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August 23, 2013

Trouble in Paradise

Virginia brought in just over $264 million more in taxes last year than was expected, but beneath the surface of that seemingly good news, though, are some big warning signs for the state’s economy.

That’s because the bulk of the additional revenue came from a one-time spike in “nonwithholding” taxes – the tax individuals pay on non-wage income – not from taxes on things that indicate a booming economy, such as sales or wages. And when you look at the poor performance of these other revenue streams and consider the reasons for the uptick in nonwithholding taxes, it’s clear that the state’s economic recovery remains on shaky ground.

Nonwithholding taxes grew 19.1 percent in 2013, almost 3 times the forecast rate of 6.8 percent. But while nonwithholding taxes are one of Virginia’s most volatile revenue sources, the uptick has a lot more to do with national factors than with economic growth or any action at the state level.

Here’s why: In anticipation of the scheduled federal tax increases associated with last year’s “fiscal cliff,” many wealthy taxpayers collected bonuses or sold stocks late in 2012 in order to pay taxes on that income at the 2012 rate, allowing them to avoid the higher tax rates set to kick in during 2013. Congress eventually prevented most of these tax increases from taking effect, but not before the uncertainty around the negotiations caused an end-of-the-tax-year shifting of income by wealthy people. The result: an artificial $290 million boost to state revenue collections.

But other types of state revenue actually came in under projections. Virginia’s sales tax, corporate income tax, and individual income tax withholding fell short of forecast by roughly $168 million. Without the one-time bump in nonwithholding tax revenue, Virginia would not have a revenue surplus today.

The performance of Virginia’s sales and income tax revenues is important for reasons beyond funding our schools and keeping our communities healthy and safe. Robust sales and income tax revenues point toward an economy where Virginians are working and families have both the earnings and consumer confidence to spend. And when these revenues are not robust, well, the opposite may be true.

–Sara Okos, Policy Director

The Commonwealth Institute

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