Virginia revenues up more than $550 million for fiscal year, building reserves
BY MICHAEL MARTZ Richmond Times Dispatch, July 12, 2018.
Virginia’s revenue reserves are getting a $550 million boost from soaring income tax collections in the last fiscal year.
Gov. Ralph Northam announced Thursday that income tax collections rose by $325 million in the fiscal year that ended June 30 for taxpayers who make estimated payments on capital gains and other income that isn’t subject to payroll withholding taxes. Those payments began rolling into the state treasury soon after President Donald Trump signed the Tax Cuts and Jobs Act in December.
Virginia also is benefiting from a $227 million jump in income tax withheld from paychecks, the biggest single source of state revenue.
“On the strength of a record $2.4 billion in revenue collections in the month of June, I am happy to announce that preliminary figures indicate that the state concluded fiscal year 2018 with an approximately $551.9 million surplus in general fund revenue collections,” Northam said in a statement.
“This significant surplus will substantially increase the commonwealth’s cash reserves in order to protect taxpayers against a future economic downturn and further affirm our valuable AAA bond rating.”
Withholding revenue rose 5.4 percent for the year, almost 2 percentage points higher than the forecast of 3.5 percent.
“I think a lot of it has to do with the [federal] budget passed by Congress, increasing defense spending, and the tax cuts at the federal level,” Secretary of Finance Aubrey Layne said in an interview. “We think it’s stimulative in the short term.”
The nonwithholding income tax collections are trickier for the state to gauge because they could reflect taxpayer efforts to avoid limits imposed on deductions for state and local taxes in the new federal law.
Virginia has refunded $75 million in estimated tax payments and some large taxpayers have made payments but haven’t filed their state returns, which are due by Nov. 1 for extended filing.
“We still don’t know what part of it is going to be subject to being refunded,” Layne said.
Speaker of the House Kirk Cox, R-Colonial Heights, said in a statement that the revenue surplus is “thanks in large part to responsible budgeting and strong economic growth spurred by Republican policies at the state and national level.”
Wary of windfalls
Virginia lawmakers and policymakers have been wary of counting on windfalls of nonwithholding tax revenues since 2014, when the bottom fell out a year after a big surge in payments in response to an increase in the federal capital gains tax in late 2012.
As a result, the state places a “collar” on the volatile source of revenues that limits the amount of new nonwithholding revenue that can be available for spending in the two-year state budget.
This year, Northam and the General Assembly already have agreed to deposit any surplus tax revenues in either the Revenue Stabilization Fund or a new cash reserve. The commitment helped to persuade S&P Global Ratings to upgrade Virginia’s financial outlook from negative to stable the day after Northam signed the budget on June 7.
“There is no question that the decision to appropriate 100 percent of the surplus to replenishing our cash reserves was key to S&P,” House Appropriations Chairman Chris Jones, R-Suffolk, said of the role the reserve commitment played in the national rating agency’s decision.
His committee had estimated an additional $500 million in revenue to bolster reserves, while the Senate Finance Committee said the total could exceed $600 million.
“I’m very pleased that it exceeded our target by $50 million,” Jones said. “That puts more money into our cash reserve.”
S&P had downgraded the financial outlook to negative a year ago because of concerns that Virginia had depleted its rainy day fund by drawing on reserves even when the state’s revenues were growing.
The state has withdrawn money twice to balance the budget to avoid cutting core services to make up for projected revenue shortfalls — first in 2014 because of the collapse of nonwithholding payments, and again in 2016 because payroll taxes didn’t increase as fast as forecast because of slow wage growth.
In addition to income taxes, Virginia’s sales tax collections increased by 3.1 percent in the fiscal year, a 10th of a percentage point higher than forecast, for a total of $3.5 billion.
Sales tax collections do not reflect potential changes in Virginia law after a decision by the U.S. Supreme Court last month that overturned a prior ruling that prevented states from collecting taxes on internet sales.
State officials estimate the taxation of online sales — in addition to sales taxes already collected from Amazon and other online retailers with distribution warehouses in Virginia — could boost the state treasury by $250 million to $300 million a year.
Layne expects the General Assembly to address the issue of online sales taxes, as well as state conformity with the federal tax reforms, in its 45-day session that begins in January.
Northam will address the assembly’s joint money committees on Aug. 17 with final revenue numbers for the last fiscal year and July. The state will then go through its normal process for revising its revenue forecast for the governor’s budget proposals in December.
“Neither internet sales nor [tax] conformity will be part of the new forecast because they are not law,” Layne said.
The new budget already will spend $60 million a year in additional income tax withholding revenues anticipated in the biennium.
Some of the additional money collected at the end of the last fiscal year could have come at the expense of revenues for the first month of the new fiscal year, Layne said.
With the July Fourth holiday falling on Wednesday, some taxpayers may have made withholding tax payments early because collections in the first two days of the new year were lower than a year earlier.
“It looks like we had about a $100 million flip,” he said. “It’s still cash revenue in the [previous] fiscal year, so it’s got to be counted.”