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State Revenues Ahead of Forecast Through May

Secretary of Finance Stephen E. Cummings returned to the Senate Finance and Appropriations Committee on June 13 to provide an update on state revenue collections during the critically-important last quarter of the state fiscal year.  Secretary Cummings reiterated his confidence in the Administration’s forecast despite some “noise” in the revenue figures due to the state’s new Pass-Through Entity Tax and more softening than expected in withholding and sales and use tax collections.

General Fund revenues are down 3.4 percent on a fiscal year-to-date basis relative to the same period in FY 2022, but ahead of the forecasted 8.8 percent decline.  On a fiscal year-to-date basis, state general fund revenues are ahead of the December 2022 forecast by $948 million.  However, the Administration expects that approximately $600 million of this additional revenue may be returned to certain business taxpayers in FY 2024 due to the timing of implementation of the new Pass-Through Entity Tax.  Although there is no net effect on Virginia revenues attributed to this tax (this mechanism allows certain business owners to deduct state and local taxes from their federal income taxes at levels above $10,000 per year), delays in processing credits against the new tax and taxpayer requests for extensions have pushed those credits into FY 2024.

Individual income tax withholding collections, with growth of 4.1 percent on a fiscal year-to-date basis, are lagging the forecast of 4.8 percent growth in this source, and are $112.4 million behind projections.  Although the December forecast expected some slowing in withholding collections, this revenue source has performed slightly worse than anticipated; Secretary Cummings noted that although job growth overall has remained strong, much of Virginia’s job growth has been concentrated in lower-paying employment.  Sales and use tax collections are similarly falling short of expectation, growing by 6 percent on a fiscal year-to-date basis, and lagging the forecast of 8.1 percent growth.  Sales and use tax collections are $185.8 million behind projections to date.  As Secretary Cummings has previously indicated, slowing growth in this revenue source is a reflection of a shift away from consumption of goods (which are generally subject to sales and use taxes) toward non-taxable services, and will need to be evaluated carefully in developing the forecast for the Governor’s December 2023 budget proposal.

Secretary Cummings’s June 13 memorandum transmitting the May revenue report indicates that the Administration continues to expect a recession, but on a later timetable than originally predicted; the December forecast expected a recession in the first half of calendar year 2023, but the Administration now anticipates a mild recession during FY 2024.  The difficulty in pinpointing the timing of an economic slowdown was highlighted later in the week when the Federal Reserve’s Federal Open Market Committee opted not to raise interest rates at its June 13-14 meeting, preferring to monitor the effects of the series of rate increases approved at earlier meetings, but signaling that future rate increases are likely.  The most recent inflation figures, released on June 13, suggest overall progress in managing inflation, although certain components are proving to be “sticky.”  The Consumer Price Index for All Urban Consumers (CPI-U) rose by 0.1 percent in May (down from an 0.4 increase in April); shelter and used cars and trucks were the largest contributors to the increase, offset by a drop in energy prices.  However, when volatile food and energy prices are removed, “core” inflation registered at 0.4 percent in May.  Yearly figures demonstrated a similar pattern; overall inflation was 4 percent for the 12 months ending in May (the smallest yearly increase since the 12-month period ending in March 2021), but core inflation was 5.3 percent.

Federal Open Market Committee members cited the difficulty of interpreting mixed economic indicators in explaining the Committee’s decision to pause action this month.  Federal Reserve Chairman Jerome Powell said in his post-meeting press conference, “In light of how far we have come in tightening policy, the uncertain lags with which monetary policy affects the economy, and potential headwinds from credit tightening, today we decided to leave our policy interest rate unchanged and continue to reduce our securities holdings.  Looking ahead, nearly all Committee participants view it as likely that some further rate increases will be appropriate this year to bring inflation down to 2 percent over time.”  However, the Committee underscored its commitment to taming inflation; as Chair Powell stated at the press conference, “[T]he committee is completely unified in the need to get inflation down to 2 percent over time…we understand that allowing inflation to get entrenched into…the U.S. economy is the thing that we cannot, cannot allow to happen…Getting price stability back and restored will benefit generations of people as long as it’s sustained.”

VACo Contact:  Katie Boyle

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