State Revenue Surges, but Growth Not Sustainable

Woo hoo! Enjoy it while it lasts.
Woo hoo! Enjoy it while it lasts.

by James A. Bacon

There’s good news on the state budget front. Governor Bob McDonnell announced yesterday that thanks to a spike in May collections, General Fund revenues have grown 6.0% through May, ahead of the 3.6% forecast growth. The fiscal year ends in June.

While advising caution, McDonnell said, “At this moment, it does appear Virginia is on track to meet, and exceed, budget projections, and to post a fourth-straight revenue surplus.”

McDonnell deserves credit for cautious budgeting. His stewardship of the General Fund may prove to be his greatest accomplishment as governor. But it’s premature to break out the confetti. Virginia’s fiscal challenges are hardly over. Much of this year’s revenue surge resulted from a one-time influx of income tax revenue as  investors shifted income to 2012 in order to beat the higher federal tax rates that went into effect in 2013. Sales tax revenues, by contrast, have increased far more modestly.

That’s why it’s a bit discouraging to hear this kind of self-congratulatory, press-release boilerplate from the governor, which implies that Virginia is on some kind of fiscal roll:

Revenue is up; unemployment is down. This is more good news for Virginia’s economy. Over the past three years we’ve seen our state unemployment rate fall to 5.2 percent; the lowest mark in Virginia in 4 ½ years. During that time over 171,000 net new jobs have been created in the Commonwealth during that period; 151,000 of those jobs are in the private-sector. Put simply: more Virginians are working, and that increase in employment is reflected in the growth in state revenue collections.

True, more Virginians are working. According to a June 13 report by Secretary of Finance Richard D. Brown, payroll employment rose 1.1% year from April 2012 50 April 2013. But that 1.1% increase in employment doesn’t come close to explaining the 7.7% increase in individual income taxes through May. Rising wages may account for another two or three percentage points, but the rest is likely tax-avoidance behavior. Next year will not look as good.

On the other hand, the 6.0% increase in Virginia’s General Fund revenues from all sources so far this year handsomely exceeds the national average for the 50 states, which the National Governors Associations pegs at 4.2%. A modest amount of back-patting may be in order.

But a new report, “The Fiscal Survey of States,” projects general fund revenue growth for all states to slow to 2.8% next fiscal year. Meanwhile, federal funding for state budgets remains problematic — a theme I explored in the previous blog post. States the NGA:

Federal funds flowing to states declined for many programs in accordance with sequestration, the automatic across-the-board federal budget cuts that went into effect on March 1, 2013. Although most major federal grant programs that provide funds to states, such as Medicaid, are exempt from the automatic budget cuts, the lower caps on federal spending in place for federal fiscal year 2014 and beyond could significantly impact a number of state grant programs; in most instances, states will not have the resources to compensate for fewer federal dollars.

It looks like a whole lot of ugly going forward. There is no magic money tree to make life easier on the General Assembly. Let us be thankful for a healthy close to Fiscal 2013 and prepare ourselves for a tougher 2014.

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3 responses to “State Revenue Surges, but Growth Not Sustainable”

  1. Neil Haner Avatar
    Neil Haner

    Continuing on Sequestration, 2013 will also be the year that Federal spending cuts show up in the paychecks of Virginia’s large workforce of government employees and contractors. Obviously the extent is yet to be known, but it certainly is going to put a hamper on the state’s growth.

    Of course there’s only so much the Governor can do about that. Best just to keep the Commonwealth’s belt tight for another year until we can see just how much affect it has.

  2. larryg Avatar

    General Fund protocols are a menace to fiscally conservative budgeting.

    it’s by and large a slush fund that is subject to the whims of politics.

    earmarked taxes are much less vulnerable to such shenanigans.

    I LIKE the idea that the gas tax is a dedicated tax and the fact that funding from the sales tax is done on a percentage basis so that each year, what VDOT gets is basically what those taxes generate – and then it has to prioritize them.

    The same thing happens with the 1% that localities get from the sales taxes for schools and local spending. There is no knock down battle about which countries get how much money – they get what the sales tax generated in their county and not a penny more no matter how “badly” they “need” it.

    general fund taxation is how we get ourselves into messes.

  3. larryg Avatar

    I LIKE the way the General Assembly allowed Fairfax to levy an income tax but it could ONLY be used for transportation AND it had to be approved by referenda.

    Why not do that with other taxes, like the meals tax? dedicated it NOT to general revenues but to something specific – like fire/ems or libraries, etc and then make the recipient of the monies – live within those revenues?

    when you do that – you make it harder (not impossible) for politicians to mess around with taxes and spending and the limiting nature reassures taxpayers that there is some finite limit to the taxes – and the spending.

    what’s the principle argument against this – beyond the fairly obvious one that a dedicated tax may not match the spending needs of something?

    but if you combine say a meals tax with a charge for ambulance service and you use that as the basis for fire, rescue and EMS – it becomes a benchmark and it’s actually tied to population growth and the demand for the service.

    I’d do the same for schools. benchmark the sales tax and a certain percentage of property taxes for schools and let the schools live within that funding stream or justify an increase – not in funds – but in the percentage of property taxes.

    funding schools as a percentage of property taxes lets people better understand the taxes – and the need – and if schools need a higher percent of property tax revenues – it clearly says that something else has to be cut.

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