The State of State Revenues: Tight Budget Year Shows Why Virginia Needs New Revenues

Budgets demonstrate values  — they show who is a priority to the lawmakers who craft them and the people who elect them. When budgets are robust and well funded, everyone in every community in Virginia can thrive, no exceptions. However, despite being able to balance the state budget to meet current commitments to education and health care, Gov. Youngkin proposed tax giveaways to businesses, corporations, and their wealthy shareholders in his outgoing budget, while slashing critical health care access for those who access health coverage through Medicaid and immigrant mothers. At a moment when action is required to invest in our future and address the cost-of-living crisis that families face today, he failed to include proposals to raise new resources.

State of Play for Virginia State Revenues

In fall 2025, state agencies made adjustments to the forecasted costs of the programs they administer based on updated data. The anticipated cost of providing health care through Medicaid, FAMIS, and CHIP came back much higher than what the state has budgeted for the current year. In order for the state to maintain its promise to provide health care and education at current levels, the state needs to spend an extra $414 million on health care in the budget year that ends June 30, 2026 (fiscal year 2026) from the general fund (GF), the part of the budget over which legislators have the most flexibility. In the upcoming two-year budget (fiscal years 2027 and 2028), lawmakers would need to allocate an additional $2.9 billion GF on health care and an additional $543.8 million GF on K-12.

All the while, Virginia lawmakers must anticipate additional costs that the federal government is shifting onto states. In summer 2025, leaders in Congress rushed through legislation to make unprecedented cuts to food and health care assistance through the SNAP and Medicaid programs, while leaving states to pick up a higher share of the tab for administering these programs. Because of federal decision making, Virginia must now spend more state dollars — at least $100.4 million in the upcoming two-year budget (FY27-28) to cover administrative costs — to replace federal support and those costs are expected to increase over time.

Fortunately, Virginia has more resources than expected going into the next budget. Updates to the state’s revenue forecast for the upcoming budget cycle predict additional revenues of $823 million in FY26 and $566 million in the upcoming FY27-28 budget for the general fund. This increase is primarily driven by growth in taxes withheld from workers’ paychecks, considered a stable source of revenue.

Several factors give lawmakers more flexibility than recent budget headlines suggest. Stronger than expected revenue collections, updates to the predictions on future revenues, unused funds from the outgoing budget, and savings from lower-than-expected program use mean that budget negotiators can cover increased costs in FY2026 —  including increased health care costs — and still have funds left for the upcoming budget cycle. In his introduced budget proposals, Governor Youngkin carries forward $2.1 billion from FY26 into the FY27-28 budget.

In total, the additional revenue, substantial carry forward, and other adjustments mean that in his proposed budget, Gov. Youngkin was able to cover increased mandatory spending and some of the cost shift of SNAP, and have $305 million left over at the end of the two-year budget. Notably, he still chose to propose tax breaks for corporations and their shareholders, while making cuts to health care. Rejecting almost all of Youngkin’s misguided tax policy decisions would free up an additional $732.5 million. That level of funding could help restore $238.1 million to make sure Medicaid reimbursement, which encourages providers to accept patients with Medicaid coverage, keeps up with annual inflation and $29.5 million to a program providing health coverage to thousands of pregnant people.

Is There a Budget Gap? 

There is no immediate “budget gap,” but under Gov. Youngkin’s proposal for the 2027 through 2029 budget years, the state would rely on leftover general funds from 2026 to meet ongoing commitments. Carry-forward funds are not an ongoing revenue source. Ideally, one-time funds should be used for one-time purposes and not to balance ongoing budget investments. 

Because the budget’s general fund spending exceeds base revenues, it raises concerns about structural imbalance. Eventually, one-time carry-forward funds will run out. Current budget projections show that just to meet current budget funding levels, the state will need to rely on leftover funds carried forward until the 2030 fiscal year, when revenues are finally predicted to exceed budget costs. 

This reliance on one-time funding leaves very little room to adapt to future challenges, let alone to make the investments so many communities need. If there are additional costs from federal policy changes, another year of unanticipated increases in mandatory spending, an unexpected economic downturn, or another unforeseen cost, keeping the budget whole without new revenues will be even more difficult. While there is no literal ‘gap’ right now that lawmakers are required to address through budget cuts or raising revenues, there are very few resources available to make ongoing investments.

Revenues to Meet the Moment

Lawmakers can meet their current obligations by rejecting outgoing Governor Youngkin’s proposed tax cuts, but maintaining the status quo is not enough for families facing rising costs. Communities across Virginia need stronger investments in education, health care, and overall affordability. 

Virginia decision-makers have options to raise the resources to do more. By raising new, sustainable revenues, lawmakers can move beyond relying on one-time funding and begin making transformative investments that help families not only meet their basic needs, but truly thrive.

A balanced budget is not the same as a strong budget that delivers for Virginia families. Without new revenues, lawmakers are choosing to leave critical needs unmet. This session is an opportunity to change course and make investments that actually strengthen communities across the commonwealth.