Northam Would Save Most of Virginia’s New Cash

Source: Virginia DPB. Well, $1.9B is 8% of one year’s general fund revenue, but a fairly small cushion in a $141B two-year total budget. The blue lines represent the official Revenue Stabilization “Rainy Day” Fund and the orange lines are a cash reserve that represents legislative spending discipline.  (Who picked UVA colors?)

By Steve Haner

Other states are in trouble these days, but Virginia suddenly has about $1.5 billion in free cash flow to use over the next 18 months, Governor Ralph Northam announced Wednesday. About half of it ($750 million) will be placed into reserves or used to improve the financial health of the Virginia Retirement System.

The COVID-19 recession has certainly had an impact, reducing state spending, and adding unanticipated expenses. But the economic restrictions imposed here have not equaled those in other states, and the federal government has continued its spending on services and contracts in Virginia.

A series of pre-pandemic tax increases have also cushioned the blow, along with $3.3 billion sent to the state for COVID-related expenses. 

In his speech to legislators assembled on Zoom, the Governor did not directly repeat the plea he issued in August for them to practice restraint and leave the cash in reserve. The budget adjustment he kicked off on August 18 was largely successful in that regard, with a series of amendments approved just a few weeks ago (November 18).  Today’s second round of amendments is also restrained.

By the end of Northam’s term, he and Secretary of Finance Aubrey Layne predicted, the state’s reserves will be just below $2 billion, or about 8% of one year’s revenues flowing into the General Fund. But as noted before, the General Fund is no longer the largest and hardly the only important part of the budget.  With the various non-general funds added in, the two-year spending projection is now $141 billion.

Compared to that, the reserves look less comforting. But many states right now are drawing down reserves, not adding to them. Not many governors around the U.S. are producing introduced budgets that have grown over the previous one.

For details, you can review Secretary Layne’s presentation here, and here is a set of slides from Director of Planning and Budget Dan Timberlake. Layne’s focus is mainly the revenue and the economy, and Timberlake focuses on the spending plans. The Governor’s Office issued this set of highlights.

When the crisis first hit ten months ago, the legislature had just adopted a budget spending $139 billion over two years, filled with new programs and spending increases. Most were quickly frozen, with some plans now relaxed by the first set of amendments and a few more items restored with this proposal.

The headline items include a two percent pay bonus in the second year, fiscal year 2022, for state employees and teachers. Both could convert to actual raises if the revenue projections hold. With school headcounts down due to virtual instruction, the state would normally send fewer dollars to localities, but Northam included $500 million in “no loss” funds to compensate.

Federal COVID relief funding runs out at the end of this month, and whether Congress will send more remains unknown. So, Northam included a couple of hundred million dollars to support the vaccinations and other health care efforts that had been funded by Washington. If Washington does come through with more state grants, some of those funds might be redirected later.

There is also $50 million directed toward restoring rail passenger service to Roanoke. That’s about it for a big new spending proposal. Beyond that, most of the new spending items are smaller dribs and drabs.

The most controversial may be to add four more judges to the 11 seats on the Court of Appeals, an idea already drawing fire from Republicans as “court packing.”

The off-year “short” session usually lasts 45 calendar days, ending in late February. Republican legislators have announced they will force compliance with the minimum session length of 30 calendar days, ending mid-February. That may be another reason the Governor limited his list of amendments, although it is still more than 200 individual changes.

The adjusted budget signed in November projected a continued shortfall in revenue of almost two percent. Instead, the state is running six percent ahead of its initial forecasts.  Sales tax revenues continue to exceed expectations, mainly because personal income has remained strong in Virginia and the state now captures tax on most on-line purchases.

Corporate income taxes continue to grow and should reach an unprecedented $2.5 billion over the biennium. This is largely because Virginia followed the lead of Congress when it changed corporate taxes by eliminating numerous business deductions or subtractions. Congress then cut the federal tax rate, but Virginia left its six percent corporate tax rate in place, producing a windfall tax increase.

The explosive real estate market in this low-interest environment is also producing a bonanza of recordation taxes for the state, now over $1 billion for the biennium.

Layne announced that the Governor would propose that Virginia conform with some, but not all, of the tax provisions in the federal CARES Act adopting in response to COVID. Virginia would conform with the individual tax provisions and would treat forgiven PPP (Paycheck Protection Program) loans the same way as the IRS. But the PPP loan tax exemption is the only business-related provision Virginia will conform with.

The Governor would spend $12 million in the Department of Environmental Quality to better protect Virginia’s air, land, and water, and $13.5 million in water quality and agricultural best management practices (BMPs), bringing Virginia’s BMP investment to $35 million in FY2022, including new staff.  The Governor’s budget also invests $276,000 to enhance food safety in Virginia, and $521,000 to develop the hardwood forest habitat program.

There was no mention in his speech or the documents, upon first inspection, of the proposed Transportation and Climate Initiative compact with other northeastern states (admit it, we’re now a northeastern state). Other states are preparing to address it, and it is possible individual legislators may promote it if the Governor does not.  It would involve a major carbon tax on gasoline and diesel fuels, producing revenue in the second half of the second year of this budget.

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54 responses to “Northam Would Save Most of Virginia’s New Cash

  1. That was a really good fact-based commentary! Someone might attribute the fairly stable financial condition of the state to dumb luck or not but I think the “here comes the Dems to put a wrecking ball to the state budget” has not come true.

    Who do we give credit if not Northam? Layne? Who else?

    What does Dick say?

    On the Conformity issue, did other states not also get similar “windfalls”?

    • All cabinet officers would give the Guv credit for good outcomes. 🙂 State responses on corporate tax conformity were mixed. Virginia was not alone in reaping a windfall, but some cut their rates.

  2. Dick,
    This is very well done.
    Thank you.

  3. Given the elimination of direct aid to States, as appears likely for the current Covid Aid package being negotiated in Congress, it looks like this is the right time for Virginia to not be short of State revenue.

  4. LOL! as the kids say.
    My apologies, Steve. But again, a great posting.
    Steve

  5. “With the various non-general funds added in, the two-year spending projection is now $141 billion.”

    And what was the equivalent number 10 years ago. I want to say about $78b. If that’s right … our state spending increased (per year) by 80.7% (in nominal terms) from FY10 and FY20.

    Virginia’s population increased 6.7% from 2010 to 2020.

    The cumulative inflation rate was about 21%. So, population + inflation = 27.7%.

    Our gross state product increased (in real terms) by 11.6% over those 10 years.

    What I have so far (over 10 years or so):

    State spending +80.7%
    Cumulative inflation: +21%
    Rough real spending increase: 59.6%

    Population increase: 6.7%

    Rough real spending increase roughly adjusted for population: 52.9%

    Real cumulative state gross domestic product: 11.6%

    So, if I did this right (and I may not have) our state government spending is growing 4.5X faster than our state GDP adjusted for inflation and population.

    That can’t be right. Where am I going off the tracks?

    • Medicaid Expansion?

    • Primarily, you are assuming that spending in 2010 (during the Great Recession) was adequate and that any increase in spending should have been proportionate to increases in population and inflation. Furthermore, under your assumptions, any additional revenue accruing from economic expansion should have been offset by tax cuts.

      Secondly, you (like Steve) are lumping nongeneral and general fund revenue together. Total spending includes nongeneral fund revenue from, among other sources, transportation taxes; federal funds for education, Medicaid, etc.; and revenue from ABC sales.

      Transportation taxes–revenues increased as a result of the McDonnell tax increases (2013) and increases enacted in the 2020 transportation bill. Perhaps the Commonwealth did not need this additional funding for transportation. Many areas, including NoVa and Hampton Roads have benefited.

      Federal funding–Perhaps Virginia should have opted to continue refusing Medicaid expansion funding

      ABC revenue–what can I say? The population is increasing and they continue to drink.

      The nongeneral fund revenues also reflect revenue from increased higher education tuition and fees. Many people (including me) believe these increases have been excessive.

      • As Virginia gets more “blue”, its moves increasingly the direction of the dark blue states that couldn’t balance their budgets even prior to COVID-19. For example, prior to the outbreak of COVID-19, New York Governor Andrew Cuomo had projected a $6 billion deficit for the 2020–2021 state budget. The state’s economy was already facing difficulties even with the best economy in modern times.

        “Gov. Cuomo unveiled plans Tuesday to reduce the state’s looming $6.1 billion deficit by forcing New York City and other local governments to rein in their Medicaid spending — or pay for it on their own.”

        https://nypost.com/2020/01/21/gov-andrew-cuomo-to-unveil-2020-new-york-state-budget-amid-6b-deficit/

      • I didn’t assume anything about the appropriateness of the spend in 2010. I just went back 10 years to see how much the spend had increased. However, US GDP decreased from 2008 to 2009 but then increased in 2010. In retrospect, the so-called “Great Recession” wasn’t really so great a recession after all.

        I “lump together” general fund and non-general fund spending because the separation has increasingly become arbitrary. It is a trick used by our political class to keep people from realizing just how fast our state government is growing.

        Transportation taxes are taxes.

        The point about federal spending is valid. My “back of the napkin” calculation did not account for changes in federal contributions and those could be significant.

        ABC sales should rise in proportion to the population. I accounted for that.

        Excessive increases in tuition and fees represents a type of “taxation by incompetence”. In any regard, I am trying to look at what the state spends regardless of where it obtains the money. As far as I know, the difference between intake and outgo is very small with increases in net debt accounting for some outgo without in-period intake and contributions to the rainy day fund accounting for intake without outgo.

        I also didn’t account for off-balance sheet spending . For example – using regulations of Dominion to turn that private enterprise into a taxing entity and wealth transfer mechanism without impacting the state’s books.

  6. More taxes on gas/diesel…
    Real estate tax rate up..
    Welfare buried in my Dominion Energy bill…
    I’ve probably missed a few…
    One way to make the State budget look good is to shift the spending burden onto local government,,, happens all the time,,, can you say unfunded mandates…

  7. I think the record will show that Northam has cranked up spending considerably. But he does deserve credit for building up the financial reserves.

    • So, if I stick a gun in your face and rob you but then put your money (now mine) in the bank I guess I could tell the judge that I deserve a reduced sentence because I am a “good saver”.

      The dramatic increase in spending by the state (net of inflation and population growth) is THE issue for Republicans in 2021. McAuliffe and Northam the last 8 years. By my rough calculation spending over the past 10 years has increased 60% net of changes in inflation, federal contribution and population. Imagine a 60 second TV ad with that clearly described via graphics next summer and fall.

      Someone tell Kirk Cox to forget the culture clash and focus on the pocketbook.

  8. Time for a progressive income tax.

  9. The Tax Foundation has quite a comprehensive report on all the 50 states actions on conformity – which is not simple – fairly complex.

    In terms of the gas tax – how much of it was a claw back from prior losses of revenue?

    Here’s what would be pretty userful in these narratives about higher taxes.

    Specify each tax in terms of how much for the individual taxpayers – like has been done for the Dominion rate increase.

    Most of us acutely know when the real estate taxes goes up or real estate is re-valued and even if the tax rate stays the same the increased value causes a tax increase.

    Finally, the people who are MOST affected from tax increases are the retired on fixed income and lower income who often do not see COL adjusments, etc.

    • “Finally, the people who are MOST affected from tax increases are the retired on fixed income and lower income who often do not see COL adjusments, etc.”

      Wow, good argument for a top tier progressive income tax over commodity and non-liquid asset taxes.

      Oooh, oooh, a 10% State tax on LTCG&QD. Might as well tax that which the feds don’t.

      • One way to reduce the regressive nature of taxes would be to expand EITC and base the refund on an income based on poverty level benchmarks like we see used in qualifying people for ACA health care.

        AND – the EITC refund would not be a lump amount but rather 12 montly payments – in the form of vouchers than can only be used for food and shelter.

        • Or, we could have a living minimum wage. The EITC are just wages that Uncle Sugar pays in place of the employer. Of course, unlike a simple wage, it is tied to dependent needs.

          I like your 12 payment plan, but let’s be more proactive. When you purchase healthcare insurance on the Marketplace, you rough out your next-year income to determmine prepaid tax credit applied directly to the premium. Do the same for EITC.

          • And your idea is a good implementation, agree.

          • “Or, we could have a living minimum wage.” Would the application of $15/hr only apply to menial labor individuals or would you apply the increase across the board for the professionals who’ve now see their buying power reduced?

            If you provided the cashier at McDonalds a raise to $15/hr but do not provide the same percentage increase to the EMS worker who previously was making $21/hr, that’s wrong.

            How about we just provide a flat tax where everyone pays the same percentage of their income and drive on.

          • In terms of what different workers are “worth” or not – if the EMS is in a union and the McDonalds worker not – should we assume that they are getting paid what they are “worth”?

          • Larry,

            The difference that you are not seeing is that you arbitrarily raising the wage of unskilled workers while ignoring the skilled worker. You’re rewarding someone who simply doing nothing but being alive.
            (Also, the EMS workers wage isn’t determined by Government)

            You’re also doing nothing more but increasing that COL, moving the tax bracket those unskilled workers fall into and doing absolutely nothing to help them. They will be in the same financial state they were prior to your increase of $15/hr.

            If you want to help the unskilled, you’re better to fund programs that teach trades and or skills so that they can better themselves and achieve a higher pay through their own means. Giving handouts just makes dependents.

          • Are you just assuming that whatever low skill workers are paid is what they are worth? ditto for EMS workers?

            Should EMS make less – or more?

            Is the labor market the true pure arbiter without regard to other factors?

            Finally, if we taxpayers end up paying taxes for entitlements for low-skill workers – what does that mean? Should we do that with taxes or higher prices for low-skill products/services?

            In terms of “helping”. Yes, education – AND EITC ? Conservatives like EITC, at least they used to because it requires a job to get the benefit – which means less entitlements otherwise?

          • Larry,

            As someone who worked for minimum wage in high school and college, yes. My job required zero skill and was nothing more than a exercise is repetition.

            Also, the minimum wage is the floor to which individuals can be compensated but has exceptions.

            EMS will make what the market will bare for them, the same as all other skilled positions.

            “Finally, if we taxpayers end up paying taxes for entitlements for low-skill workers – what does that mean? Should we do that with taxes or higher prices for low-skill products/services?”

            We already pay for entitlements through our taxes, why should I pay higher taxes for advancing myself while rewarding someone who has shown no inclination do that themselves?

            EITC is just burden shifting, it’s slight of hand.

          • Oh did my share of minimum wage but I also see where “minimum wage” will vary according to region and other circumstances so that “foor” is not the same.

            re: “We already pay for entitlements through our taxes, why should I pay higher taxes for advancing myself while rewarding someone who has shown no inclination do that themselves?”

            Well, because, enough of your fellow taxpayers don’t want to see people working full time and still not able to afford food and shelter?

            “EITC is just burden shifting, it’s slight of hand.”

            EITC is far less a subsidy that we pay for employer-provided health insurance:

            ?itok=KF__f_XQ

            Would a true flat tax get rid of ALL of these?

          • Larry,

            Minimum wage is bottom of what you can be paid for work. If you are doing minimal work, you deserve minimal pay. If you’ve made poor choices in your life, it is not my responsibility to compensate you for them.

            “Well, because, enough of your fellow taxpayers don’t want to see people working full time and still not able to afford food and shelter?’

            That doesn’t make any sort of sense. You know why they can’t afford “food and shelter”? You know why they have those problems? Increased COL stemming from Government. Government is never ever, in the entire history of humanity the “answer”.

            The EITC expansion of 1993 had nothing to do with the increase in employment, that was welfare reform. The EITC is burden shifting, you’re telling Jimmy who’s got a wife an kid that it’s okay for him to stay in his $12/hr job we’ve going to cut your tax burden because you made poor decisions. You’re also stunting wage growth.

            https://prospect.org/economy/like-eitc-plenty-turns-out./

          • Little Jimmy with a wife and kid may qualify for EITC at roughly $25/hr. Provided his investments produced less than $3500 in gains. Investments! Ha!

          • Just to make sure folks know that EITC is capped and limited.

            People who get EITC actually get less that higher paid workers get as a subsidy for purchasing health insurance.

          • Larry, take a look at this before you complain about “tax expenditures.” https://www.bloomberg.com/news/articles/2020-12-16/what-happens-when-the-1-move-to-miami-and-austin

            Technology and lower-tax/more efficient regulation make it a lot easier for people and their businesses to move. While I suspect congressional lobbyists will stay put for business as usual, more and more advocacy meetings with federal agencies are via online platforms and conference calls. I was on one this week with three FCC staff members scattered around the Metro area, me at home and counsel for the other party in Metro Denver. I’ve also had a recent meeting with my client’s employee in Metro Ottawa, Ontario.

      • I’m not opposed to restructuring Virginia’s taxes, and in a way that makes them more “progressive” if you want to use that term. You get to go to Northern Virginia and explain it for me (Larry thinks they are so liberal up there…well, try selling them on 6.5% on incomes above $50K and 7.5% on incomes above $100K…..). To do what I’d like with the standard deduction, it will take a major hike on upper incomes.

        • Well no, I don’t think they are “liberal” per se but that they are just not on board with some/many of GOP Conservative “ideas” – like essentially trying to prevent people from getting health insurance either through the ACA or the Medicaid Expansion.

          The GOP has to WANT to actually REPRESENT voters in NoVa and in order to do that, they need to change from lecturing people about Conservative “principles” and listening to the concerns and interests of voters.

          They actually used to do that and a true moderate GOP could beat a Dem in Virginia any day of the week and twice on Sunday.

          Now we have someone like Cox trying to fend off someone like Chase just to have the ability to appeal to NoVa voters and even then if he chooses to lecture rather than listen AND Represent, he still won’t win enough of them over to go with RoVa and win the state.

          • You keep forgetting (ignoring) that Cox did support Medicaid expansion. It will be Chase’s #1 or#2 attack point.

          • Well he supported it after it cost the GOP the GA and was inevitable.

            So Chase will attack him for saying he became a hypocrite to his principles and will that be effective in Rural Va? Do bears…. in the woods?

            Funny thing, Medicaid is literally a lifeline to rural folks but when you identify it as a government program, they hate it and vote against it.

        • 50, 100K? Nah, more like 150, and 250K, and 8, 10%.

          For the 1st 3 years of my retirement I was one of Romney’s 47%. Didn’t pay a dime in fed income taxes.

        • “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy…”
          – Alexander Fraser Tytler

          https://www.goodreads.com/quotes/108530-a-democracy-cannot-exist-as-a-permanent-form-of-government

          • James Wyatt Whitehead V

            Good one Mr. Nathan. I always liked the way Walter Williams framed this issue.

            “But let me offer you my definition of social justice: I keep what I earn and you keep what you earn. Do you disagree? Well then tell me how much of what I earn belongs to you – and why?”

    • Nope. You are trying to do what Northam and the Democrats have been doing for the past 3+ years. Making the issue so complex that the spendthrift attitudes of the Democratic majority can be obscured.

      State government spending comes almost entirely from two sources – state taxes and federal contributions. Yes, there are things like the ABC Stores. However, when you look at changes in state spending net of population you wash out things like the ABC stores.

      I think the people of Virginia would be stunned if they understood the increase in state spending per year since McAuliffe took office.

  10. People who used to be able to itemize deductions also contributed to this surplus. The higher federal standard deduction saved me almost $700 on my federal taxes, but cost me almost $500 in state taxes last year.

    • Yes, exactly, that is the “conformity” tax hike in a nutshell.

      • But that gets too complicated for the typical voter. The question needs to be boiled down to state spending net of federal contribution, inflation and population growth. What has been the growth in that number since McAuliffe took office?

        The commercial I see in my mind starts with a graph of state spending by year from the the time McAuliffe took office through the summer of 2021. Then the graph is lowered for inflation. Then lowered for population growth. Then lowered for changes in federal contribution. The remaining graph is essentially the net population adjusted spending increase pushed through by the McAuliffe and Northam Administrations.

        If my quick and dirty numbers are even close to being right … that commercial would shock the hell out of most Virginians.

        The Republicans need to go “anti-remnants of the Byrd Machine” by simplifying the matter and shining a big bright light on the reality.

    • And to think Trump did it with his deficit-busting tax cuts in which he INTENDED to deprive states of SALT revenues.

      There are so many things in the tax code these days that those who can afford professional tax help can usually get enough money back to pay for that help and then some.

      Tax software now days, BTW, lets you run “scenarios” like itemizing both Fed/State or not.

  11. An RPV press release states the following:

    “Northam’s budget spends more money than Virginia receives in revenue every year. It is structurally imbalanced and violates time-honored budgeting practices of the House and Senate money committees when Republicans held the majority in Richmond. …”

    I wonder what the factual basis for this statement is. It’s worth examining.

    • On the face of it, the assertion is wrong. For the biennium, the projected revenues exceed the proposed appropriations. Any structural imbalance would result from reliance on one-time revenues, juiced up revenue projections, and the authorization of programs that have a low cost at the beginning but increase in cost significantly in the future. Northam’s budget seems to do the opposite. Additional cash balances are used for one-time expenditures (reserves and paying down liability of retirement plans) and COVID costs. As for the use of one-time revenues, I have not seen the details of the revenue projections.

    • Great. After 20 years of running this blog even you can’t quite figure out what the hell the RPV is talking about.

      “Structurally imbalanced”?
      “time honored budgeting practices”?

      What percentage of Virginians would understand or care about that message?

      Here’s my alternative – Under the McAuliffe and Northam administrations net per capita state spending in Virginia increased 45%. Note: I made up that number but I have a strong suspicion I am not that far off.

      It’s time to pin the spending tail on the Democrat donkey.

      • Much of the additional spending was paid by NoVA residents and spent elsewhere to keep their real estate taxes down. At the same time, NoVA residents regularly complain that they are shortchanged by the Commonwealth. We may generally be better educated than our fellow citizens down south. But, in terms of political sophistication, we are kindergarteners.

        I do, however, have hope that things might change with the growing population of Hispanics and Asians in NoVA. They are much more savvy to what goes on in government than “well-educated white folks.”

        • Most of the “well-educated white folks” in NoVA have every intention of moving back to where they came from as soon as their last kid graduates high school.

          And their political apathy reflects that.

          • That’s my plan although “where I come from” is NoVa. It’s sad but I really can’t wait to get out of here.

            Meanwhile, Hewlett-Packard and Oracle have both decided to bug out of California and relocate to Texas. A cautionary tale for the tax and spend crew in Virginia.

    • Yes, but does it follow the laws of physics?

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