Virginia tax revenues are showing the effects of cuts made last year and softening of the state's economy, but Gov. Glenn Youngkin said they remain ahead of projections and support additional tax cuts.
Youngkin said Friday that the state has collected $111.3 million more in the first eight months of this fiscal year than projected in his proposed budget, which includes an additional $1 billion in cuts to state income tax revenues.
"Virginians remain overtaxed, and the commonwealth has abundant resources available to lower costs and cut taxes for families and local businesses," the governor said. "At the same time, we can make critical investments to transform our behavioral health system, invest in education and law enforcement, and strengthen communities across Virginia."
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"With the continuing uncertainties affecting the global economy and recent turbulence at U.S. banks, Virginia remains in a position of strength to deliver services and reduce taxes for Virginians," he said in announcing revenues collected in February.
Budget in limbo
Youngkin's budget proposal remains in limbo because of a stalemate between the House of Delegates and Senate over the governor's proposed tax cuts, which would come on top of $4 billion in reduced income and sales taxes in the two-year spending plan enacted last year.
Those tax cuts are showing up in state revenues, which makes it hard to compare current tax collections with the same periods last year.
For example, total revenues fell by $112 million, or 7.3%, in February, compared with the same month a year ago, before adjusting for tax policy changes, and just $12.5 million, or 0.8%, after adjustments. Revenues rose by 1.2% for the fiscal year to date before adjustments. Revenues rose 4.4% after them because of reductions related to sales tax collections and, especially, income taxes, which were reduced by one-time rebates, an 80% increase in the standard deduction for taxpayers, a higher earned income tax credit for low-income working families, and a phased exemption for military retirement income.
Youngkin's proposed revisions to the budget would raise the standard deduction to double what it was a year ago, eliminate the age cap for the military retirement income exemption, and reduce the tax rate for corporations and individuals in the highest income bracket, which includes 84% of Virginia taxpayers.
Budget negotiations broke down on Feb. 24 when Senate Democrats balked at a compromise House Republicans proposed that would not include the governor's proposal to lower the corporate income tax rate from 6% to 5%. However, it would have included a new round of one-time tax rebates and eliminated the military retirement age cap. The proposal also would have kept the governor's proposal to lower the top individual rate from 5.75% to 5.5%, while adjusting income levels in the lower brackets, but the proposed cut is not popular with Senate Democrats who say it makes the tax code more regressive and less fair based on ability to pay.
The Richmond Times-Dispatch reported Wednesday that budget negotiations are scheduled to resume on Tuesday, with tax policy as the first and highest priority to resolve.
Secretary of Finance Steve Cummings said the governor's budget assumed that a recession would begin this year and last for three fiscal quarters, so revenue collections have been better than expected.
"February revenue collections came in ahead of plan," Cummings said Friday.
A later downturn?
He said the administration still expects an economic downturn, although later than expected, but remains confident in the forecast in the proposed budget.
In a letter to Youngkin on the February results, Cummings, a former banker, acknowledged the unexpected collapse of two regional banks - Silicon Valley Bank in California and Signature Bank in New York - over the last weekend. He said the failures "had exposed unexpected and problematic side-effects from the rapid rise in short-term interest rates."
"While the uncertainty facing the banking system over the past weekend was concerning and we were tracking it closely, it appears that such systemic concerns have been addressed by actions taken by the Federal Reserve and [Federal Deposit Insurance Corp.]," he told the governor.
The revenue results showed weakness in corporate income taxes and fees on court filings such as deeds, but higher interest income on state investments offset those declines, Cummings said.
Michael Martz (804) 649-6964
@mmartzrtd on Twitter