Secretary of Finance Aubrey Layne struck a note of guarded optimism in briefing the House Appropriations Committee June 15 on May General Fund (GF) revenue collections, predicting that once June collections are tallied, state revenue losses will be well within the estimated $1 billion reduction predicted earlier this spring. State revenues have been shielded to a certain degree from the economic contraction caused by the COVID-19 pandemic by Virginia’s large number of jobs connected to the federal government and by actions taken by the federal government to keep interest rates low and infuse cash into the economy through lending and direct payments to individuals and businesses. However, Secretary Layne warned that local revenues could be more severely affected.
Total state GF revenues fell 20.6 percent in May, in part due to the Governor’s action to defer the due date for individual and corporate income tax payments to June 1. On a fiscal year-to-date basis, collections have declined by 1.2 percent, trailing the annual forecast of 3.1 percent growth. Individual income tax withholding declined by 13 percent in May, in part due to there being two fewer deposit days in this month relative to May 2019; on a fiscal year-to-date basis, collections have grown by 3.1 percent, but lag the forecasted 4.7 percent growth. Secretary Layne pointed out in his presentation that reductions in withholding collections have been concentrated in small businesses, which represent the bulk of employers but generate a comparatively small share of tax collections.
Individual income tax nonwithholding collections, which were projected to decline by 4.3 percent in FY 2020 as taxpayers adjusted to the federal income tax provisions enacted in the Tax Cuts and Jobs Act, have dropped 22.6 percent on a fiscal year-to-date basis, but Secretary Layne pointed out that June collections would likely make up for a significant portion of this reduction. Sales tax collections fell by 12.5 percent in May; although collections have grown by 5.4 percent on a fiscal year-to-date basis, this performance still lags the forecast of 7.4 percent growth. Secretary Layne noted that collections from online sales had increased, but bricks-and-mortar retailers continue to struggle, and some may not survive the pandemic.
The National Bureau of Economic Research announced on June 8 that the United States entered a recession in February 2020, with the end of 128 months of expansion, pointing out that this extended run of good times represented “the longest in the history of U.S. business cycles dating back to 1854.” The Congressional Budget Office (CBO) released revised economic projections for 2020 and 2021 in May, predicting that real inflation-adjusted Gross Domestic Product would contract by 11 percent in the second quarter of 2020 (equivalent to an annual decline of 38 percent), although CBO acknowledges significant uncertainty surrounding this prediction. CBO staff expect economic growth to resume in the second half of 2020, projecting an average of 15.8 percent annual growth over that time, but express concern that the sharp contraction will have short- and long-term effects on the labor market, and warn that “[e]mployment is expected to remain low in the third quarter of 2020…a notable drop in state and local government tax revenues is expected to lead to more layoffs in the state and local government sector.”
The Governor is scheduled to announce the FY 2020 revenue shortfall on July 10, which is expected to trigger a revenue reforecast. The Joint Advisory Board of Economists and the Governor’s Advisory Council on Revenue Estimates are scheduled to meet on July 20 and August 3, respectively, laying the groundwork for a revenue reforecast that will be the basis for a special session to rework the biennium budget sometime later this summer.
VACo Contact: Katie Boyle