Gov. Ralph Northam has identified an additional $730.2 million in state revenues that General Assembly budget negotiators can use for a revised two-year spending plan, primarily because of strong sales tax collections over the Christmas holiday season.
The assembly money committees had expected more revenue because of Virginia’s surprisingly strong economic performance in this fiscal year, but Northam gave them a new revenue forecast on Monday that includes $410 million the first year and $320 million in the second that will help them fashion a final budget during the closing two weeks of the legislative session.
“These revised budget numbers tell us that Virginia’s economy continues to thrive, in spite of the pandemic,” Northam said in announcing the additional revenues.
“Before the pandemic, we had passed the most progressive budget in Virginia history,” he said. “These additional dollars help us get back to that historic budget and allow us to move forward with our shared priorities — providing Virginia families and businesses the relief they need to get back on their feet, supporting public schools, and giving our public workers a pay raise.”
The additional money will substantially close the gap between the new revenues and the $2.7 billion cut from the two-year budget last year because of the economic fallout from the COVID-19 pandemic. The budget proposed by the governor in December included an additional $1.2 billion in revenue, so the new forecast will increase that amount available to almost $2 billion.
“Our economy is rebounding and generating growing revenues to fund services that Virginians expect — from public schools to salaries for public workers and much more,” Northam said in a letter on Monday to Senate Finance Chair Janet Howell, D-Fairfax, and House Appropriations Chairman Luke Torian, D-Prince William.
The governor is expected to lay out his priorities for the budget to members of the joint conference committee that will be appointed to negotiate differences between the House and Senate spending plans.
“As the General Assembly has progressed, we have worked diligently together to address very important issues facing the commonwealth, and it is my hope we continue to do so during these next few weeks — and beyond,” he told Howell and Torian.
Most of the new revenue represents “cash in the bank” that should be used for one-time expenses, while about $300 million comes from tax collections that could be sustained to pay for ongoing expenses, such as pay raises for teachers, state employees and state-supported local employees that will be negotiated by the budget conference committee.
Salary increases represent a major issue in the budgets the House and Senate adopted on Friday, with both chambers proposing raises for teachers, state and other public employees, but of differing amounts. For example, the House proposed a 5% raise for teachers and 3.5% for state employees in the second year of the budget, while the Senate proposed increases of 3% for each.
Northam based the revised revenue forecast on sales tax collections, not income taxes that represent 70% of the money the state relies on to finance the general fund budget for core state government services, such as public education and safety.
“This adjustment is based solely on the trend of actual revenue collections year to date and incorporates a re-evaluation of the sales tax forecast,” he told Howell and Torian. “The underlying economic forecast has not changed from the one that we reviewed last November.”
For example, sales tax collections rose 5.6% in January compared with the same month a year earlier and 6.5% for the first seven months of the fiscal year compared with the same period a year ago, or about $136 million. The budget adopted in a special session last fall predicted sales tax collections would decline 2.6% for the fiscal year.
“We actually ended up doing very well for December and January in sales,” Deputy Secretary of Finance Joe Flores said Monday.
But income tax collected through payroll withholding fell 12.6% in January, when the state had one less payroll deposit day than the same month a year earlier. Those collections, representing almost two-thirds of state revenues, grew by just 0.3% in the first seven months of the fiscal year, while the budget is based on annual growth of 2.7%.
The weakness in payroll income taxes was offset last month by a big gain in estimated income taxes paid by self-employed professionals and investors, as well as a $20 million gain in corporate income taxes in January compared with the same month a year earlier.
The state also showed a 27.8% gain in taxes on deeds and other court filings in January compared with a year earlier, and 37.5% for the first seven months of the fiscal year.
Total tax collections fell by 2.4% in January compared with the same month a year earlier, but increased by 6% for the first seven months of the fiscal year, well ahead of the previous forecast of 1.2% for the year that will end on June 30.