Guest Column

Steve Haner

Our Cup Runneth Over

The state's revenue glass is more than half full and soon may be overflowing. The reported $55 million surplus understates the real picture. So, why are politicians ignoring the good news? 

Reporters covering Gov. Mark R. Warner's August 25 report on state finances couldn't tell if the glass was half empty or half full. The governor didn't clear things up.  

Seeing a glass half full he said: "Job growth in Virginia has now been positive for three months. Job growth in July (0.9 percent) showed the best monthly increase in over two years. In Northern Virginia, job growth has now been positive for seven consecutive months. And, payroll withholding [of income tax] collections – the best current indicator we have of the Virginia economy – are showing some momentum."

Seeing a glass half empty he said: "We face another very difficult budget. Even with an economic recovery, there will be a substantial gap between available revenues and the spending requirements which we would all judge as non-discretionary."

Does it matter where the waterline is? The water is unmistakably rising.

That angle on the story was largely unreported the next day and may be ignored during the remaining 60 days of the election campaign. And it is a curious thing when politicians pass on a chance to take credit for good news.

The governor's report was filled with good news, reflecting the upside of 18 months of difficult decisions, and provided ample cause for bipartisan celebration. The state has weathered the worst fiscal storm since World War II without a significant tax increase and without radical reductions in services. There have been casualties and fee increases, but in other states either the programs or the taxpayers have suffered worse.

After declining almost four percent in 2002, Virginia's General Fund tax revenue grew 1.8 percent ($200 million) in the fiscal year that ended June 30 and is expected to grow 4.6 percent ($500 million) in the fiscal year now underway. The $11.4 billion in taxes to be collected this year should break the old record (in unadjusted dollars) set in 2001 (See Chart).

The official revenue surplus of $55 million is the tip of the iceberg. That number reflects General Fund tax collections beyond the forecast. More than half the budget now is non-general funds (federal funds, dedicated taxes and fees) and no figures were reported on whether those programs finished June with unspent cash, as they often do. The August 15 comptroller's report showed the state had a General Fund "unreserved fund balance" of $244 million on June 30, due to the extra revenue and spending restraints. Last year it was $70 million. The governor quickly earmarked all of it and would deny that it represents the real surplus amount, but its existence is hardly a sign of fiscal stress.

Also missing from the balance sheet was more than $200 million in federal grant funds the state collected last spring and put in the bank to draw interest. A second installment of the same size will come in October. Congress gave the states this money largely to spend as they wish. In everything but name it is General Funds. The governor announced August 25 that the full $415 million will not be spent yet. That demonstration of fiscal discipline should impress Wall Street bond brokers who maintain our AAA rating. 

But while it was a good decision, you didn't hear Warner or anybody else saying Virginia actually finished the year with a $260 million revenue surplus, which will soon grow to $470 million. 

Warner made another announcement that day which drew too little notice. He said that there was no need to revisit the revenue forecast for this new fiscal year. The budget relies on an expectation that tax revenues will grow 4.6 percent this year. A year ago the governor wisely ordered a mid-cycle forecast and reduced spending accordingly, but he feels no such need now. 

That is a sign that he is confident we'll make the budget, perhaps because of those unspent balances still not reported. Thinking deviously, it might also be a sign that no one is interested in seeing a forecast that is even more optimistic, at least not before November 4. Smart lawyers and smart politicians do not ask questions they don't want answered.

(And Paul Goldman elsewhere in this issue (See "No Car Tax for Life?", September 8, 2003) reminded us that a revenue forecast above five percent triggers the legal requirement to finish the car tax cut. I'd forgotten that, but you can bet the governor didn't.)

Any doubts of the governor's quiet confidence in state finances should have disappeared after last week's announcement that he will include at least $525 million more in his next two-year budget for public education. He didn't swear but certainly implied it could be done without a tax increase.

Are there reasons to believe that the state might blow past the 4.6 percent projection and produce an even healthier surplus come next summer? Yes.

In July, the first full month of the new fiscal year, Virginia jobs grew almost one percent. That's in one month. Northern Virginia has had seven straight months of job growth. There are high profile and painful layoffs going on, but we are seeing steady growth overall. It is not regionally balanced, but it never is.

The governor just announced a very nice General Dynamics expansion in Prince William. As one of the states that did not raise taxes significantly in either the 1992 or 2002 recessions, Virginia should be positioned well to compete for relocations and expansions, and the Governor is hustling to land them. The latest college rankings and SAT results don't hurt our prospects either.

The tax cuts at the federal level will stimulate consumer spending and sales tax collections. To make the budget we only have to match 2002 sales tax collections.

If the federal tax changes and rising stock and real estate market stimulate more asset sales and higher dividend payments, that will benefit the state treasury. Yet the forecast is based on lower estimated income tax payments than actually came in 2003. 

The governor, in another wise move, squeezed the refund bubble out of the budget. For a few years the state had run behind, paying many income tax refunds in the following tax year to puff up the end-of-year books. Now the Tax Department is largely current, setting the stage for a big reduction in 2004 refunds. Plus, those who refinanced mortgages will see smaller refunds, too.

Corporate income tax collections, a small part of the budget but a good economic indicator, are rebounding nicely. They were projected at only $301 million last year but came in at more than $340 million. The 2004 budget presumes a collection of only $316 million, but there is every reason to expect it won't shrink but will continue growing instead.

So where was the champagne? Where were the high-fives? There may be less justification for discussing tax increases, at least if the money is intended to maintain existing state programs. Isn't that good news?

-- September 8, 2003

Bring Home the Bacon

Stephen D. Haner is vice president for public policy with the Virginia Chamber of Commerce. You can can e-mail him at s.haner@vachamber.com