Boomergeddon in Virginia: Federal Cutbacks

If there’s one thing that pundits of all ideological stripes agree upon, it’s that the federal government cannot continue running $1 trillion-a-year deficits without inducing a Boomergeddon-style fiscal and economic melt-down. The only question worth asking is how we avoid the worst-case scenario: through spending cuts, tax increases or a combination of the two. (It would be wonderful if the economy would simply grow its way out of its fiscal malaise, with booming growth generating booming tax revenues, but the causality is likely to run the other way, with an ever-growing federal debt crowding out private investment and growth.)

Whatever path Congress and a newly elected (or re-elected) president pursue, the results are not likely to make life easier for the country’s 50 governors. Any pruning of federal spending will (a) reduce state aid to states and localities , (b) reduce federal procurement spending that props up local economies, and assuming a restructuring in the federal tax code, (c) cut federal income-tax deductibility for state and local taxes, thus increasing Virginians’ federal tax payments.

As the “Report of the State Budget Crisis Task Force” makes clear, a return to fiscal responsibility by the federal government will come at the expense of Virginia and the other states.

Direct federal spending. Of the six states examined in the report, Virginia will be the most severely impacted by a reduction in federal spending on employment and procurement. Write the authors:

Virginia, with its dependence on defense procurement and its cadre of federal workers and retirees, is at particular risk. … Total direct federal spending per capita in Virginia – including procurement, wages, retirement, and other spending – is 60 percent above the national average and accounts for about 32 percent of Virginia’s gross state product. Among the study states, Virginia ranks first in federal procurement, which makes up more than 13 percent of its state GDP; federal salaries and wages constitute approximately five percent of state GDP.

Click on maps for more legible images.

Federal aid to states and localities. Fortunately, Virginia is less vulnerable to cutbacks in federal aid to states and localities. Of the federal government’s $3.8 billion in FY 2012 outlays, $612 consists of grants to state and local governments. The dominant program is Medicaid, but the spending also covers the Child Health Insurance Program Expenditure program, highway and transit funding, community development grants, housing assistance, pollution controls and more. If these grants were cut only 10% across the board — probably a conservative assumption because so much of this spending is discretionary and not locked into entitlements — the states would collectively lose $60 billion a year.

Under that scenario, Virginia would lose nearly $1.1 billion. That’s painful but not as bad as for others. Among the six states studied, the cuts would amount only to $1,327 per capita in Virginia, a fraction of the $3,163 per capita cuts in New York and considerably less than the national average, based on FY 2010 numbers.

The outlook for the years ahead is made considerably more complicated by the Affordable Care Act’s massive expansion of the Medicaid program, 90% of which will be paid for by the federal government after the phase-in period. The Task Force authors question whether that commitment is sustainable over the long term.

Federal income tax deductions. Finally, on the grounds that Congress will be forced to reign in tax expenditures (tax deductions, credits and exemptions) as a way to increase revenue, the study examines the impact of a rollback in tax deductions for state and local government taxes. As a moderate-tax state, Virginia has less to lose than some — but more than commonly realized.

Among those Virginians who claim deductions on their federal income taxes, the average deduction is $9,229 — 36% higher than the national average. Thus, any scaling back of state and local tax deductions will hit Virginia than many other states. Of course, high-tax states like New York, New Jersey and California would be hammered.

In previous commentary, I have emphasized Virginia’s dependence upon federal employment and procurement. But the study makes clear that direct federal spending is only one one factor that needs to be considered. The Old Dominion also would lose federal aid to states and localities, while a sweeping tax restructuring could penalize households that deduct state-and-local taxes from their federal income. Add it all up and we may not be the single-most vulnerable state in the country, but every indicator suggests that fiscal stress in Washington, D.C., eventually will be felt as fiscal stress in Richmond.


Special thanks to criminal defense lawyer Nicole Naum for her support of Bacon’s Rebellion.

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  1. DJRippert Avatar

    I know! Let’s ask our state government what pre-packaged plans they have in place for this completely foreseeable crisis …

    **sound of crickets chirping**

    Frankly, Jim – you are missing a biggie. When NoVa and Tidewater get hammered by the cuts in federal spending, Richmond will get a lot less in taxes than it had been getting. How much of Richmond’s economy is dependent on state government and state sponsored monopolies like Dominion?

    And, those ever-so-clever education funding formulae might behave quite a bit differently when (not if) there is a collapse in the value of NoVa and Tidewater real estate resulting in a collapse in real estate taxes.

    But that’s all OK – as you and various members of our General Assembly have been saying for years, “Virginia is the best state for business”. So – how bad can it possibly be?

    The absolute and unmitigated incompetence of Virginia’s political “elite” is about to be put on full display.

    I wonder what potential governors Cuccinelli, Bolling and McAuliffe have to say?

    At least McAuliffe can claim that he wasn’t part of the hopelessly inept state government that had years of federal bounty but never took a single intelligent action to provide for the day when the bounty was decreased. That alone is good enough for me to vote for Terry.

  2. Don, You and I are mostly in agreement here. On where we disagree: Yes, I have celebrated our “Best State for Business” ratings, but I have *always* said that industrial recruitment was only a part — and a shrinking part, at that — of a well-rounded approach to economic development. I can’t think of any other publication in Virginia, either print or online, that has done more to push the boundaries of thinking about what it takes to prosper in a globally competitive knowledge-intensive economy.

  3. Oh, I suppose I also disagree with your appraisal of McAuliffe. I see no indication that he thinks about fiscal and economic development issues any differently than the people from whose milieu he comes. Perhaps he will surprise us. I hope he does.

    One guy who *does* think differently is Aneesh Chopra, who has declared his intention to run for Lieutenant Governor. His thinking is very fresh and original. I’m just don’t know if he’s demonstrated an ability to get things done. I’m not saying he hasn’t, I’m just saying, I don’t know if he has.

    1. DJRippert Avatar

      Back in 2009 McAuliffe was on the record as wanting to beat some of the stuffing out of Virginia’s idiotic implementation of Dillon’s Rule. Here is some commentary from Virginia Virtucon:

      That thought alone puts McAuliffe miles beyond Kookinelli and the Jobs Guy.

    2. DJRippert Avatar

      I am not at all sure about Chopra. Seems like another lifetime politician in the making. What has he ever accomplished?

      I don’t trust anybody, from any party, that seems to have spent their lives hopping from college to government position to government position. I guess Chopra worked at the Advisory Board for a few years. That’s a stretch for the guy who will be breaking ties in the State Senate for a while.

  4. saunders Avatar

    Solutions anyone? It seems that tax increases and spending cuts would both throw us into the toilet?

  5. Solutions anyone?

    A mere niggling detail ! 🙂

    What worries me is that the sequester was supposed to be the gradual cut in spending (over 10 years) but even now, even the GOP hates that idea if it means 50b in cuts to DOD so I’d not hold my breath waiting for Va to be “savaged” by cuts.

    Here’s one way to think about the future.

    Think Obama gets re-elected but the Senate falls to the GOP.

    What kind of cuts would you expect to see that pass both houses and end up on Obama’s desk?

    Bonus question: – would there be ANY sending cuts at all and just more tax cuts?

    Sooper Dooper Bonus – would ObamaCare be repealed with override votes?

  6. Darrell Avatar

    I don’t see what you are concerned about. There are a bunch of Chinese generals biting at the bit to start ww iii. Only a couple of their politicians stand in the way of a new imperial Chinese empire.

  7. reed fawell Avatar
    reed fawell

    Solutions anyone? There is only one I can think of.

    Remember the late 70’s. Our Viet Nam / Watergate hangover. Our Hostage crisis. Our Desert one Debacle, and Military Drug problem. The mighty Soviet Union’s takeover of Afghanistan. Our withdrawal from Olympics. Our economic collapse: Sky High Inflation and Mortgage Rates, and No Growth. The Japanese & Dutch buying up the USA, starting with Mid town Manhattan and Pebble Beach. Our Experts proclaimed end of US Capitalistic system – our Gurus going to Japan to figure out what was wrong with us. The Camp David Summit seeking solutions to the malaise of the American People.

    And then what happened? 12 years later, the Soviet Union’s Gone, the Japanese slide into decades long recession, and the US seemingly sits astride the World. Why?

    Perhaps the late 30’s holds some answers. Remember (or read about) those times: An intractable depression. A fractured society – politically, socially, economically. Huge labor / Management gridlock. A nearly Packed Supreme Court. Intractable political opposition. One extreme thinks Stalin’s communism is way to go, the other favors Nazi Germany’s efficiency. A isolationist wing opposes draft to enlarge the Worlds 18th largest army (ours) facing Fascism about to overrun Europe nearly to Moscow, plus North Africa, China, south East Asia, and Pacific Rim.

    Then the nightmare happens and what happens? 6 Years later Fascism’s gone, the US begins the largest economic expansion in world history. Why?

    In both cases, was it the rise of Great Leadership? The kind that inspired other leaders to be great and united the American people to do great things, under always flawed but nevertheless inspired policies?

    In the most recent case, I believe, it came from a new President. In earlier case, it believe it came from a third Term President who many people had considered a failure up to and indeed long into WW II.

    So where is it going to come from now? Wish I knew.

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