On Friday, March 15, Governor Youngkin released state General Fund revenue figures for the month of February, reporting that revenue collections continue to align with FY 2024 forecasts. Total General Fund revenues increased by 17.3 percent in February relative to February 2023, and have increased by 6.3 percent on a fiscal year-to-date basis; year-to-date collections are ahead of the FY 2024 forecast embedded in the “caboose” budget by $827.5 million. However, in his monthly revenue report, Secretary of Finance Stephen E. Cummings explains that this number shrinks to $339.3 million when excluding nonwithholding and refunds, which have been challenging to forecast as a result of timing issues created by the new Pass-Through Entity Tax. Secretary Cummings cites uncertainty about non-withholding income tax collections, signs of slowing in the economy, and ongoing geopolitical risks as factors supporting a “conservative revenue and economic outlook going forward.”
Individual income tax withholding revenues are up 5 percent fiscal year-to-date, and are outpacing the forecast by $347.4 million. Nonwithholding collections rebounded in February after an unexpected decline in January, with February collections up by 96.8 percent relative to February 2023; however, Secretary Cummings’s memorandum points out that this figure is likely distorted by a small number of taxpayers’ submission of Pass-Through Entity Tax payments. Nonwithholding collections are down by 1 percent for the year, but are ahead of the forecast by $327 million on a fiscal year-to-date basis. However, the majority of non-withholding revenues are traditionally collected in the final quarter of the fiscal year, and the revenue memorandum reiterates concern about the implications of the January drop (reflecting estimated payments for the fourth quarter) for the final payments.
Sales and use tax collections dropped by 3.5 percent in February and are down by 1.8 percent on a fiscal year-to-date basis, but are ahead of the forecasted 4.6 percent decline by $41.3 million. Corporate income tax refunds exceeded collections in February, and collections are trailing the forecast by $59.6 million on a fiscal year-to-date basis, but April and June are traditionally more significant months for this revenue source.
Economic indicators at the national level are largely positive, although persistent inflation remains a major concern for the Federal Reserve. Consumer Price Index figures released last week show an uptick in inflation in February (0.4 percent), following an increase of 0.3 percent in January, with most of the growth attributable to shelter and gasoline costs. The overall index increased by 3.2 percent over the last 12 months (following a 3.1 percent increase for the 12 months that ended in January), although personal consumption expenditures (PCE), the Federal Reserve’s preferred measure, is closer to the Federal Reserve’s 2 percent target, with a 2.4 percent increase over the 12 months ending in January (“core PCE,” which excludes food and energy, was up 2.8 percent).
The Federal Reserve’s semiannual Monetary Policy Report, presented to Congress earlier this month, pointed to progress in taming inflation, but Chairman Jerome Powell reiterated in prepared Congressional testimony that the Federal Open Market Committee is “strongly committed” to its 2 percent inflation target, pointing out that the Committee is “acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher cost of essentials, like food, housing, and transportation.” The Committee is meeting this week and many observers expect interest rates to remain at current levels given the persistence of inflation levels above the Federal Reserve’s target; Chairman Powell hinted at rate cuts “at some point this year” in his prepared testimony, but cautioned that “the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured.”
The Monetary Policy Report paints a picture of a strong labor market at the national level, although the Report indicates that labor demand is “gradually cooling.” In Virginia, the Department of Workforce Development and Advancement released January employment figures last week, showing Virginia’s seasonally adjusted unemployment rate remained at 3 percent (well below the national rate of 3.7 percent). The labor force participation rate increased by 0.1 percentage point, to 66.6 percent. Total nonfarm employment, seasonally adjusted, was up by 1.4 percent between January 2023 and January 2024 (reflecting an estimated increase of 59,900 jobs), with all ten metropolitan areas tracked by the Department showing year-over-year job gains; job growth from December 2023 to January 2024 was more modest, reflecting 0.2 percent growth statewide (with six metropolitan areas experiencing job growth, two seeing declines, and two that were unchanged).
VACo Contact: Katie Boyle