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April 21, 2015

On Revenues: Cautious Optimism

More revenue is coming into the state than expected. That’s good news for our economy and the state’s ability to pay for our priorities, such as schools and health care. But Virginia’s lawmakers should be careful with this additional revenue, making sure it’s invested in the things we know grow our economy, rather than spent in the form of tax cuts and misguided giveaways.

In March, general fund revenue – which includes state income and sales taxes – was up 11.8 percent from the same month a year ago. And year-to-date, revenue collections are up 7.1 percent from a year ago, much higher than the 4.7 percent assumed in the budget.

All of this is good news, both in terms of what it says about the state’s economy, which is stronger than the state’s pessimistic predictions, and the ability of the state to meet its growing needs. Nonetheless, lawmakers should still be very careful moving forward.

Despite the recent growth, Virginia’s economy remains on uncertain footing. Though better than the rest of the nation, Virginia’s 4.8 percent unemployment rate remains stubbornly above pre-recession levels. A large number of the state’s workers have either dropped out of the labor market or are having to settle for part-time work. And job growth hasn’t been quick enough, with employment levels only recently back to where they were about seven years ago.

The state is also still feeling the pinch of across-the-board federal spending cuts, set to get even worse later this year unless Congress intervenes. That may seriously dampen Virginia’s economic growth in the coming months.

And it’s been less than a year since Virginia’s budget was blown open by an unexpected $2.4 billion shortfall. Much of the better-than-expected revenue is needed just to get us back to where we thought we’d be by now if not for that shortfall.  

All of this shows that we shouldn’t take this revenue trend for granted. Instead, if the state’s revenue growth keeps up, lawmakers should use these funds to make the types of investments that foster economic growth and bring broad-based prosperity for years down the road. That includes putting more money into our schools, investing in health care, and strengthening the state’s earned-income tax credit.

See, the state is still investing less in these public services than we did eight years ago. Investment from the general fund has declined by almost $5 billion after adjusting for population growth and the growing cost of providing the same services.

That has real implications for Virginia. For example, per-student state direct aid for public education will be down about 15 percent next year from the 2008-2009 school year. While that’s a slight improvement over recent years, largely due to low inflation, this decline has hurt our schools in many ways, through fewer teachers and other instructional staff, for example.

At the same time, Virginia’s lawmakers should resist the urge to use this as an excuse to put in place new tax breaks, loopholes, and giveaways. Many of these tax expenditures fritter away precious state resources inefficiently and with little accountability.

Better than expected state revenue collections are cause for cautious optimism. But we shouldn’t get ahead of ourselves. If this trend keeps up, we should make sure that we make the investments that will keep Virginia’s economy growing, rather than the inefficient and wasteful giveaways that currently plague our tax code.

–Mitchell Cole, Policy Analyst

The Commonwealth Institute

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