“One of our top priorities is not to find ourselves in a circumstance where we cross the skies on both sides of this: tax cuts or spending,” Youngkin said this week in brief remarks to reporters after meeting with a group of business leaders to assess the state’s economic prospects.
Youngkin chaired the closed-door annual meeting of the Governor’s Advisory Council on Revenue Estimates, a group of business and finance leaders — as well as lawmakers on the General Assembly’s monetary committees — who provide economic forecasts that help frame the budget process.
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Youngkin said the broad consensus from the panel over the two-hour discussion was that some degree of economic slowdown seems likely. “In general, there is an expectation that there will be a recession next year,” she said. This requires budget officials, she added, to be “very careful in what we do, particularly next year as we head into a storm – and we all really believe it’s going to be a storm; we’re not sure if it’s a tropical storm or a hurricane-level storm.
Inflation, Russia’s invasion of Ukraine, supply chain issues remaining from pandemic-related shutdowns, as well as the Federal Reserve’s steady hike in interest rates to combat rising prices contribute to expectations of economists of a coming recession. But Youngkin pointed out that Virginia is in an unusually good position to weather the decline in tax revenues that could accompany a fresher economy.
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That’s because two years of federal pandemic relief, combined with a sharp rebound from corporations and the wealthiest taxpayers, have left state coffers filled to the brim. Thanks to measures approved by the General Assembly and signed into law by Youngkin and his predecessor, former Governor Ralph Northam (D), Virginia is set to reach an all-time high in its budgetary reserve funds.
By the end of next year, Youngkin said, state reserves will exceed $4 billion, or about 15 percent of the state’s general fund, a level state lawmakers once thought was nearly unattainable. These reserves help protect Virginia’s valuable triple-A rating and can safeguard finances if revenue dwindles. Additionally, the state ended the last fiscal year with a $3.2 billion surplus.
“The Commonwealth is in its best financial position ever,” Youngkin said, though he also argued that part of that tax cushion is the result of excessive taxation during Democratic administrations in Richmond.
Youngkin’s office reported strong tax revenue numbers for October, with collections up 3% from the same month a year ago. This included the state paying a variety of rebates to taxpayers, as well as the first impact of an increase in the standard deduction for personal income tax reporters that the General Assembly approved in its session earlier this year .
Were it not for these factors, October revenue would have increased 10.3% from a year ago.
Youngkin took office in January promising tax cuts, and the divided legislature — Republicans control the House of Delegates and Democrats control the Senate — has delivered $4 billion worth over the next two years, including nearly doubling the standard tax credit. . That change is expected to reduce state revenues by about $50 million a month.
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But Youngkin failed to get approval for his proposed gasoline tax break, and while he convinced lawmakers to agree to end the state’s 1.5 percent tax on groceries, a tax remains in place local 1% on groceries. Democrats — and even some Republicans — have expressed concern that larger tax cuts would reduce the state’s ability to finance its obligations at a time of economic uncertainty.
“We’re in such choppy waters,” Senate Finance and Appropriations Committee Co-Chair Janet Howell (D-Fairfax) told reporters in August. “Hopefully, we’ll be able to do some tax relief, but it’s not necessarily in the bag, and I wouldn’t want people to be deluded.”
Senate Majority Leader Richard L. Saslaw (D-Fairfax) said in an interview this week that he is very skeptical of the idea of cutting taxes during an economic downturn. “If we hit a recession [and cut taxes]we are going to shut down half of the government,” he said, adding that Virginia is still lagging behind in efforts to raise the pay of teachers and law enforcement agencies and provide mental health services.
“We have to address the functions that people expect from us,” Saslaw said.
The lawmaker is expected to call a new session on Jan. 11, and Youngkin said he will propose a $397 million “tax relief” fund and expressed interest in cutting the corporate tax rate, among other possible cuts. He will define his budgetary priorities on Dec. 15, when he proposes changes to the two-year spending plan that went into effect on July 1.
On the positive side of the balance sheet, job growth has returned to Virginia since the end of company shutdowns and restrictions due to the pandemic. The state’s unemployment rate was 2.7 percent in October, one point below the national rate, and wage growth is picking up.
But Youngkin, a former private equity executive who delights in discussing state finances, outlined several potential weaknesses that could impact tax revenues next year. Most of the state’s revenue comes from taxes withheld from residents’ salaries, he said, and that would be impacted by recession-related job losses.
Taxes not withheld — tied to the stock market or other capital gains — “are much harder to predict,” Youngkin said. “We will be suitably cautious on this forecast,” given the steep ups and downs markets have experienced over the past year.
Corporate profits are another major source of state tax revenues, and Youngkin said he expects they will come under pressure next year if the economy slows. And consumer spending, which drives tax revenues, “has generally been pretty healthy. There has been some decline in the overall health of the consumer balance sheet, but it’s still good even compared to where we were before the pandemic. But that can change quickly. And so we’re watching that very closely,” she said.