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State General Fund Revenues Drop in March; Last Quarter Key to Meeting Forecast

Late last week Governor Northam announced that state General Fund (GF) revenues fell 1.4 percent in March, a result that was not unexpected, given the delay in processing income tax refunds in February. Secretary of Finance Aubrey Layne had explained when transmitting February revenue numbers, which reflected a large increase that month, that the Department of Taxation had issued far fewer refunds in February 2019 than it had in February 2018, since the Department could not begin processing refunds until the passage of tax conformity legislation by the General Assembly. The Department appears to have caught up in March, issuing approximately $96 million more in refunds in March 2019 than in the same month last year, although total refunds issued in February and March 2019 ($704.7 million) are still less than total refunds issued in the same months last year ($832.5 million).

Total GF revenue growth continues to trail the forecast, growing 3 percent on a year-to-date basis. Growth of 5.9 percent is needed to meet the annual forecast. Secretary Layne’s March Revenue Report notes that growth is expected to be higher in the remaining months of the fiscal year, when individual and corporate income taxes are due. Meeting the forecast will require a strong finish to the fiscal year; Secretary Layne’s memorandum points out that $7 billion must be collected in the final three months of FY 2019, while $6.3 billion was collected in the same period in FY 2018.

Sales tax collections underperformed in March, falling by 1.1 percent, although growth in collections on a year-to-date basis, registering at 3.5 percent, is close to the forecast of 3.7 percent growth. Despite robust performance earlier in the fiscal year, sales tax growth slowed in the third quarter to 1.2 percent, as did growth in individual income tax withholding. In an article in the Richmond Times-Dispatch, Secretary Layne said, “It looks like our growth is slowing, just like the national economy is.” A summary of the most recent Federal Reserve’s Federal Open Market Committee meeting in late March echoes this view, noting, “Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter.”

Virginia’s seasonally adjusted unemployment rate increased slightly in February, from 2.8 percent to 2.9 percent, but remained below the national rate of 3.8 percent. The Virginia Employment Commission documented growth on a year-to-date basis in seasonally-adjusted total non-farm employment in all metropolitan areas, with the exception of the Blacksburg-Christiansburg-Radford Metropolitan Statistical Area, which held steady. Virginia data for March will be available later this week, but national figures for the labor market in March demonstrated marked improvement over February’s disappointing report, representing an increase in total non-farm payroll employment of 196,000 (by contrast, February’s increase was 33,000 jobs).

VACo Contact: Katie Boyle

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