On February 15, Secretary of Finance Stephen E. Cummings reported to the House Appropriations Committee on January state General Fund revenues, notifying Committee members that revenues are ahead of the December forecast, but highlighting several areas of uncertainty in the months ahead. After adjusting for timing issues for collections and certain policy changes, such as the creation of a new pass-through entity structure for income taxes (which would artificially inflate collections in December and January, but subsequently be offset by credits in the remainder of the year), general fund revenues have increased by 4.5 percent on a fiscal year-to-date basis. On an unadjusted basis, revenues are up 2.1 percent, and are $78.7 million ahead of the December forecast on a fiscal year-to-date basis.
Secretary Cummings indicated to the Committee that, in contrast to February of last year, the Administration is not recommending any changes to the revenue forecast, as revenues are generally tracking the forecast and there is some uncertainty regarding the performance of non-withholding income tax collections in the fourth quarter. Non-withholding is among the Commonwealth’s most volatile revenue sources, and typically the bulk of non-withholding collections occur in the final quarter of the fiscal year; the January revenue report notes, “January’s data provided the first indication that non-withholding liability is likely to be significantly lower in Fiscal Year 2023 and lower monthly collections are expected over the remainder of the fiscal year.” Secretary Cummings cited a “disappointing” holiday sales season nationally as well as lower than expected sales tax revenue collections in Virginia during the October-December holiday shopping season as another area of concern, noting that a shift in consumption from goods to services is likely limiting sales tax revenue growth, since services are generally not subject to sales tax in Virginia.
Secretary Cummings suggested that the December forecast’s expected economic slowdown remains likely, with economists predicting GDP to contract in the first two quarters of 2023, remaining flat in the third quarter of the year, and then rebounding. Inflation is beginning to moderate, but remains above the Federal Reserve’s target of 2 percent, and market watchers expect additional rate increases by the Federal Open Market Committee in the near term. However, the national labor market remains robust, with large gains in January.
The January revenue report is available at this link; Secretary Cummings’s presentation is available at this link.
VACo Contact: Katie Boyle