The first look at Virginia’s revenue performance in the fiscal year that just ended is eye-popping.
Despite a predictable dip in June because of shifted tax filing deadlines, Virginia finished the fiscal year on June 30 with almost $2.6 billion more in tax revenues than it had forecast in the state budget. Compared to the previous fiscal year, the state collected an additional $3.1 billion, growing by 14.5% instead of the 2.7% estimate in the budget.
“We have effectively managed Virginia’s finances through the pandemic, and now we are seeing the results — record-breaking revenue gains, a recovery that has outpaced the nation, and recognition as the best place to do business,” Gov. Ralph Northam said Wednesday, the day after CNBC named Virginia the top state for business for the second consecutive time.
Northam will work with the General Assembly in a special session that begins Aug. 2 to determine how to spend $4.3 billion in federal aid that Virginia has received under the American Rescue Plan Act. He will propose a new two-year state budget to the assembly on Dec. 16, the month before he leaves office.
“Fueled by a surging economy, federal American Rescue Plan funds, and the largest surplus in Virginia history, we have significant resources available to make transformational investments in this Commonwealth,” he said. “I look forward to working with the General Assembly in the fall to seize this opportunity so we can build a brighter future for all Virginians.”
The results will be preliminary until the books close later this month, but revenue collections show strength across the Virginia economy as the COVID-19 pandemic ebbs — in company payrolls, investor gains, real estate and housing, and consumer buying — both online and increasingly in brick-and-mortar stores.
“It reflects an expanding economy and a recovering economy in Virginia,” Secretary of Finance Joe Flores said Wednesday.
Most of the surplus — the amount of revenues above the budget forecast — came from income taxes paid by self-employed professionals and investors on capital gains. It’s the most volatile and least predictable source of state revenues, but it grew by $1.4 billion in the fiscal year compared to the previous 12 months.
But the state also collected more in two other critical categories — income taxes withheld from payroll, which reflect jobs and wages, and sales.
“That’s our bread and butter,” Flores said of income taxes withheld from paychecks, “along with sales taxes, and both of them came on very strong.”
Withholding taxes grew by $635 million, or 2 percentage points higher than forecast, and the state collected an additional $460 million in sales taxes, as consumers began returning to stores while still making purchases on the internet. Sales tax collections grew by 12.4%, compared to an estimate of 4.7% in the state budget.
Income taxes paid by corporations grew by $500 million, almost 50% higher than a year ago, while court fees paid on deeds and other recorded instruments increased by $196 million.
Tax rates haven’t changed, but collections rise with income, sales and other economic activity.
“The bottom line is that wages are rising, allowing people to make more money, so they’re paying more in taxes,” Flores said.
Virginia finance officials had been cautious but confident that the state would produce a revenue surplus in the fiscal year, but it grew exponentially with each month — initially $500 million, then $1 billion and then $2 billion while continuing to climb.
Much of the growth came in the last quarter of the fiscal year — since April 1 — as the state accelerated vaccinations against COVID-19, businesses began reopening and people began gathering in greater numbers after more than a year of restrictions to prevent the spread of the coronavirus disease.
Virginia collected $8.6 billion in the final quarter, even though revenues fell about $180 million in June, the final month of the fiscal year. The decrease reflected different filing deadlines for income taxes — June 1 in 2020 and May 17 in 2021 to give taxpayers more time during the pandemic. Normally, income taxes are due May 1.
Flores cautioned that Virginia lawmakers should not anticipate a huge windfall of revenues to spend in the two-year budget that Northam will propose in December for the next General Assembly to consider in the legislative session that will begin Jan. 12.
Once the surplus is certified, about half of it will be deposited in the Revenue Stabilization Fund — known as the rainy day fund — and Water Quality Improvement Fund, as required under the state constitution.
The governor and assembly also will face some big bills to pay in the next two-year budget for public education and Medicaid because of new forecasts of costs that come due every other year in the two biggest programs for state spending.
“The surplus can go away fast,” Flores said.