Secretary of Finance Stephen Cumming’s slide showing most of the final surge of unexpected revenue before June 30 came from payments from business owners and investors. Click for larger view.
by Steve HanerFirst published this morning by the Thomas Jefferson Institute for Public Policy.
Does last week’s glowing report on Virginia’s state tax collections presage additional tax relief for struggling families? The first question is, was the news really glowing?
Less than 18 months ago, in April 2021, the Virginia General Assembly and then- Governor Ralph Northam (D) agreed upon a set of revenue assumptions and spending plans and adopted a budget for the coming two fiscal years. As of June 30 of this year, ending the first of those two years, tax revenues turned out to be $6.2 billion higher than that projection.
How much of that $6.2 billion is coming back to Virginia taxpayers? Less than 20% of it, about $1 billion, in rebates due in a few weeks. In reality, that $1 billion was pulled from the surplus from Fiscal Year 2021. The additional, unexpected $6.2 billion for Fiscal Year 2022 has been spent, will be spent, or is being parked in the state’s reserve funds to sustain future spending.
The massive explosion in state revenue has mainly resulted in additional state spending. Yes, the 2022 General Assembly agreed to several future tax reductions, reducing future revenues, but it did so assuming that the new, higher level of state spending would still be protected. If Virginians really want to pay less in taxes, slowing down the spending growth is the first goal.
Every August the legislators come to Richmond to hear the Governor, now Republican Glenn Youngkin, announce the financial results from the fiscal year just ended and outline plans for the coming months. The underlying data follows a set format, but each administration can change focus or emphasis and it can be interesting to see how things are packaged.
A key point to remember: this discussion focuses on the General Fund, fed by state taxes. With one exception there is no mention of the non-general fund side of the budget, which has exploded even faster due to grants and transfers from the various federal COVID packages and could be producing surpluses as well.
The April 2021 budget mentioned above was later adjusted by the 2022 General Assembly, which could see the revenue wave starting. Even that adjustment, approved just months ago, substantially underestimated tax revenues and transfers by $2 billion.
Governor Youngkin also revealed, and not all governors mention this, that another $1.2 billion allocated to the various agencies of government had not been spent by June 30. He added it to the unexpected revenue. From his prepared remarks on August 19:
But I am incredibly proud to share – and hope Virginians will be proud to hear – that our state government spent roughly $1.2 billion less than was appropriated by the General Assembly. And the combination of the roughly $2 billion in unplanned revenue and the $1.2 billion dollars of unspent appropriations resulted in a $3.2 billion dollar cash surplus at year end.
He then went on to explain, for those listening closely, that most of the surplus was already appropriated before he ever got to that podium. (You can read his prepared remarks here.)
The $1.2 billion the agencies didn’t spend is already re-appropriated, “carried forward” for the new fiscal year (one reason many governors don’t count that when they announce a “surplus”). Another $900 million is earmarked for the constitutional reserves. Almost $600 million will go to items the General Assembly approved contingent upon a surplus being achieved.
If that $600 million was spent in advance, should it even have been included in any claimed “surplus” or “unplanned revenue?”
A real surplus – what in the business world might be called free cash flow – is almost impossible. This is a situation legislators and governors from both parties have created. Legislation and constitutional provisions automatically earmark unexpected revenue. That is all the more reason Governor Youngkin’s decision to set aside $400 million for future tax relief is noteworthy. That might actually count as a real surplus, but the other $2.8 billion is already gone.
Whether there is any additional tax relief next year will depend first on how the economy is faring six months from now, and there are signs in Secretary of Finance Stephen Cumming’s presentation (the slides are here) that inflation and the Federal Reserve’s efforts to crush it are dampening Virginia’s prospects.
Last year, when Governor Northam announced that General Fund surplus, he also noted a large amount of extra revenue collected by the separate Commonwealth Transportation Fund. Not so this year. The state tax sources that fund the non-general fund transportation activities missed their most recent revenue projections by $32 million. Neither Governor Youngkin nor Secretary Cummings mentioned that shortfall, which is mainly due to lower fuel consumption, a possible recession signal.
Back on the general fund ledger, other tax sources which are economic bellwethers are stagnant. Recordation taxes went down in 2022 compared to 2021. One category of taxes on alcohol consumption shrank while another grew, but barely, at a rate far lower than inflation. The sales tax growth of 9% reflects mainly inflation, so, good news for the state there is bad news for consumers looking at higher prices (which also hit government, remember).
The categories where revenue has exploded beyond expectations include the corporate income tax (up 110% in three years) and those elements of the personal income tax where business or investment income is reported and taxed for individuals. Business owners and the self-employed do not have tax withheld on income but make quarterly payments. Those non-withholding collections were up 71% between 2019 and 2022.
Secretary Cummings reported that of the final $1.9 billion spurt of unexpected tax revenue in the most recent months, 75% was due to non-withholding payments. Another 15% was due to smaller refunds being paid on previous years’ taxes, and those refunds also tend to be larger with the non-withholding taxpayers.
Non-withholding revenue, refunds and corporate income taxes are the most sensitive to the business climate, the most likely to actually take a dive in a recession, and the most likely to be trimmed if the recent Congressional tax increases tighten business profits.
One good thing about unexpected revenue is that it is unexpected. Therefore it is not baked into the next year’s revenue assumptions, creating a new floor. Yes, the 2022 General Assembly pre-spent $600 million of it, but on one-time expenses, not base budget items. The fiscal year we are in now, which ends June 30, 2023, assumes basically the same level of General Fund revenue ($24.8 billion) as was collected in Fiscal Year 2021.
The current politically divided General Assembly will only consider additional tax relief if the revenue needed for the spending side is assured, probably with a healthy adjustment for additional inflation. That will come first, and a realistic assessment of the state’s business climate indicates even that could be a challenge.
So that’s the Virginia Mercury take on all this, quoting folks on where the surplus should go — tax cuts or spending. The point is, the surplus is already gone (all but $400m anyway.)
Wow – it appears that the past Administration did something right anytime there are hundreds of millions of dollars of surplus being discussed. Let’s see what this new Administration does with it.
Did something right? 1) Raise every state tax in sight and 2) enjoy the bonanza created by the COVID spending sugar high, further enhanced by passing out hundreds of millions in improper unemployment benefits. Yes, the COVID sugar high started with Trump and cannot be blamed on Biden alone…Oh and 3) reap further benefits from inflation with a state tax code not indexed for inflation. Yeah all those were things done “right.”
Did something right? 1) Raise every state tax in sight and 2) enjoy the bonanza created by the COVID spending sugar high, further enhanced by passing out hundreds of millions in improper unemployment benefits. Yes, the COVID sugar high started with Trump and cannot be blamed on Biden alone…Oh and 3) reap further benefits from inflation with a state tax code not indexed for inflation. Yeah all those were things done “right.”
You gotta admit… “explosion of revenues” and “state economy in the ditch” has some issues…
But again – what exactly are we spending this “explosion” on?
Don’t talk Medicaid and don’t talk money from stimulus… just the increased revenues from taxes…. where is it being spent?
WayneS
I agree with Nancy Naive’s suggestion in another thread. Make the necessary budget revisions to allow the current $400M surplus to be spent on small road-improvement projects which are otherwise unlikely to be funded.
I’d certainly enjoy the +/-$100 tax rebate I might get if the money is returned to the taxpayers, but our roads need improvements more than I need $100.
Well, if you read my column you noted that the transportation revenue is NOT surging, perhaps a recession signal. You have not seen me advocate for cutting the transportation taxes, but plenty is being spent and in 40 years of watching that activity I’ve never seen a time when the cries were not consistent: More! Give us more!
in 40 years of watching that activity I’ve never seen a time when the cries were not consistent: More! Give us more!
Right. And throughout those 40 years, public roads have been added to Virginia’s highway system virtually on a daily basis. That, coupled with inflation (even normal inflation) makes it perfectly logical that VDOT would need an ever-increasing amount of money to take care of those roads.
in 40 years of watching that activity I’ve never seen a time when the cries were not consistent: More! Give us more!
Right. And throughout those 40 years, public roads have been added to Virginia’s highway system virtually on a daily basis. That, coupled with inflation (even normal inflation) makes it perfectly logical that VDOT would need an ever-increasing amount of money to take care of our roads.
Usually I ignore Larry’s less relevant questions, but he creates an opportunity to make a point. The August EOY presentation is mainly about revenue and doesn’t really look at spending, certainly not in any detail. Just how much spending went up, on a dollar or percentage basis, won’t really be clear until JLARC issues its annual spending analysis (usually in October now) or the Comptroller issues the detailed agency spending data, also months away. The administration and legislative staff have the data, people with access to the accounting databases probably have a good idea, but somehow it never is discussed until somebody digs it out. 🙂
The easy answer is that there was $6.2 billion more in tax revenue than anticipated only 15 months ago, and only $400 million is really set aside, so $5.8 billion was either spent, appropriated to be spent, or parked in reserves that can only be used for future spending. And that is GF only. And don’t forget, Larry, the state share of Medicaid is the largest GF category.
Another thing Cummings didn’t put out, and we only see it some years, is a real cash balance sheet. They’ll take that to NYC for the bond analysts, but don’t hold your breath looking for it from the pols….
As I recall, the last recession in Virginia uncorked some bizarre behaviors. The most significant was the realization that the so-called Great Recession caused housing and real estate prices to tumble. This affected the Local Composite Index by lowering the amount that Northern Virginia (in particular) was expected to pay to other areas of the state. While this change was completely within the process used to set inter-regional transfers it was not taken well by those areas who are usually recipients of Northern Virginia’s charity. Rather than accept lower payments the eternal recipients of regional charity insisted that the process be changed so that their schools would not see a slowdown in payola. Bob McDonnell, then governor, decided to under-fund the employee pensions as a means of borrowing in order to keep the flow of ed money at its pre-recession level. At least, that’s my recollection.
Now we face another recession. Many believe we are already in recession while others are waiting for the senile occupant of the White House to inevitably push us into an incontrovertible recession. Pushing and signing the “Inflation Reduction Act” was a great step on the way to guarantee higher inflation, decreased consumption and … voila … a full on recession that even Janet Yellen can’t deny.
So, what to do with the surplus in Virginia?
I say save it and have it ready to use when the inter-region school funding tsunami slows a bit leaving those in recipient jurisdictions gnashing their teeth and wailing that “something needs to be done” so they can get “their ” money.
Good summary. As for the $1.2 billion in unspent appropriation, not all of that has to be reappropriated. Provisions in the budget bill mandate reappropriation of some of it. For the remainder, the Governor has the discretion of reappropriating it or having it remain unappropriated in the general fund. This is an exercise that the administration goes through every summer with agencies, with the agencies, of course, making their case as to why they should be allowed to retain the unexpended FY 2022 balance. I will poke around in the publicly-available data bases to see if those various amounts can be identified.
VDOT keeps a large list of unfunded projects. They usually have them ordered according to priority / effectiveness such that if more funding appears, they can quickly apply it to the need.
Does the state also maintain a list of priorities that cannot yet be funded? For instance, is there an estimate of what it would cost to improve the mental health system?
If not a list, then how are “needs” developed and prioritized to be funded when/if such funding becomes available?
I hear Youngkin talking about lowering taxes but he’s not talking about unfunded needs…. and the tradeoffs.
If you ask any agency head, you will get a list of priority “needs” that need more funding. Mental health is one such area. How much would it cost it improve the mental health system. First, you would need to define how you want to improve mental health services. The GA has yet to reach a consensus on that question.
Need and priorities are developed and prioritized during the budget process. The budget bill that the Governor presents to the legislature encapsulates his priorities. The GA then amends it to include its priorities.
They provide a list of needed roads and they see how much money is available and from that they tell folks how much can be done with the money they do have – and folks can decide if there should be more or not.
Instead – the two things – services/infrastructure are separate issues. taxes are always too high and services/infrastructure never enough – the two are not seen as related.
Most folks , most taxpayers , have no clue how many police officers they should have or how many teachers or fire/rescue, etc.
If you asked 100 people how many police officers there are in their local city or county, only a small number would actually know – and even then they’d not know if it was too many or not enough. The metrics are a separate issue.
But when someone comes along talking tax cuts – most are all for it – no matter the impact. The presumption is that taxes are too high and money wasted.
Of course, the expect the police to response in a matter of minutes, no matter how much they’re funded or their staffing levels. They just expect govt to take care of it – and cut taxes.
VDOT uses a concept called levels of service.
That same concept is available to localities and the state – to essentially define what level of service is desired – and the cost to provide it.
But when the only conversation is about tax-cuts – we never get to an informed decision – just a political one.
Another comment I meant to make: the nonwitholding category is the most volatile and hardest revenue to project. It consists of income taxes paid by those not subject to withholding (self-employed individuals) and other revenue not subject to withholding, such as capital gains. With the declines in the stock market this year, the nonwithholding tax revenue for the current tax year is likely to take a significant dip.
“The sole location of Your Hometown Deli in the Philadelphia suburb of Paulsboro, New Jersey, closed June 30, the modest deli’s former parent company said in a Securities and Exchange filing this month first reported on by CNBC.
The public company, previously known as Hometown International, shot to a valuation of over $100 million last year despite its namesake deli pulling in about $13,000 in annual sales.
The company is now known as Makamer Holdings following a merger between the deli and the bioplastics maker Makamer in April, apparently confirming earlier speculation that the deli was a shell company ruse for an eventual reverse merger to take another company public.
Makamer sold off the deli’s remaining inventory for a paltry $700 on July 1, according to the filing, and offloaded its deli subsidiary for $15,000 on August 9.”
Not being a member of the GOP, I feel free to state that shenanigans like that should be illegal.
With that said, I’d like to point out that while your hometown deli may have been located in the Philadelphia suburb of Paulsboro, New Jersey, my hometown deli never was.
Not being a member of the GOP, I feel free to state that shenanigans like that should be illegal.
With that said, I’d like to point out that while your hometown deli may have been located in the Philadelphia suburb of Paulsboro, New Jersey, my hometown deli never was.
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