Of Course Tax Hikes Grew the State Surpluses

Senate Finance Committee data illustrated the expected state revenue boost caused by 2017 federal changes. Predicted and seen in 2019 and 2020, it carried over into 2021.

by Steve Haner

At Tuesday night’s debate Democratic gubernatorial nominee Terry McAuliffe dismissed the 2021 $2.6 billion general fund revenue surplus as entirely due to extra federal COVID relief funds, which is absurd on its face. By definition, every dollar is general fund state tax revenue. It came from some form of state tax.

Why do Virginia Democrats continue to deny that recent state tax law changes are in part responsible for almost-embarrassing large cash surpluses recently announced? At the time the deeds were done, nobody was denying the big revenue impacts. The really big hit was a totally bipartisan decision, so Democrats can share the credit or blame.  

Federal money flows in and out of a separate category known as non-general funding. Is there another part of the surplus lurking out there, left-over non-general funds raised during fiscal year 2021 but not spent in that period? Was it indeed made fatter by unspent federal dollars? Yes. It is just not included in the big reports shared and discussed in the public meeting of the legislative money committees.

One non-general fund surplus that was reported is in the state’s transportation funds, where federal funds do mix in. Add it to the general fund surplus, and the total is now about $3 billion. It is 100% certain that the 2020 transportation tax increases contributed substantially to that surplus. The gas tax went up a nickel per gallon in some parts of Virginia, 12.6 cents per gallon in all other parts of the state, and an entirely new statewide highway user fee (tax) was imposed on annual vehicle registrations, all July 1, 2020.

The largest element of the $2.6 billion general fund surplus can be traced back to the decisions made by the 2019 General Assembly to keep most of the state revenue windfall generated by the 2017 federal tax code changes. Republicans then ran the committees that made those decisions and fought like COVID-ridden kittens to protect us from that coming state tax hike.

But nobody hid the financial impact. State Secretary of Finance Aubrey Layne (now out of office so let’s admit, a Republican) invested in some excellent financial modeling that showed a revenue surge coming, and then later on confirmed the models were proving fairly accurate. All of these developments were reported on Bacon’s Rebellion far more than anywhere else.

The impact of the state’s failure to adjust its rates or standard deduction to match congressional actions had the greatest impact on business taxpayers using the corporate income tax. Revenue in the fiscal year just ended rose more than 80% over four years prior.

Two years ago, Layne was quite open about how the federal “tax conformity” windfall also ballooned the state’s 2019 surplus. Now the standard line is, what tax conformity windfall?

The other major contributor to the general fund surplus (and somewhat to the transportation surplus) was sales taxes collected on remote sales through the Internet, hard to collect from the seller prior to a court decision. That was a good policy decision. But people pay more tax after it passed, and it fattened the surpluses.

All the signs are this explosion of state revenue is just getting started (the September reports will be telling). The fiscal year we are now in will reflect the second part of the gas tax increase, the new tax on electric bills tied to the Regional Greenhouse Gas Initiative, and another round of state taxes on Payroll Protection Program (PPP) grants and a similar state grant program helping employers maintain staffing during the recession.

That is the one part of the recent surpluses where McAuliffe’s claim that federal funds are responsible has some truth. Had there not been billions flowing into Virginia for PPP grants and loans, Virginia would not have been able to skim its 6 percent off the top with its income tax. The General Assembly could have made another decision, not to tax, and the failure to do so was – again – disappointingly bipartisan.

The argument over the explanation for the surplus is a sideshow to the real campaign debate, which is whether some tax cuts in compensation are called for. To his credit, Republican nominee Glen Youngkin has routinely recognized that tax hikes built the surplus and tax cuts of some form are called for. The elements of his proposed tax cuts line up well to partially reverse the recent increases.

Search in vain for tax cuts promised by McAuliffe, even those sought by liberal allies who complain (with justification) that Virginia taxes lower income workers too heavily. Youngkin’s idea to eliminate the sales tax on groceries, in particular, was pulled straight off their wish list.

Would there still have been a revenue surplus had the state fully adjusted to prevent a “tax conformity” windfall, or failed to adopt the Wayfair sales tax rules, or skipped some other other changes? Perhaps. The COVID federal funds did stimulate personal spending. But absent those changes it would have been far, far smaller.

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16 responses to “Of Course Tax Hikes Grew the State Surpluses”

  1. FluxAmbassador Avatar

    If memory serves, the pandemic showed a small laundry list of things the state needs to turn the wrench on – the unemployment system, nursing home regulations, etc. – that we should put that surplus to work on.

    Also it’s nice to see some real world examples that raising taxes doesn’t lead to a decrease in collected revenue, something I’ve been promised was a certainty for my whole life.

    1. Nancy Naive Avatar
      Nancy Naive

      Yeah, but this wasn’t nthe first time that adage was proven false.

      1. Stephen Haner Avatar
        Stephen Haner

        Talk about looking for a silver lining…:)

  2. The political class’s new strategy: Enact tax increases, spend more, then deny they enacted the tax increases. It seems to be working.

    1. DJRippert Avatar

      It works especially well when the tax increases are hidden rather than simple increases in the tax rates.

    2. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Except for transportation taxes, Democrats can truthfully argue that they did not raise taxes. The major revenue increase resulted from conforming to the changes in federal tax policy enacted by Republicans. The tax on internet purchases was already on the books; most people chose to not pay it and got away with that. Now, there is no denying that those policy choices resulted in some people, but not all, paying more in taxes.

  3. LarrytheG Avatar

    On transportation – which is NOT general fund but earmarked trust fund, I’d ask is it a NET INCREASE or is it clawing back what had been lost to more efficient vehicles?

    On conformity, I agree but if TCJA reverts in 2024 to prior tax policy, it changes what Va should/would do about conformity.

    In the meantime, the State has some issues that demand attention – like the mental health facilities, nursing homes, opiod addiction, VDH and VEC.

    For a given dollar , kept by the taxpayer or taxed – it’s spent on something. If it is invested and returns a benefit, that’s good but if the State has awful mental health facilities – is that dollar better spent by the state?

    1. DJRippert Avatar

      Virginia was #24 in total stat-local taxation. Before most pf the Northam tax hikes hit. That meant there was plenty of tax being taken for reasonable government services.


      1. LarrytheG Avatar

        no outstanding state needs? mental health, nursing homes, opiods, VEC and VDH technology?

        I no more like taxes than you guys. I hate it every time I get the local tax bill and again at tax time but I also want govt services that work and are not lacking because they are not funded sufficiently.

        Do we think the mental health thing is bad government and there is enough funding already, but just poor management?

        Easy to be cynical. Hard to be really informed and actually advocate for increased funding when really needed.

        1. Stephen Haner Avatar
          Stephen Haner

          Is “too much” even possible in LarryWorld? State revenue growing by one-third in one governor’s term, during low inflation, doesn’t raise an eyebrow? (Granted, that low inflation is passing now, but I’m talking about before…)

          1. LarrytheG Avatar

            sure there is such a thing as too much but there is also such a thing as underfunding that actually ends up harming services and infrastructure.

            Anyone who has seen how SmartScale for VDOT works can tell you that transportation money is pretty scarce these days.

            We have abysmal mental health services and the State Police on light on manpower, etc.

            Even Youngkin claims public school teachers need salary increases!

          2. Stephen Haner Avatar
            Stephen Haner

            Money should be scarce and the spenders should be forced to dig for value….

            So, 40 years ago (and I was on the front row) Robb’s main promise was: Teacher salaries above national average! What an old and honorable line of bull….why haven’t any of the D or R governors done it? Mainly because it is a rapid moving target, made harder to achieve by even your own efforts! Your own higher salaries raise the bar.

          3. LarrytheG Avatar

            The teacher salary thing is classic pandering….. also used for public safety at times and really it’s more of a local issue than a State one.

            But there are state issues – like transportation infrastructure, mental health, modernization of agencies like VEC , prisons, so “digging for value” might be a good ethic but when things like mental health don’t get adequately funded, year after year, it’s mot than just that.

    2. Stephen Haner Avatar
      Stephen Haner

      Aaaaaaand the “spend it all” caucus is heard from.

      I don’t see a future Congress letting the standard deduction revert to the far lower level, or recreating all the deductions eliminated — but watch THIS Congress on SALT. Plus we’ve been told no tax hikes below $400K in income. Biden wouldn’t break that, would he? 🙂 But totally reversing TCJA would have that exact effect.

      1. LarrytheG Avatar

        You may not but for Virginia to change on that premise seems a bet at best.

        Best bet – wait until the dust settles with Congress.

        I’ll tell you that right now, workers that are independent contractors get ripped both Federal and State and conforming won’t help them.

  4. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    This is a good, fair summary. I did not watch the debate, so I don’t know the context of McAuliffe’s claim. Even so, it is disappointing to hear that his position, by definition, is wrong. Instead of running away from the surplus revenue, Democrats should acknowledge that it resulted from policy choices that very bipartisan in nature, point out that most of the surplus will be going into reserve funds and the rest will be used for one-time activities for which there is a consensus agreement, such as rural broadband and renovating or replacing old schools. Unfortunately, this type of response does not play well as a bumper sticker or in today’s Twitter environment.

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