State General Fund Revenues Continue to Perform Well; Budget Preparations Underway

October 18, 2018

Governor Northam announced last week that September General Fund (GF) revenues grew 4 percent in September, and on a fiscal year-to-date basis, revenues have increased by 2.7 percent through September, surpassing the annual estimate of 1.5 percent growth.

September’s healthy revenue collections were partially attributable to growth in individual income tax revenue, both withholding and nonwithholding. Income tax withholding collections increased by 3.6 percent in September. On a fiscal year-to-date basis, collections are up by 1.1 percent, behind the annual estimate of 2.6 percent growth; however, approximately $120 million in withholding payments that should have been made in July were made in June due to the timing of the Independence Day holiday. When adjusting for this quirk of the calendar, withholding has increased by more than 5 percent through September. Income tax nonwithholding collections are up by 14.4 percent on a fiscal year-to-date basis; Secretary of Finance Aubrey Layne suggested in his presentation to the House Appropriations Committee on October 15 that the continued strength in this revenue source is an indication that last fiscal year’s robust collections may reflect ongoing wealth creation rather than short-term tax planning strategies.

Another bright spot in the September revenue report was the continued strong performance of sales tax collections, which grew by 7.5 percent in September and have also grown by 7.5 percent on a fiscal year-to-date basis. Secretary Layne noted that sales tax collections have rebounded from a disappointing Christmas shopping season and speculated that some of the additional collections may be due to online sellers voluntarily remitting sales taxes in light of the Supreme Court’s decision in the Wayfair case. Although Secretary Layne expressed confidence that revenues will meet their annual forecast, he cited corporate income taxes and recordation taxes as two lagging revenue sources that bear watching for signs of future economic trouble.

The budget development process is moving forward, with agency decision packages due last week. Secretary Layne provided a list of expected claims on the budget to the Committee, including the economic development incentive package for Micron Technology, Inc., potential clawbacks of federal Medicaid funding associated with two state hospitals, and the state share of costs associated with Hurricane Florence. The Joint Advisory Board of Economists met on October 11 to discuss revenue projections, and the Governor’s Advisory Council on Revenue Estimates will meet November 19. Governor Northam will present his budget to the “money committees” on December 18.

Secretary Layne also reported to House Appropriations on recent meetings with rating agencies, who were interested in Virginia’s plans to address future risks to its budget stability, such as the effect on state finances of an aging population and the associated future demand for additional services. Attendees also discussed cybersecurity risks, both for state assets and for private entities in the state, and the potential effect on the state budget of changes to insurance models expected in the future to account for threats associated with climate change. House Appropriations Chairman Chris Jones expressed his interest in continuing to deposit funds in the Revenue Cash Reserve to guard against future economic shocks; rating agencies have pointed to fellow AAA-rated states, which generally have higher levels of reserves than Virginia, as possible models.

In response to a question from the Committee regarding how the Administration plans to proceed on collection of sales and use taxes from online sellers, Secretary Layne suggested that the Governor would propose legislation to address the Wayfair ruling in the 2019 session. He noted that projections for additional revenues to be generated by enhanced collections from remote sellers remain uncertain, in part due to the voluntary compliance already demonstrated by some online sellers. He suggested that the state is looking toward the provisions in the South Dakota law that the Supreme Court cited as a model in the Wayfair ruling as potential guidelines for legislation in Virginia – for example, provisions barring retroactive collection of sales taxes from online sellers.

VACo Contact: Katie Boyle

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