Northam Budget Priorities: Financial Reserves, Medicaid

Allocations of anticipated new tax revenue in Governor Ralph Northam’s proposed Fiscal 2019-20 General Fund budget.

Thanks to economic growth and windfall tax revenues, Governor Ralph Northam expects Virginia to spend $2.1 billion more in its next biennial General Assembly budget. He proposes setting aside 44% in financial reserves and spending the rest. He does not propose giving anything back to Virginia taxpayers, according to documents released by the Department of Finance today.

Medicaid (which falls under “maintenance of government” in the table above) takes the lion’s share of new revenue, followed by state support for K-12 education, clean water, economic development, transportation, and mental health.

Critical to Northam’s proposed budget is a distinction between ongoing revenue sources and one-time resources. The influx of revenue from conformity to the 2018 tax reform act will yield hundreds of millions of dollars to the state. However, because changes to the federal tax last only five years, the Northam administration reviews the resulting windfall as temporary, not the basis for long-term budgeting. Accordingly, “temporary” revenue sources are spent on one-time budget items — primarily adding a bit more than $1 billion to Virginia’s meager revenue reserves and revenue stabilization fund over the next two two years, with smaller sums for water quality and rural broadband.

The draining down of budgetary reserves threatened Virginia’s AAA bond rating and was averted only by a significant injection of funds in the 2018 budget. But Virginia is still ill equipped to deal with another recession. A repeat of a 2007 recession scenario could result in a three-year lost of $9 billion in General Fund revenue. Even Northam’s budget would boost the budget reserves to only $1.549 billion by fiscal 2020.

Northam’s budget provides $216 million in Earned Income Tax Credit (EITC) benefits to lower-income Virginians and $20 million in higher-ed financial aid, but there’s not much in the budget for middle- and upper-middle class Virginians, who will pay most of the extra taxes.

Update: Republicans are not happy with the proposed budget. Said House Speaker Kirck Cox: “They are touting around $2.2 billion worth of spending and that is really paid for mainly by $1.2 billion worth of tax increases on the middle class.”

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8 responses to “Northam Budget Priorities: Financial Reserves, Medicaid”

  1. Well I think I agree with Speaker Cox that it is a large (unpublicized) tax increase on the middle class.

    I have probably decided to do less IRA conversion this year, which brings my income well down from my Virginia Gothic sample calucation, and yet I still have the same tax penalty thanks to Virginia.

    Gov. Northam’s plan to “conform” to the Federal tax laws is a euphemism for a huge middle class tax increase in Virginia. Democrats are hoping that they can mislead the public by saying this is “conforming” and *not* an intentional tax increase, even though big tax increase on some is the indeed net effect.

    Other states are not “conforming” in this manner. New York for example is allowing tax payers to take the standard deduction on their Federal return, and still itemize on their state return.

    Of course, I am not the least bit sure Virginia Repubs are blameless, because they like the idea of punishing northern Virgina taxpayers. So until now they have to some extent gone along with the Gov’s proposal to (wink, wink) “conform”.

  2. $0 to transportation in 2020. Is rural broadband tucked into economic development? How will this interface with Northam’s Ask the Governor statements on Oct. 31 about a new $90 million internet sales tax? “After his appearance, Northam told WTOP’s Max Smith that, while previous discussions of a possible internet sales tax have centered around using the money for transportation, the idea of putting it toward expanded broadband was “certainly on the table for discussion,” and ultimately up to the legislature, who would have to pass any such tax first.”

  3. Steve Haner Avatar
    Steve Haner

    Make no mistake, TBill, Virginia should (wink, wink) conform. To de-conform would be a huge mistake. I know you want to change that one rule about having to state standard deduction if you use he federal standard deduction, but there are dozens or other things in play. Many of the federal provisions are highly advantageous if also recognized at the state level, and should not be held hostage to the one thing you want.

    If the GA does that for you, fine (it helps me too), and I think the House GOP is going to propose that. But I think that’s the only well of support for that idea and it is not enough by itself. A higher standard deduction is an idea that can pass, and will help you and me some, it not in full….

    1. I am open…bigger Va. standard deduction is another way to fix the problem. In fact, I might call that true conforming.

      I am still confused about what conforming means, but I don’t feel “conforming” means that Virginia is forced to charge (former) middle class itemizers a lot more state tax…that is a choice Gov/GA are making. What, the devil made ’em do it?

  4. Steve Haner Avatar
    Steve Haner

    Fascinating – the signature proposal for an earned income tax credit grant (or “refund”) is not on that list of new spending proposals. $206 million in the second year is a serious spend in my book….

  5. LarrytheG Avatar

    So the ball is in the GOPs court so to speak. What is their proposal?

    Straight up de-linking full conformity runs into budget issues, right?

    New York, by the way – got to work on their plan early in 2018.

    Taxes in Virgina are going to be a disaster now if they change anything and that may be why we see no GOP counter plan.

    Also give Northam credit in recognizing the difference between one-time revenues and recurring revenues – it’s what I would expect from principled fiscal conservatives – no matter party.

    I guess I’m waiting to see the GOP Plan.

  6. TooManyTaxes Avatar

    High taxes and a dynamic economy does not necessarily yield an educated population. Nor does low taxes and a dynamic economy.

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      Interesting statistics. Most authorities that I have read suggest that roughly up to 40% of average population typically drops out of active learning in school before high school graduation. Another words, they would test at least below the 12th grade level.

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