State General Fund Revenues Off to a Strong First Quarter, But Uncertainty Remains

October 23, 2019

Secretary of Finance Aubrey Layne had good news to present to the House Appropriations and Senate Finance Committees this week, but cautioned members of the “money committees” that much uncertainty remains about how General Fund (GF) revenues will perform in the remainder of the fiscal year. He reiterated the need for caution in constructing the upcoming biennium budget, suggesting that the state’s traditional approach of relying on organic growth in the major GF revenue sources to meet spending needs may be a challenge this year, as growth in keeping with historical trends in the major GF spending areas – health and education – could absorb all of the projected growth in the major GF revenue sources – individual income and sales and use taxes.

Total GF revenues increased by 9.3 percent in September, and on a fiscal year-to-date basis, revenues grew by 8.2 percent, with significant gains in individual income tax non-withholding and sales and use taxes contributing to this growth, among other sources. Individual income tax withholding grew by 3.4 percent in September, and increased by 5.8 percent on a fiscal year-to-date basis; thus far, collections are ahead of the forecast of 4.2 percent growth. Secretary Layne suggested that additional growth in withholding collections will need to be generated by growth in wages, as Virginia’s unemployment rate remains low (at 2.7 percent, on a seasonally-adjusted basis).

Individual income tax nonwithholding collections turned in a strong performance, growing by 16.5 percent on a fiscal year-to-date basis, with collections in September 17.2 percent above September 2018 collections. Secretary Layne told members that he was concerned that the collections at the end of FY 2020 would not match the strong collections in the last quarter of FY 2019, suggesting that the September payments may not reflect wealth generation but may instead reflect taxpayers making “safe harbor” payments in the amount of their previous year’s liability, which may require refund payments at the end of the fiscal year. January’s estimated payments will provide additional clarity about trends in this revenue source. Secretary Layne pointed to sales and use tax collections as a potential area of growth, pointing out that all of the growth in September collections (reflecting August sales) is attributable to new use tax dealers – generally online sellers newly required to register and collect sales and use taxes as a result of Virginia’s passage of legislation implementing the Wayfair decision. Continued growth in recordation tax collections is expected as well, as low interest rates encourage refinancings.

The Joint Advisory Board of Economists (JABE) met on October 17, and the Governor’s Advisory Council on Revenue Estimates (GACRE) will meet on November 25; these deliberations will inform the Governor’s budget, which will be introduced December 17. Secretary Layne provided several pie charts detailing the major sources of state GF revenues and GF spending (see slides 18 and 19 of Secretary Layne’s presentation), noting that growth in the education and health portions of the budget (including Medicaid, K-12, and higher education) of 5 percent would consume $770 million, and growth of 7 percent would require $1.1 billion. Four percent growth in the state’s major revenue sources – individual income and sales and use taxes – would generate $750 million. Secretary Layne pointed out that since the Great Recession, approximately 25 percent of GF spending occurs within state agencies, and that most of that spending reflects mandatory programs or provides a match to federal dollars, leaving few discretionary spending items to cut in the event of a downturn.

VACo Contact: Katie Boyle

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