Weak Growth Makes Conformity Revenue Tempting

Virginia economic performance measures 2017 and 2018. The U.S. exceeded expectations while Virginia lagged.

I called it correctly back in June: Conformity to federal tax reform produces a major boost in state revenue which the state’s leadership on both side of the aisle is strongly tempted to keep because the state remains strapped for cash.

The signs of economic stress are all over Secretary of Finance Aubrey Layne’s August 17 presentation to the General Assembly’s money committees. At the end of perhaps the longest U.S. bull market in history, following a tax cut designed to stimulate growth and a major shift in regulatory climate, Virginia continues to under-perform the national economy. The employment growth figure of less than one percent stands out.

Yes, Virginia ended fiscal year 2018 on June 30 with $555 million more general fund revenue than projected in the budget – a 2.7 percent cushion. But Layne explained a large part of that came from $120 million in last-day deposits  made earlier than normal because of the July 4 holiday timing. It also appears many taxpayers boosted their withholding because of uncertainty over whether or how Virginia would conform to federal tax reform.

The report shows Virginia missed its forecasts on corporate income, recordation, insurance premium and other smaller taxes tied to economic activity, and only exceeded the sales and use tax projection by one-tenth of one percent. Layne, always candid, mentioned the growing prevalence of sales and use tax exemptions as business incentives as one reason that revenue source can’t seem to grow.

The chart above shows the basic problem:  Virginia missed its own forecasts on employment and wage growth, while at the same time the national forecasts – higher to begin with – were being beaten. The similar chart for the new fiscal year shows the same expected result – Virginia trailing the national averages into next year.

The overall general fund growth target for fiscal year 2019 is an anemic 1.4 percent. The first month of the new year, July, was down from last year.

This continued weak economic performance explains why Virginia seems unable to refill its mandatory revenue stabilization fund, or rainy-day fund. There are no large surpluses to direct to that purpose, so only a trickle of money is flowing in. By law, Virginia also has dedicated portions of any surplus revenue to several other uses.

Virginia has avoided the wrath of the Wall Street rating firms over its small reserves by setting aside a second, non-mandatory revenue reserve with what would otherwise be operating cash. Only with the help of that will the reserves exceed $1 billion by 2020.

Failure to Launch: Virginia’s Rainy Day Fund must be supplemented by diversion of operating funds to even approach its prior totals. Source: Layne presentation.

Much of this was overlooked because the discussion Friday promptly turned to tax policy and Governor Ralph Northam’s call for full conformity with the federal changes, projected to increase state tax revenues by $3.6 billion over five years.  But the link between the two issues is strong.

At the end of his presentation Layne went through several risks facing the state, and these did not include the giant risk of an economic downturn or stock market crash (which came up in response to a question from Del. Scott Garrett, R-Lynchburg).

Virginia has apparently made some major economic development promises, a package of incentives large enough to lead Layne’s list of revenue risks should the deal be sealed and announced  Is it Amazon? He was careful not to mention names, but such an open discussion was unprecedented. It must be a huge incentive promise.  

Next he mentioned VRS, which of course needs to continue strong investment performance to meet future obligations but may come asking the General Assembly for increased employer contributions. He went on to talk about federal risks, expensive technology costs facing the state, and capital needs. Then he pointed to transportation funding, which remains flat despite the 2013 transportation tax package because gasoline prices remain low and more vehicles are moving away from that fuel. Only Hampton Roads and Northern Virginia, with their added regional taxes and greater acceptance of tolls, are seeing major construction activity, he said.

How the sales tax is sliced between multiple state and local uses

The U.S. Supreme Court’s recent decision in the Wayfair case opens the door for Virginia to demand that out-of-state sellers collect sales tax from Virginia buyers and remit that to Richmond.  The estimate Friday was that might produce $250 million a year for Virginia, but that is shared several ways and only $89 million of it would be available to the general fund for appropriation. Layne reminded those talking of directing this revenue to school construction that much of it already goes to education.

Perhaps it will happen naturally, perhaps it is already happening, but somehow Virginia needs to see some real five plus percent year-over-year growth – one more reason to take a long, hard look at the state tax code to see what if any provisions might be impeding that and what changes might kick start things.

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11 responses to “Weak Growth Makes Conformity Revenue Tempting

  1. Bless you Steve! I am speaking in front of council tonight. I might be able to use this.

  2. Excellent Reporting, Steve. You’re on roll.

    Bottom line, the state is stealing money from taxpayers, thanks to Trump’s business genius.

  3. Excellent article – but my main take away is to understand two things:

    1. – why is Virginia “under-performing”

    2. – is that judgement born out when we compare Virginia to other states or even to itself historically.

    data is tricky stuff… it can say one thing then later different data seemingly contradicts the first.

    Virginia HAS been warned about it’s skinny reserve fund…and justifiably so – but I remain to be convinced that we are really under-performing much less that being a good reason to essentially increase taxes on folks… seems like you’d want the opposite, no?

    • Larry:

      I’ve been harping on your first question for years. https://www.baconsrebellion.com/wp/has-virginias-economy-officially-tanked/

      In the real world inhabited by the other 49 states the state government can’t just sit back and wait for money to flow from the federal government into the state. Those state governments actually have to work with in-state business interests and develop a governance program that works. Virginia has been fat, dumb and happy for decades riding the wave of ever ramping federal spending. This requires more than a state economic development lead persuading the GA to hand out economic goodies to various corporations. It requires a constant review of economics, education, workforce, etc in the state. Virginia has none of that.

  4. I think it’s fascinating that the answer from our essentially useless state government isn’t generating more growth but generating more taxes (as a percentage of economic activity). I further find it fascinating that our state government is using a bevy of cheap tricks to raise taxes without having to vote to raise taxes. The “hospital charges” to fund Medicaid expansion, the conformity non-action, the internet sales tax. Virginia’s Democrats (and their enablers in the Washington Post Ministry of Propoganda) have always though that Virginians should pay more in taxes … a la Maryland. So, they’re not going to say anything. Meanwhile, Virginia’s Republicans need to protect their shrinking political base that is now heavily centered on the rural welfare state. So, they will sit quietly on the sidelines listening to “wooshing” sound of monet being taken out of middle class pockets in NoVa, Richmond and Hampton Roads and transferred to the rural areas.

    Cuccinelli always had this right. The key is to constrict the budget, not hope for fairness, transparency or even honesty from our state government. The state budget should grow no more than the old budget + the increases in population and inflation. Put it into the state constitution and handcuff the politicians in Richmond.

    • Lot’s of GOP candidates years ago promoted the idea of a cap on state general fund spending growth tied to inflation and population. Then they got the majority and the responsibility that came along with it and the talk dried up. The problem is too many items in the state budget on automatic pilot – Medicaid, the education Standards of Quality, etc. A tight cap that didn’t include them would mean a total squeeze on the other parts of the budget.

  5. I agree with Drippert, and Haner too, in spades. And would only add that, per Haner, the “Republican” who keeps his word once in power is a rare bird indeed. But it looks like at long last we have found at least one.

  6. Virginia cares more about illegal immigrants than it cares about growth. They provide labor at below-market rates and transfer the social costs from employers to the taxpayer since wage levels are so low. The desire to unite large families motivates many Hispanic voters – a growing part of the electorate. Hence, we have a bargain made in hell between Republicans and Democrats that costs taxpayers a lot of money. Make Virginia a target destination for poor people.

    There is no job growth at upper levels and has been this way for years. All the job growth is at low-paying service job positions – jobs that don’t pay enough taxes to support the necessary services associated with a large population.

    But for people born in different countries, Virginia would be losing population. Many college graduates leave the state because of the high cost of living in metro areas and the lack of higher paying jobs. Anecdote – I bet at least half of my daughter’s friends in Raleigh are graduates of Virginia colleges.

    Ditto for many retirees. While many stay here to be near children and grandchildren, many move away to avoid the traffic and high cost of living. (I recently looked at a brand-new house in Metro Raleigh with slightly more square footage than my present house but with real estate taxes of $3800 versus $12-13 K here.)

    And much of public capital goes to fund infrastructure that should be paid by developers according to state law. We spent billions and billions for the Silver Line only to see Metro ridership continue to fall and traffic continuing to grow. Better a land speculator gets rich than we create a good business environment for new companies that are not government contractors.

    And, at least for the D.C. part of Virginia, we don’t have risk takers like they do in many other parts of the country. Government contractors are not risk takers.

    Even a business savvy guy like McAuliffe didn’t make a dent in stopping the sluggish Virginia economy. But some of that goes to his desire to please the “progressives” in his party cuz he wants to run for President. Northam seems like a good and decent man but he has no clue.

    Bottom line. Virginia is headed in a direction to her post Civil War past that even federal spending won’t help unless we have another world war.

    • The ghastly murder of University of Iowa student Mollie Tibbetts shows the self-serving corruption from the so-called elites. The suspect arrested, Cristhian Bahena Rivera, is an illegal immigrant working for “Yarrabee Farms [that] is owned by Craig Lang, the former president of the Iowa Farm Bureau and an active member of the Republican Party in the state. He ran for Secretary of Agriculture in the GOP primary. The Farm claims the suspect passed E-Verify. Yah right. Mr. Lang is disgusting. And I’m waiting for some one on the progressive side to argue Rivera should be given the right to vote.

      • Let’s take a look at the flip side of this same problem. How our elite colleges and universities produce students, graduates, and professors who, along with the policies of both Democrat and Republican leaders, acerbate the growing divide between our fellow American citizens.

        “There is one category that the religion of the liberal elite does not recognize – that its purpose, one might almost conclude, is to conceal: class. Class at fancy colleges, as throughout American society, has been the unspeakable word, the great forbidden truth. And the exclusion of class on selective college campuses enables the exclusion of a class. It has long struck me in leftists or PC rhetoric how often “white” is conflated with “wealthy,” as if all white people were wealthy and all wealthy people were white. Roughly 60 percent of working class American’s are white. Almost two-thirds of white America’s are poor or working poor. Altogether, lower-income whites make up 40 percent of the country, yet they are almost entirely absent on elite college campuses, where they amount, at most, to a few percent and constitute, by a wide margin, the single most underrepresented groups … Nor coincidentally, lower income white belong disproportionately to precisely those groups whom it is acceptable and even desirable, in the religion of the (liberal elite) colleges to demonize: conservatives, Christians from red states. See On Political Correctness (power, class, and the new college campus) by William Deresiewicz, March 16, 2017, in American Scholar.

        Here, of course, within your comments TMT and Professor Deresiewicz’s, we find the taproots of the events that took place Charlottesville during the Spring and Summer of 2017.

  7. TMT – You’ve just made one hell of an informed and intelligent statement on Virginia’s present and its future, unless Virginians change the course they are on. Lets get it the exposure and attention it deserves. Pass it around. Reed

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