House Appropriations Committee Chairman Luke Torian and Senate Finance and Appropriations Committee Chairwoman Louise Lucas offered similar cautionary messages about the upcoming state budget process at their respective committee meetings this month. Both Chairs noted that state revenues have performed better than expected thus far, but pointed to headwinds facing the state in the coming months, including expected cost shifts and spending reductions in the federal reconciliation bill, the effects of federal workforce reductions and other federal spending cuts, and projected budget pressures independent of federal actions, including the Medicaid forecast and the biennial rebenchmarking of the Standards of Quality. Chairman Torian reassured fellow legislators that the state will meet the fundamental budget needs of the Commonwealth, including health care and education, but admonished colleagues to temper their expectations regarding other investments, and issued a firm refusal to rely on the state’s budget reserves to backfill ongoing spending requirements. Chair Lucas similarly exhorted members to stay informed as additional economic data becomes available; the Senate Finance and Appropriations Committee’s Special Subcommittee on Federal Impacts to Resources will meet in October, and both “money committees” will hold retreats in November to take stock of state finances.
Chairman Torian’s comments came at the end of the final meeting of the House Emergency Committee on the Impacts of Federal Workforce and Funding Reductions, at which the Committee received a staff briefing outlining key findings and recommendations. The Committee’s report documents the importance of the federal government to Virginia’s economy, as a major employer, purchaser of goods and services, source of grant funding, and provider of direct support to individuals. Federal funds represented approximately one third of the state budget in FY 2024, with most of these dollars concentrated in the Medicaid program. The report outlines expected impacts on the state budget of various provisions in HR 1, the recently-enacted reconciliation bill, and catalogs cancellations and rescissions of various grant funding. Key recommendations in the report include requests for better data to inform policy decisions, proposals to enhance unemployment benefits, and workforce initiatives to assist displaced federal workers. Staff stressed that state and local budgets will not be able to replace declining federal support, and that “prioritization is going to be key for decision makers” as the impacts of federal actions are absorbed over the next several years. Staff’s presentation is available at this link, and the full report is available at this link.
A key decision facing legislators in the next session is the degree to which Virginia will incorporate changes to the federal tax code included in HR 1 into Virginia law, the subject of a presentation by Deputy Tax Commissioner Kristin Collins at the September 16 Senate Finance and Appropriations Committee meeting. In 2023, Virginia adopted “rolling conformity” with the federal tax code, with certain guardrails, so that federal income tax changes with impacts below certain revenue thresholds would be automatically incorporated into Virginia’s tax laws, but the 2025 Appropriation Act paused these provisions, allowing the legislature to make decisions about conforming to many federal tax policy changes. General Assembly action is not required for tax policy provisions that simply extend provisions that were set to expire, but new federal actions that affect the calculation of adjusted gross income would require the legislature to mirror these provisions in Virginia tax law, if so desired. Several business tax provisions in the reconciliation bill fall into this category. The Department of Taxation estimates that fully conforming to the individual and business provisions in HR 1 would result in a state revenue loss of approximately $575 million in the current fiscal year, $258 million in FY 2027, and $244 million in FY 2028. Due to these significant revenue impacts, conformity decisions will have substantial ramifications for state budget negotiations, and these high-stakes decisions will likely need to be made early in the legislative session; traditionally, conformity bills have been enacted as emergency legislation to allow time for Virginians to prepare and file their state income taxes.
Secretary of Finance Stephen Cummings reported to the Senate Finance and Appropriations Committee that state revenues continued to outperform expectations, and are ahead of the forecast by $266.5 million year-to-date. Strength in individual income tax withholding contributed to growth in August relative to the same month last year, with collections 10.3 percent ahead of the previous year; however, the Secretary’s memorandum notes that this source is “subject to swings from large employers” and is unlikely to remain at these levels of growth. Secretary Cummings was largely upbeat about the state economy’s performance, although he noted that job growth is slowing and unemployment claims are rising. Revenue collections in September, which will include the first quarterly payment for individuals and corporations making estimated payments, will provide a better picture of the state’s economy. The state’s revenue forecasting process will continue throughout the fall, with meetings of the Joint Advisory Board of Economists and the Governor’s Advisory Council on Revenue Estimates scheduled in October and November, respectively. The Governor will present his amendments to the current biennium budget and his proposed 2026-2028 biennium budget on December 17.
VACo Contact: Katie Boyle