By Steve Haner
What a difference just four years has made in Virginia’s financial condition, with the state’s General Fund tax revenue having increased 31% during the period and its Commonwealth Transportation Fund revenue increasing by almost 36%. This is comparing the annual results for the fiscal years ending June 30, 2023, just released, and the same summary for the year ending June 30, 2019.
Corporate income tax collections for FY 2023 were 117% higher than four years before, state motor fuel taxes rose 72% in the period, and sales and use taxes grew in excess of 30% during the period. Net (after refunds) personal income taxes rose more than 24%.
There were major headwinds pushing against such growth during the period, mainly the 2020 COVID-19 recession, an anemic stock market, and a round of income tax cuts in 2022. Pushing the other way, adding to revenue, were a series of tax increases approved when Democrats had full control of state government in 2020 and 2021, and the economic sugar high from federal deficit spending.
Put that all in the shaker and the result that pours out is Virginians seeing their overall taxes grow faster than the 19% official inflation for the period between July 2019 and July 2023. The resulting cash balances for the Commonwealth were previously discussed here.
Why start with 2019? That was the last full-scale Assembly election. In 2019 the General Assembly made various adjustments to state taxes in response to the federal Tax Cuts and Jobs Act, but most of them did not really kick in until the following tax year. Those changes basically left much higher effective corporate tax rates in full effect, which is the main explanation for those taxes more than doubling in four years.
Republican Governor Glenn Youngkin’s 2023 proposal to reduce the corporate tax rate slightly to compensate for the TCJA windfall has been denigrated by most Democrats and will likely be a club wielded against the GOP in the 2023 elections. Some people are ecstatic that corporations are paying more than double in just four years.
The 2020 General Assembly, under full Democratic control and working with a Democratic governor, expanded the scope of the sales tax to internet sales in line with the Wayfair federal court decision and raised transportation revenues, formally indexing the motor fuels tax rates to inflation. Those explain why the fuels taxes rose 72% over four years, and sales tax growth exceeded 30%. The sales tax growth has benefited both the General Fund and the Commonwealth Transportation Fund.
Last year Youngkin proposed to lower the impact of the higher motor fuel tax changes, also rejected by Democrats and defeated.
Inflation also played a major role in the growth of the general sales and use taxes, the sales and use tax on vehicles, and even the 24% growth in net personal income taxes. The adjustments made to the standard deduction in 2019 and 2022 did not fully counteract the Tax Cuts and Jobs Act’s “windfall” effects through lost deductions, or correct for all inflation.
Lottery sales more than doubled during the period, from just under $2.3 billion to just over $4.6 billion, but net profits the Commonwealth could spend grew only 38%, from $633 to $871 million. Many still consider that a tax on the mathematically challenged, but it is a voluntary drain on people’s pockets.
The Commonwealth Transportation Fund has undergone several changes in the short period. Gone is the Priority Transportation Fund as a separate category. It has been partially replaced by a new Highway User Fee that is aimed at electric and hybrid vehicles and the most efficient gasoline cars and trucks. The HUF collected only $58 million in 2023, but it will be a fast-growing revenue source.
Until then, higher motor fuel tax rates and the expansion of the sales tax to capture more transactions explain the growth in the Commonwealth Transportation Fund at almost twice the rate of inflation. Neither it nor the General Fund are likely to slip backwards now.