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State General Fund revenues ahead of projections in February, but slowdown still expected

On March 17, Governor Youngkin released updated information on state General Fund revenue collections for February, which were largely aligned with expectations.  The March 17 revenue report from Secretary of Finance Stephen E. Cummings reaffirmed the Administration’s expectation of an economic downturn, albeit later in the forecast period.  On the national level, although job growth remains strong, the unexpected failures of several regional banks and the Federal Reserve’s Open Market Committee’s action to impose an additional rate increase have fueled national discussions about a slowdown.  March’s changeable economic news has led state budget conferees to pause budget negotiations temporarily, according to media reports, in order to determine potential implications for state revenues.

Total state General Fund revenues are up 1.2 percent fiscal year-to-date, outpacing the estimate of an 8.8 percent decline.  Overall, General Fund revenues are ahead of the December 2022 forecast (which includes the Governor’s proposed tax policy changes) by $111.3 million on a fiscal year-to-date basis.  Secretary Cummings wrote in his monthly revenue report, “Based on the advice of the Governor’s Advisory Council on Revenue Estimates, the forecast also assumes a three-quarter recession, beginning in the third quarter of Fiscal Year 2023. While results have exceeded expectations based upon a stronger than expected economy since the time of our forecast, we continue to expect a similar downturn two to three quarters later in our forecast period.”

The memorandum outlines some signs of a slowdown in the economy:

  • Individual income tax withholding collections grew by 4.7 percent on a fiscal year-to-date basis, slightly behind the forecast of 4.8 percent growth. The Secretary’s memorandum notes that collections are trailing projections by $30.1 million, pointing out, “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.”
  • Without adjusting for policy actions enacted last year (termination of the accelerated sales tax program and elimination of the state portion of sales and use taxes on groceries), sales and use tax collections are 9.7 percent higher on a fiscal year-to-date basis, but are trailing projections by $29.1 million. Secretary Cummings speculated in his memorandum, “The continuing shift in consumption from taxable goods to non-taxable services is likely dampening sales tax revenue growth more than anticipated.”
  • Corporate income tax collections are also softening. On a fiscal year to date basis, collections are 12 percent behind FY 2022 and are lagging projections by $31.1 million.  Secretary Cummings suggested that weakening in corporate profit growth is attributable to “the slowing economy and margin compression as corporations are finding it harder to pass along higher costs to consumers.”

After significant media attention to the failures of several regional banks and the swift action by the federal government to guarantee deposits, speculation swirled about whether the Federal Reserve’s Federal Open Market Committee would pause its series of interest rate increases at its March 22 meeting.  The March 14 release of the Consumer Price Index reflected inflation’s persistence, with the Consumer Price Index for all Urban Consumers (CPI-U) increasing 0.4 percent in February (following an increase of 0.5 percent in January), largely attributable to housing costs.  The Committee stayed the course on interest rates, approving an increase of 0.25 percentage points, but indicated that future increases would be carefully considered in light of economic conditions, writing in its meeting statement, “In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments…The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”  In March 30 remarks to the Virginia Council of CEOs, Federal Reserve Bank of Richmond President Tom Barkin defended the rate increase, citing the lingering “economic dislocation” of the pandemic and expected price increases as factors that will delay inflation returning to the Federal Reserve’s target of 2 percent, but also said that “policy will need to be nimble” in responding to economic conditions.

VACo Contact:  Katie Boyle

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