Tax-and-Spend Pressure Builds Inexorably

by James A. Bacon

There are two items in the news today indicating that pressure for more spending and taxes will be remorseless in the 2019 General Assembly session: (1) The Virginia Retirement System board of trustees has lowered the expected rate of return on its $82.3 billion investment portfolio, requiring $215.6 million-per-year additional contributions from state and local governments, and (2) the Virginia Board of Education has approved changes to the Standards of Quality for Virginia public schools that would require $950 million more in state support to meet. And that doesn’t include increased demands from Medicaid, the program that ate Virginia’s budget; higher education where state support is the only thing restraining runaway tuition increases; or more money to meet the state’s burgeoning mental health needs.

First, the VRS. Last year the retirement system for public-employee and teacher pensions earned a 6.7% return on investment: not shabby but below the 7% assumption used to calculate contributions from state and local governments. In recognition of poorer investment prospects in an era of super-low interest rates, the board reduced its assumed rate of return to 6.75%. To make up the difference, state and local governments will have to contribute $215.6 million a year more during the two years of the next Biennial budget, reports the Richmond Times Dispatch.

“I know it’s going to take more money out of the budget, but it’s the right thing to do,” Secretary of Finance Aubrey Layne told the RTD.

Layne’s logic is impeccable. The time to put money into the system is when the economy is growing. A recession may not be imminent, but history says one is inevitable at some point. Investment returns crash during recessions just as state and local tax revenues dry up. The time to fix the problem is now.

Second, the SOQs. The State Board of Education unanimously approved changes to the Standards of Quality (SOQs) which set standards for inputs into public school systems such as teacher-student ratios, staff support, and the like. The state is required to revise these standards periodically, and in this round the BOE says that $950 million yearly in state support will be needed to fund more reading teachers, smaller class sizes, and more money for schools with large percentages of poor kids. While the General Assembly has not always fully funded the SOQs, the new, more expensive standards will put intense pressure on the legislature to increase spending.

Meanwhile, increased Medicaid spending is on autopilot. Health care costs increase significantly every year, and so does Medicaid spending along with it — and that doesn’t account for continued to tweaks that inevitably expand the scope and cost of the program. Among other challenges, the General Assembly, after increasing Medicaid reimbursement rates to hospitals, now must deliver on promises to increase reimbursement rates for physicians to the tune of tens of millions of dollars a year, maybe more.

And let us not forget higher education. By jacking up state support for institutions of higher education for roughly $50 million last year, the General Assembly browbeat Virginia’s universities into not increasing their tuitions. But the ambitions of Virginia’s public universities remain undiminished and cost pressures in higher education are as relentless as ever. The General Assembly will be caught between a rock and a hard place: Increase state support by another eight-digit figure or face the fallout from another round of aggressive tuition increases, which the universities will blame entirely on lawmakers.

Virginia also faces intense pressure to “do something” (which means spend more money) to address the rising incidence of mental illness and opiate addiction. The social problem and the hardships it creates are all too real. I do not under-estimate it one bit. (I’m reading Beth Macey’s book, “Dopesick,” and it’s terrifying.) The solutions are less than obvious, and the predictable (and not illogical) response is to “invest” more money in mental-health and addiction-recovery services. The easiest thing to do is spend more money on more government programs, so that’s what we’ll do.

How will Virginia pay for all this? I know the answer, and so do you. Higher taxes. I’m confident that Northam is trying to figure out right now which tax hikes will go down the easiest. Unless Republicans pull off a miracle upset in November’s elections, Democrats will control the state Senate, the House, and the Governor’s Office. Even if the GOP does defy predictions, Republicans don’t have the intellectual firepower to resist. Hide your wallets. A tax hike looks inevitable.

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7 responses to “Tax-and-Spend Pressure Builds Inexorably

  1. Of course there will be a tax hike. On what planet do Democrats take control of a state and fail to hike taxes? I see two approaches. Unfunded local mandates. The General Assembly and Northam will take actions which force localities to raise more money. This leads inexorably to higher property taxes. The other action will be a more graduated income tax. Right now the highest tax rate (5.75%) kicks in at $17,001 of annual income. That’s just a bit above full time minimum wage. The Dems will lower the rate for people making less than $25,000 per year – maybe to 3% for example. They will leave 5.75% for people making $25,001 – $75,000 then drop a 7% rate on incomes over $75,000. Something like that.

    It will be interesting to see what people in NoVa making $80,000 per year and being told they are rich have to say about our new liberal overlords.

  2. Agreed – as noted in the comments yesterday, the Democrats floated a trial balloon about re-instating the local car tax in full, using Schapiro in the RTD to do it. He didn’t pull that out of thin air. An income tax hike would run about like DJ outlines it, but there are many things in VA now exempt from sales tax that might not stay that way, as well. The business community fell in line for the Warner tax increase in 2004 (speaking as the person who wrote the Chamber of Commerce position paper….)

    • But at the end of the day the poor performance of the Redskins is not the fault of the teams they play. In a similar vein, the poor performance of the Republicans in Virginia is not the fault of the Democrats. The Republicans tried to cling to the shrinking demographic of rural and small town Virginia while losing first the fast growing suburbs and then the exurbs. It makes you wonder whether Kirk Cox or Tommy Norment could pass the SOL proficiency test for 8th grade math.

      The Democrats in control pie is baked. There’s no un-baking it now. The only way we avoid becoming Illinois or New Jersey is to start opening new sources of tax revenue beyond individual income taxes, corporate taxes, sales taxes and property taxes. Open the casinos, legalize weed, make sports betting legal. Adopt a vehicle miles traveled tax. Make everybody pay to drive. The average boomer turns 65 in 2020. They have a lot of money. Jack up the typical taxes and watch how fast they leave the state.

  3. You may have a big surprise. Long run you are right about the demographics, and perhaps I’m deluding myself, but I see enough close races around the state to see 51 R’s in the House when the smoke clears. It involves gaining back some of the 2017 flips, but those are possible (definately some possible here in Richmond.) The Democrats are spending a ton of money in races they will not win.

  4. The GOP has a philosophy they believe in and they don’t change to attract more voters. They’re good at careful messaging as well as deflecting blame on the Dems but at the end of the day -unless they are willing to be more attentive to what voters want – they’re going to shrink and become a permanent minority.

    Of course, the Dems can screw things up and send voters back to the GOP – but the GOP really has no real answers to a lot of modern society problems like health care or taxes, regulation .. they just plant a stake in the ground and refuse to budge. It’s better to see at-risk kids fail than to put more money on the problem. They did not AGREE to the Medicaid Expansion – they basically dug their heels in until enough of their own changed position and made the remaining opposition moot.

    That’s not how you win.

  5. Well, it is more accurate to say they dug their heels in until Trump and Congress failed in their efforts to repeal the ACA. Prior to that a chance remained that Congress would undo the whole thing anyway, or quickly pull the rug out of the 90 percent match. 🙂 Many Republicans I know would just bust with pride at your description of their sticking to principles, while Democrats blow with the wind of voter desires! And as Henry Clay said, they’d rather be right than be President…(or Governor, or delegate….) They would say they have plenty of solutions for at-risk kids, better than just throwing money at the problem. Solutions few voters (parents) want to accept.

  6. Jim,
    When the author of Dopesick came and spoke at the Norfolk library downtown (Stover), I saw her. Excellent and her talk is really worth going to if you see it.

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