers – the tax on gasoline went from 3.1% to 5% – which is STILL not enough to fund a needed roads. It’s basically enough to pay for maintenance and operation – and a limited number of other projects selected through Smart Scale – which pretty much will not approve new roads unless there is a compelling need …

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