The “money committees” received positive news about state revenues this week in their first meetings in the newly-renovated General Assembly building, which opened to the public on October 11. In his briefing on state revenues, Secretary of Finance Stephen E. Cummings reported that state General Fund revenues are 6.6 percent, or approximately $412.1 million, ahead of the forecast adopted along with the September 2023 budget revisions. However, the Secretary continued to advise caution, pointing to the continued uncertainty about future interest rate hikes, geopolitical instability, and a possible federal government shutdown. The Secretary’s revenue report characterizes the September revenue forecast as “intentionally conservative,” noting, “we remain cautious in our outlook over the near term.”
The state’s main revenue sources – individual income tax withholding and sales and use tax – are performing in line with expectations. On a fiscal year-to-date basis, withholding collections are up 0.4 percent, $53.6 million ahead of the forecasted decline of 0.7 percent. Sales and use tax collections are 2 percent higher on a fiscal year-to-date basis, outpacing the forecast of a 6.7 percent decline, but year-over-year growth is expected to slow due to the elimination of the state portion of the sales and use tax on groceries.
Higher-than-expected nonwithholding receipts represented the lion’s share of the $412.1 million in revenue collected above the forecast. The new Pass-Through Entity Tax, which allows certain business owners to elect to pay state income tax at the entity level (rather than the entity’s income being passed through to the business owner and the owner paying individual income taxes on that income) and then to receive a corresponding refundable income tax credit, continues to create what Secretary Cummings described as “noise” in the nonwithholding revenue numbers due to the timing of when taxpayers submit payments relative to when they file for credits. The Virginia Department of Taxation’s Assistant Commissioner of Tax Policy Kristin Collins, Lead Tax Policy Analyst James Savage, and Tax Policy Analyst James Ford explained to the Senate Finance and Appropriations Committee on October 17 that this new tax mechanism, which is intended to allow these businesses to circumvent the $10,000 cap on deductions of state and local taxes from federal income taxes by shifting their income tax liability to the business (which is not subject to the $10,000 cap), has made revenue forecasting for nonwithholding collections complex. State forecasters have expected taxpayers who are eligible to elect the Pass-Through Entity Tax option to account for this option in their individual income tax filings (by accounting for the Pass-Through Entity Tax credit in their individual income tax liability), but taxpayers have behaved more cautiously than expected. These “cautious filers” have overpaid their individual income taxes and will be owed refunds; Department staff note that these overpayments will likely not be corrected until late in the calendar year, making it difficult to determine whether the strong nonwithholding collections thus far in FY 2024 are attributable to underlying economic factors or to overpayments by “cautious filers.”
The House Appropriations Committee also received an update on the process of Medicaid eligibility redetermination, which began in March 2023 and requires all 2.1 million Medicaid members to be re-evaluated as a result of the end of the continuous coverage requirement that was in place during the COVID-19 public health emergency. As of this month, half of the redeterminations have been completed.
The Senate Finance and Appropriations Committee received briefings on Virginia’s foster care system, including concerted efforts by the Virginia Department of Social Services to work with local departments of social services to promote kinship care; early childhood care and education; and the Virginia Retirement System.
The money committees will hold their respective pre-General Assembly session retreats in November in advance of the Governor’s presentation of his proposed budget in December. The Administration’s budget development process is well underway, with state agency requests due at the end of September; the Joint Advisory Board of Economists met on October 11, and the Governor’s Advisory Council on Revenue estimates will meet on November 20.
VACo Contact: Katie Boyle