Overlooked in the frenzied weekend coverage of Governor Bob McDonnell’s “GiftGate” debacle: The Commonwealth of Virginia closed Fiscal 2013 with a $262 million budget surplus. State officials attributed the outcome to stronger-than-expected revenue growth of 5.3%, which surpassed the revised revenue forecast of 3.6%.
McDonnell credited “prudent fiscal management” and a reallocation of state funds to programs “that would produce economic growth.”
The surplus will yield nothing in the way of pork for General Assembly members to pass around. Surplus funds are already spoken for — the Rainy Day fund, the Water Quality Improvement Fund and the first permanent pay raise for state employees in six years.
Bacon’s bottom line: McDonnell deserves kudos for adopting conservative economic assumptions and sticking to them. However, a rhetorical tic appears in this press release, like so many other communications from the governor’s office, that really irritates me, and that is the implication that McDonnell’s economic policies somehow contributed to the commendable budgetary performance.
“Today’s great news is further proof that Virginia’s economy is getting stronger,” he stated. “Over the past three years, we’ve seen our state unemployment rate fall to the lowest unemployment rate in over four years. … We made tough decisions … and invested in areas that would produce economic growth.”
The fact is, Virginia unemployment has declined 2.1 percentage points since January 2010, when McDonnell took office, compared to 2.2 percentage points for the United States. In other words, Virginia’s improvement in the unemployment picture has slightly lagged the national average! I don’t see much room for bragging rights here. The fact is, Virginia’s economic performance is largely determined by national and industry-specific trends beyond any governor’s influence.
Reinforcing the point, individual income tax revenues, accounting for 63% of General Fund revenues, fell $115 million below estimates. That’s hardly a sign of employment-driven prosperity. It was the boom in the “individual income tax non-withholding” revenue category — tied not to wage levels but to volatile financial markets — that accounted for the surplus. This revenue category zoomed $290 million ahead of projections.
And whom can we thank for that? None other than President Barack Obama, whose insistence upon increasing federal tax rates in 2013 prompted wealthy Americans to shift income from calendar 2013 to 2012. Virginia income tax receipts, like U.S. tax receipts, enjoyed a one-time bump. Tax avoidance, not economic growth, gets the credit.
Looking ahead. How will Virginia’s FY 2014 budget fare? We won’t get the tax avoidance bump this year. (Either will Uncle Sam, if that’s any consolation.) Also, the federal budget sequester, which has been slower than expected to make itself felt, could intensify.
In its 2013-2014 Virginia Economic Forecast conducted by Chmura Economics & Analytics, the Thomas Jefferson Institute for Public Policy notes that much of Virginia’s 2000s-era prosperity was due to the surge in federal spending. Federal contract awards increased 199% from 2001 to 2011, outpacing the growth in Gross State Product by almost four times. Conversely, sequestration-related cuts in federal spending, including furloughs of government employees, could crimp economic growth, the study warns.
— JAB
