May 1 is the deadline for Virginia personal income tax returns, but more than 700 very high income Virginia taxpayers skipped the deadline. As long as they have paid enough tax to cover their liability, they can wait as late as November 1 to file an actual return.
That is one the facts stressed by Virginia Finance Secretary Aubrey Layne today as he reported on Virginia’s potential $400+ million revenue surplus for the fiscal year which ends next month, with an audience full of legislators eager to find revenue to solve their problems.
Problems such as the hundreds of millions of dollars separating the House and Senate versions of the unresolved state budget, also due by the end of next month. The decisions over Medicaid expansion account for most – but not all – of the differences. And problems such as the state’s dangerously low revenue reserve, discussed further below.
Layne knows that the state is seeing a sudden surge in revenue, but most of it is coming from taxpayers who make quarterly payments – not the working folks who have dollars withheld from paychecks. A few hundred high income individuals or couples could account for much of the surge but their payments may be only temporary. Given the uncertainty over federal tax reform, many of them probably simply paid much larger amounts – and much of that money could be refunded in a few months once the rules are better understood.
It may depend on whether and how Virginia adjusts its tax code in response to the recent federal changes, as I discussed earlier. Layne said today that if Virginia stands pat on the current rules with no changes, the windfall in revenue could be (still just an estimate) $300 to $500 million. Nobody in the meeting – neither Layne nor any committee member – piped up with any promise to make things revenue neutral. Layne did indicate the Northam Administration might not want to keep it all.
Layne’s presentation was first on the agenda as the Senate Finance Committee finally restarted the process of considering the House’s second version of the budget. The co-chairs, Senators Thomas Norment and Emmett Hanger, stressed early and often that there is still time to get a budget done without doing harm to the operation or reputation of the state and its localities. The full Senate is not set to return until May 22.
The Secretary’s less cheerful news included this: Virginia remains one of 16 states which have not seen revenue (adjusted for inflation) return to their pre-recession peak. Virginia was less than one percent off the peak as of the fourth quarter of 2017, and other states were worse, but that is still a sobering situation in the second longest financial recovery on record. Layne lays much of the blame for the state’s excessive reliance on personal income taxes (70 percent) and the retail sales tax (18 percent) for the General Fund. If you set aside the surge in non-withholding revenue, the other sources are slightly above the original estimates – but not to the point that it shows sustainable economic strength.
The state is closely following the Supreme Court’s South Dakota vs. Wayfair case over taxing internet sales, and Layne stated a decision in favor of South Dakota in late June could also produce $280 to $300 million for Virginia. But the Supreme Court could also kick the issue back to Congress.
And once again he was sharing grim information about Virginia’s comparison with other AAA rated states. See the chart below. Virginia’s Constitution allows for a reserve of up to 15 percent of GF revenue but would like to muster 4 percent to calm the rating agencies. Do not bet the rent money on that happening anytime soon. Norment spent some of the meeting chastising the news media for feeding concerns about the health of the state’s bond rating, but the final few pages of Layne’s slide show (start on page 19) are all you need to see.
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