“One of our main priorities is not to be in a situation where we overcome our skis on either side – tax cuts or spending,” Youngkin said this week in brief remarks to the reporters after meeting with a panel of business leaders to assess the state’s economic outlook.
Youngkin chaired the annual closed meeting of the Governor’s Advisory Council on Revenue Estimates, a group of business and financial executives — as well as lawmakers from the General Assembly’s Money Committees — that provide forecasts economics that help frame the budget process.
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Youngkin said the panel’s broad consensus over the two hours of discussion was that some degree of economic slowdown seems likely. “Generally, we expect there to be a recession next year,” he said. This requires budget officials, he added, to be “very careful in what we do, especially next year as we head into a storm – and we all really believe it will be a storm. ; we just don’t know if it’s a tropical storm or a hurricane level storm.
Inflation, Russia’s invasion of Ukraine, supply chain issues that persist after pandemic-related shutdowns, as well as the Federal Reserve’s steady hike in interest rates to combat rising prices all contribute to economists’ expectation of a coming recession. But Youngkin pointed out that Virginia is in an exceptionally good position to weather the drop in tax revenue that could accompany a colder economy.
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Indeed, two years of federal pandemic relief, combined with a strong rebound from corporations and the wealthiest taxpayers, have left state coffers filled to the brim. Thanks to measures passed by the General Assembly and signed into law by Youngkin and his predecessor, former Gov. Ralph Northam (D), Virginia is expected to hit an all-time high in its fiscal reserve funds.
By the end of next year, Youngkin said, state reserves will reach $4 billion, or about 15% of the state’s general fund — a level state lawmakers once thought almost inaccessible. These reserves help protect the rating of Virginia’s prized triple-A bonds and can protect finances if earnings are insufficient. Additionally, the state ended the last fiscal year with a surplus of $3.2 billion.
“The Commonwealth is in its best fiscal position ever,” Youngkin said, though he also argued that some of that tax cushion was the result of overtaxation under Democratic administrations in Richmond.
Youngkin’s office reported strong tax revenue figures for October, with collections up 3% from the same month a year ago. This included the state issuing a series of refunds to taxpayers, as well as the first impact of an increase in the standard deduction for personal income tax filers that the General Assembly passed in of its session earlier this year.
Without these factors, October revenues 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 provided $4 billion over the next two years, nearly the double the standard deduction. This change is expected to reduce state revenue by about $50 million per month.
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But Youngkin failed to get his proposal to suspend the gas tax approved, and although he did get lawmakers to agree to end the 1.5% tax on groceries , a 1% local tax on groceries remains in place. Democrats — and even some Republicans — have expressed concern that deeper tax cuts would reduce the state’s ability to fund its obligations during times of economic uncertainty.
“We’re in such shaky waters,” Senate Appropriations and Finance Committee Co-Chair Janet Howell (D-Fairfax) told reporters in August. “I hope we can do some tax relief, but that’s not necessarily in the bag, and I wouldn’t want people to be hopeful.”
Senate Majority Leader Richard L. Saslaw (D-Fairfax) said in an interview this week that he was highly skeptical of the idea of lowering taxes during an economic downturn. “If we hit a recession [and cut taxes]we’re going to shut down half of the government,” he said, adding that Virginia still lags behind in efforts to raise salaries for teachers and law enforcement and in providing mental health services. .
“We have to take care of the functions that people expect of us,” Saslaw said.
The legislature is due to convene a new session on Jan. 11, and Youngkin said he would propose a $397 million “taxpayer relief” fund and expressed interest in lowering the corporate tax rate, among other reductions possible. He will outline his budget priorities on December 15, when he proposes changes to the two-year spending plan that took effect July 1.
On the positive side of the balance sheet, job growth has returned to Virginia since the end of the shutdowns and business restrictions that accompanied the pandemic. The state’s unemployment rate was 2.7% in October, one point below the national rate, and wage growth is up.
But Youngkin, a former private equity executive who likes to discuss state finances, pointed to several potential weaknesses that could impact tax revenue next year. Most of the state’s revenue comes from taxes withheld from residents’ paychecks, he said, and that would suffer from recession-related job losses.
Non-withholding taxes — related to stock market or other capital gains — “are much harder to predict,” Youngkin said. “We are going to be sufficiently cautious on this forecast,” given the sharp rises and falls markets have seen over the past year.
Corporate profits are another major source of state tax revenue, and Youngkin said he expects them to come under pressure next year if the economy slows. And consumer spending, which fuels sales tax revenue, “has generally been quite healthy. There has been some decline in overall consumer balance sheet health, but it’s still good compared to where we were before the pandemic. But that can change quickly. And so we are watching that very closely,” he said.
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