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Commonwealth's Counties

March State Revenue Update

State General Fund revenues largely continued to perform in line with expectations in March, and the Youngkin Administration remains confident in its forecast, according to information released by the Governor on Friday, April 14.  Overall General Fund revenues declined by 3.8 percent in March relative to March 2022, mainly due to higher income tax refunds resulting from policy decisions made last year to increase the standard deduction, expand the state earned income tax credit, and allow a subtraction for certain military retirement pay.  On a fiscal year-to-date basis, revenues are up 0.6 percent, ahead of a projected 8.8 percent decline, and are ahead of the December forecast by $124.2 million.

In potential indications of a broader slowing in the state economy, individual income tax withholding and sales tax collections, two of the state’s largest sources of revenue, continue to lag projections.  Withholding collections have increased by 4.4 percent on a fiscal year-to-date basis, trailing projections of 4.8 percent growth; withholding collections are $32.3 million behind projections through March.  Secretary Cummings wrote in his April 14 memorandum, “The slowdown that has occurred in withholding growth since the beginning of the year is consistent with our economic and revenue forecast which anticipates declining growth in employment, from 3.2 percent in fiscal year 2022 to 2.4 percent in fiscal year 2023.”  Sales tax collections are “modestly lower than anticipated,” according to the Secretary; collections are up 8.5 percent on a fiscal year-to-date basis, lagging projections by $60.1 million.  The Secretary’s memorandum explains, “Sales tax collections have been slowing over the last four months due to the continuing shift in consumption from taxable goods to non-taxable services, combined with higher interest rates slowing purchases of higher dollar items.”  Nationally, retail sales declined in March, following a drop in February, although sales are up 2.9 percent on a year-to-date basis.

In his revenue report, Secretary Cummings reiterated the Administration’s confidence in the December forecast of a recession in the near term, albeit later than originally anticipated; the Administration had expected to be entering a six- to nine-month recession at this time, but now expects that recession to begin three to six months later.  Minutes from the March 21-22 Federal Reserve Federal Open Market Committee meeting indicate that Federal Reserve staff also predict a “mild recession starting later this year, with a recovery over the subsequent two years.”  Federal Reserve staff expect inflation to decline this year, driven by “steep declines in consumer energy prices and a substantial moderation in food price inflation expected for this year,” although staff cautioned that uncertainty remained, particularly regarding banking and financial conditions.

National inflation figures released last week showed some signs of moderation.  The Consumer Price Index for All Urban Consumers (CPI-U) increased by 0.1 percent in March (following an increase of 0.4 percent in February).  This broad measure of inflation increased by 5 percent over the last 12 months, the smallest 12-month increase since the period ending May 2021.  However, core inflation (all items less food and energy) increased by 0.4 percent in March, following an increase of 0.5 percent in February, largely attributable to shelter costs.

General Fund revenue collections in the final quarter of the fiscal year are typically important indicators of Virginia’s finances, as estimated and final payments from corporations and individuals are due in April and May, and estimated payments are also due in June.  As reported in the media, budget negotiators have paused further work on additional revisions to the biennium budget while awaiting a fuller picture of the state’s economic condition.

VACo Contact:  Katie Boyle

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