Governor Youngkin brought good news to the General Assembly’s “money committees” on August 19, reporting on the state’s significant FY 2022 surplus and robust reserves, and lauding the investments in K-12, law enforcement, and economic development in the state budget that was finalized in June. He also pointed to areas of concern for the Administration, including inflation and the costs of doing business in the state. He signaled that tax relief, public safety, housing, and water quality improvements will be areas of focus for the Administration in the next legislative session.
The state ended FY 2022 with $1.9 billion in unexpected revenues and $1.2 billion in unspent appropriations (which will be reappropriated). There are a series of claims on these dollars, whether by Constitutional requirement or General Assembly direction in statute or in the budget, including the following:
An approximately $900 million deposit will be required for the Revenue Stabilization Fund (the biennium budget set aside $498.7 million for this purpose, leaving an additional $400 million to be deposited).
A potential “super deposit” to the Revenue Stabilization Fund may be required to be included in the introduced budget if revenues meet certain conditions (the most recent fiscal year’s annual percentage increase in General Fund tax collections was greater than 8 percent, the most recent fiscal year’s annual percentage increase in General Fund tax collections was greater than or equal to 1.5 times the annual increase in General Fund tax collections for the immediately-preceding six fiscal years, and revenue growth of 5 percent is forecast for the next fiscal year).
The biennium budget earmarked $585 million from undesignated surplus revenues for several purposes ($250 million to address unfunded liabilities in the Virginia Retirement System, $150 million for improvements to Interstate 64, $50 million for the Virginia Business Ready Sites Program Fund; $100 million for capital projects, and $35.5 million for the Major Headquarters Workforce Grant Fund).
An estimated $131 million will be required to be deposited in the Water Quality Improvement Fund.
The Governor indicated that he plans to set aside $397 million for tax relief, pointing to the state’s healthy finances and substantial reserves and increases in the cost of living associated with inflation. He expressed a desire to lower the cost of doing business in Virginia, pointing to North Carolina’s business tax reductions as a model. He also discussed increasing costs for housing and his interest in addressing the “root causes behind the supply and demand mismatch behind places to live: unnecessary regulation, over-burdensome and inefficient local governments, restrictive zoning policies and an ideology of fighting tooth and nail against any new development.” Other priorities include public safety and a commitment to meeting water quality standards for the Chesapeake Bay.
Secretary of Finance Stephen E. Cummings provided more details on FY 2022 revenues in his presentation, reporting that General Fund (GF) revenues experienced 16.3 percent growth, significantly ahead of the forecasted 8.5 percent. Nonwithholding income tax collections and lower than expected refunds represented 90 percent of this surplus; however, nonwithholding tends to be a volatile revenue source. The state’s main GF revenue sources – individual income tax withholding and sales and use taxes – demonstrated solid growth; withholding collections grew by 9.5 percent in FY 2022, ahead of the forecasted 9 percent. Sales and use tax collections also outperformed their forecast of 6.5 percent growth; when adjusted for the elimination of the requirement for certain retailers to remit accelerated sales tax payments, sales tax collections grew 13.3 percent in FY 2022. Corporate income tax collections grew by 30.5 percent for the year, slightly behind the forecast of a 32.6 percent increase (but reflecting growth of 109.7 percent relative to FY 2019). July revenues appear to be off to a strong start in the new fiscal year as well, with growth of 5.2 percent, when adjusting for the accelerated sales tax elimination, on a year-over-year basis.
In addition to high levels of inflation, Secretary Cummings cited Virginia’s lagging job growth relative to its peers as an area of concern. Virginia lost 427,000 jobs during the pandemic and has yet to recover 119,000 of these jobs (later in the day, the Governor announced that 100,000 jobs have been added since January). Secretary Cummings noted that Virginia employment levels are 2.7 percent below pre-pandemic levels; in contrast, competitor states (Florida, Georgia, North Carolina, South Carolina, Tennessee, and Texas) have fully recovered their job losses.
The state budget development process is underway in preparation for December. State agency proposals are due in early September. The Governor met with the Governor’s Advisory Committee on Revenue Estimates (GACRE) on August 5; the Joint Advisory Board of Economists will meet in October, and GACRE will meet again in November to review the revenue forecast for the 2022-2024 biennium. The Governor will present his proposed amendments to the biennium budget to the money committees on December 15, which will incorporate any revisions to the revenue forecast.
VACo Contact: Katie Boyle