Virginia Ill Prepared to Weather a Recession

Thin ice

I’m not sure how Virginia’s Secretary of Finance, Aubrey Layne, sleeps at night. He is by nature a fiscal conservative, and he was in frequent touch with the rating agencies that threatened earlier this year to downgrade Virginia’s prized AAA bond rating. While elected officials may ignore the fiscal warning signs, it’s Layne’s job to pay attention to the warning signs. They’re coming fast and furious.

In recent days, I have drawn attention to analyses by Truth in Accounting and the Mercatus Center that have highlighted the precarious nature of the Commonwealth of Virginia’s finances. Now come new warnings from bond-rating firms S&P Global Ratings and Moody’s Analytics. As reported by Reuters:

While U.S. states’ financial health has strengthened in 2018 compared with last year, fewer than half have enough financial reserves to weather the first year of a moderate recession, according to an S&P Global Ratings report on Monday. …

Only 20 states have the reserves needed to operate for the first year of an economic downturn without having to slash budgets or raise taxes, S&P said.

Meanwhile, from Moody’s Analytics:

A Moody’s Analytics report, also released on Monday, said the number of states with sufficient reserves to withstand a recession increased to 23 from 16 last year.

However, that leaves 27 states lacking sufficient reserves. And who might they be? According to Moody’s (my emphasis):

Those states, in order of least-prepared, are Louisiana, Oklahoma, North Dakota, New Jersey, Montana, Kentucky, Virginia, Missouri, Arizona, Illinois, Pennsylvania, Wisconsin, Kansas, New Hampshire, Mississippi, Michigan and Arkansas.

More than nine years since the end of the 2007-2009 recession, and Virginia is one of the states least prepared to weather an economic downturn?

Virginia has a rare chance to put its fiscal house in order. We’re benefiting from a trifecta of (1) a temporary acceleration in economic growth and tax revenue, (2) a windfall from the federal tax cut, and (3) a windfall from the ability to start collecting a tax on Internet sales. Some people say, whoopee, let’s spend the windfalls! Others, including my esteemed colleague Steve Haner, say, let’s give it back to the taxpayers. I have yet to hear anyone (other than myself) say, let’s use the windfalls to pay down liabilities, build up reserves, and generally strengthen Virginia’s financial condition.

This is easy money. If we spend it or give it back, I can guaran-damn-tee you that a time will come when we’ll wish we’d set it aside for when we really needed it. Cutting spending and/or raising taxes at that time will be very painful.

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12 responses to “Virginia Ill Prepared to Weather a Recession

  1. The recent stock market setback notwithstanding, the state should be fat and happy during FY 2019. All the economic indicators are moving to green and the budget is based on an intentionally anemic growth prediction (1.4%). IMHO the state’s antiquated tax code, its heavy reliance on the personal income tax, it’s (dare I sound like a lib?) regressive structure that imposes too much income tax on working class families, its honeycomb of special interest exemptions – all are anchors on future economic growth. The conformity windfalls give us the best chance in a generation do so something about that. If not returned, they will just be used as excuse to spend us into an even deeper hole.

    Yes, a recession will mean the state has to take drastic steps to tighten its belt. I have watched the process going back to Governor Robb. Sometimes the cuts are smart and sometimes not, but the process has its benefits and the federal government is long overdue for the same exercise. I’m stunned, Jim, that your top priority is protecting government spending!

    • “it’s (dare I sound like a lib?) regressive structure that imposes too much income tax on working class families, its honeycomb of special interest exemptions – all are anchors on future economic growth.”

      This is an excellent point. I suggest that it can and should be expanded.

      Here I place emphasis on the words “regressive structure” and expand the word “taxes” to include fees, costs, tariffs, tolls, handling charges, service fees, inspection fees, carrying costs and charges, stamp taxes, and inflated medical, insurance, and education costs, etc. etc. etc. (just inspect your cable or propane bill), that today are imposed on American society, most particularly on America’s dwindling middle class.

      Our society, particularly it government, and public institutions that provide essential services, have turned it citizens into nothing more that commodities to be milked and manipulated, for what is most always private advantage.

      At the rate we are going, there will be soon a consumer use fee imposed not only on rain but on our individual air intake and exhale, monitored by a device implanted in our cell phones and shirt collars. Hidden government charges and corporate consumer fees now ubiquitous must be exposed. Government spending must be curtailed. Relief must be given. Particularly from these regressive charges inflicted on our middle class that is absorbing far more than its share of that pain.

      The costs of in built legacy government, education, and medical care spending is eating our society alive, bleeding it dry, most particularly our middle class. If not reduced, these sorts of impositions on the middle class, and the ills of society generally, will cause its collapse. This will happen in times of great riches, much of those riches misspent by government, despite the best efforts of fine, indeed heroic, efforts by public servants like Virginia’s Secretary of Finance, Aubrey Layne.

      • When I consider the cost of living now, the obvious and hidden costs of government and regulation, compared to when we were starting out – I have no idea how young people with starting salaries or young families cope. Just the cost of day care in today’s heavily-regulated environment is crushing compared to what we paid.

        • Boy, are you ever right. My first house I bought for $31,000 in 1972. Today that “starter” home would cost a young couple well over a million bucks. Likely a $1, 200,000. Two kids at private day schools in DC today can set you back $90,000 annually.

    • Why would you say the Virginia tax code is regressive (educate me)? I would say we put a lot of emphasis on things like car tax, which lower income folks can escape by not buying brand new cars. Also lower income folks can live outside of NoVA to get a low tax situation. As Steve points out, lower income 65+ folks benefit from generous deductions, which phase out over $75K, but Social security is untaxed at least.

      Also if we look at tax free states like TX and FL and then look at how much Va. taxes us, we have to wonder how those tax-free states do it. What would be our option to depend less on income tax?

  2. re: “think like a LIB”

    ” This is easy money. If we spend it or give it back, I can guaran-damn-tee you that a time will come when we’ll wish we’d set it aside for when we really needed it. Cutting spending and/or raising taxes at that time will be very painful.”

    GOOD LORD! Am I WRONG or are BOTH Haner and Bacon advocating KEEPING the conformity money?

    What would the Club for Growth say?

    One can bet their keister than if Layne even hints at keeping some of that money that our friends on the right will label him as yet another “extreme” Liberal who wants to spend other folks money!

    • No, sorry if I was not clear. I want VA to return the conformity windfall to taxpayers, but it might not always be the same taxpayers who paid it in, dollar for dollar. That is an impossible goal. So take the revenue and change the system in a more general way. I greatly prefer a higher standard deduction to the EITC approach.

      Yes, Jim wants to keep it! 🙂

  3. re: “…. regressive structure that imposes too much income tax on working class families, its honeycomb of special interest exemptions – all are anchors on future economic growth. The conformity windfalls give us the best chance in a generation do so something about that. If not returned, they will just be used as excuse to spend us into an even deeper hole.”

    I’m not so sure. Northam thinks MORE should go to lower income – EITC while a straight reversal will take us back to regressive taxes on working-class folks.

    no?

    So here’s a question. Is the conformity thing any or all of :

    1. – an opportunity to shore up Virginia reserves
    2. – an opportunity to clean up the special exemptions in the tax code
    3. – an opportunity to shift away from income-based revenues to consumption-based revenues?

    One thing I think we can say although probably with some disagreement is that McAuliffe did not turn out to be the tax&spend boogeyman that the Va GOP said he would be. He actually presided over a fairly fiscally-conservative government. Second, Northam also is NOT a wild-eye California type liberal trying to turn Virginia into a socialist disaster even though there are those who say that with respect to the MedicAid expansion and his stance on conformity so far.

    Virginia is trending blue – that “blue” Governance is what a lot of Virginians wants especially in our urban cores with their healthy (tax generating) economies.

    • Larry – assuming the GA and Governor do not enact conformity legislation, would you oppose conformity legislation the next time Congress increases federal income taxes?

      More and more younger Virginians with degrees are voting with their feet and leaving the state. Anecdote, about half of my 20-something daughter’s friends in Raleigh went to college in, or are from, Virginia. And more and more retirees are moving too.

      Given the presence of Uncle Sam in D.C., NoVA will always be full of wealthy people and people earning good compensation. But the overall balance is changing with more poor people moving in and more middle/upper middle class people leaving. If this latest caravan of Central Americans makes it across the border, how many will wind up in NoVA? And what are their skills and education? What happens as we use more and more robots and other technology to perform tasks that don’t require high skills?

      Certainly not everyone leaving is moving because of taxes. But layer in an ever-declining quality of life due to traffic, and there is a strong incentive to move when you don’t have a strong tie to Uncle Sam’s money.

      The decades of local governments being subservient to real estate development proposals without corresponding increases in public infrastructure is coming back to bite local (and state government) as the economic middle leaves and people from lower economic segments replace them.

    • “Asia’s biggest listed restaurant chain by market value is partnering with Japan’s Panasonic Corp. to open what the two companies say is the world’s first eatery with a fully automated kitchen Oct. 28 in Beijing. At the new Haidilao restaurant, robots will take orders, prepare and deliver raw meat and fresh vegetables to customers to plop into soups prepared at their tables.”

      https://www.bloombergquint.com/pursuits/robots-serving-spicy-soup-is-key-to-hotpot-chain-s-expansion#gs.FFh4sqg

      How long before we see things like this in the United States?

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