Gov. Ralph Northam

Virginia Gov. Ralph Northam

Virginia could end the fiscal year with an extra $400 million from a continuing surge in income tax payments in the aftermath of federal tax reforms, but finance officials aren’t ready to bank on a windfall they fear could disappear by autumn.

Gov. Ralph Northam said Friday that total state revenues rose in April by 17.8 percent compared with the same month a year ago, and collections grew by 6.7 percent in the first 10 months of the fiscal year, or almost double the annual forecast on which the state based its current budget.

The apparent windfall is likely to intensify the political debate in the General Assembly over the state revenues available for the pending state budgets that legislators are considering in a special session that will resume Monday when the Senate reconvenes after almost a month’s absence.

The governor cautioned that legislators, locked in an impasse over whether to expand Virginia’s Medicaid program through the state budget, should save the money rather than spend it as a hedge against unpredictable taxpayer reaction to sweeping federal tax reforms President Donald Trump signed before Christmas.

“As we complete our work on the commonwealth’s budget, we should use this opportunity to strengthen Virginia’s financial position by investing any unanticipated revenues in our cash reserve,” Northam said in a statement. “By taking a conservative approach we will protect our Triple-A bond rating and insulate Virginia families from future uncertainty that could stem from federal tax changes or chaos in Washington.”

The April surge came in income tax payments that are not withheld from payroll checks, but instead paid by taxpayers who have realized big capital gains or made estimated payments based on income not subject to tax withholding.

Those non-withholding tax payments, the most volatile and unpredictable source of state revenues, rose by almost 40 percent in April, adding roughly $150 million to the additional $250 million the state had collected in December and January.

The surge began after Trump signed a law instituting major changes in the federal tax code that Virginia finance officials and lawmakers are still trying to gauge.

For example, of the 781 major individual taxpayers — those with more than $1.7 million in taxable income — who have made big income tax payments, only 60 have filed state returns and an additional 175 have paid almost $35 million in income taxes while seeking extensions before they file their returns, according to state finance officials.

State law requires taxpayers to pay their estimated liabilities by May 1, but not their tax returns, so Virginia could be facing a big demand for refunds in the fall, as more than 540 other big taxpayers file their returns.

“We know they don’t owe us any money, but we don’t know if we owe them money,” Secretary of Finance Aubrey Layne said in an interview.

Layne will present the latest revenue figures to the Senate Finance Committee on Monday afternoon. Senate Majority Leader Tommy Norment, R-James City, who also is co-chairman of the Finance Committee, has called for a new forecast of revenues available for the budget without accepting billions of dollars in federal funds to expand Medicaid or a proposed tax on hospital revenues to help pay the state’s share of the cost.

Northam and House Appropriations Chairman Chris Jones, R-Suffolk, support Medicaid expansion and a provider assessment to help pay for it, and they oppose revising estimates of available revenues until after the administration and legislature fully assess the effects of federal tax reforms.

Instead, they support an amendment to the state budget that would require any additional revenues at the end of the fiscal year to be deposited in a new cash reserve fund.

“The April revenue report is positive news and a sign of a strong economy and responsible fiscal management,” Jones said in a statement Friday. “While we still have two months remaining, the positive report indicates that Virginia will likely beat its revenue projections for the current fiscal year, news that will undoubtedly be welcomed by institutional bond holders and national credit rating agencies.

“If we maintain our current trajectory, Virginia will make a significant deposit in the revenue stabilization and water quality improvement funds, as our constitution requires. Additionally, we will be able to deposit the remaining excess revenues in the newly created cash reserve fund that can be used to address any future revenue volatility. The state budget as passed by the House of Delegates includes language to require remaining excess revenues be invested in the revenue reserve.”

Sen. Emmett Hanger, R-Augusta, co-chairman of the Finance Committee and a supporter of Medicaid expansion, also opposes a revenue reforecast until the state better understands the ramifications of federal tax code changes on Virginia taxpayers.

The reason for their hesitation in banking on additional revenues from non-withholding collections is the state’s experience in 2014. That year, those same revenues plummeted below a forecast that had relied too heavily on the previous year’s experience when the state experienced a big income tax windfall driven by a sell-off of investments at the end of 2012 to avoid a pending increase in the federal capital gains tax.

The result was a projected $2.4 billion revenue shortfall for the 2014-2016 biennium that forced the state to draw down reserves in its rainy day fund. S&P Global Ratings, one of three national bond-rating agencies that gives Virginia their highest credit ratings, said withdrawals from the reserve fund in 2014 and again in 2016 were a primary reason for its decision to downgrade the state’s financial outlook from stable to negative a year ago.

By putting the additional revenues — beyond what is constitutionally required for the rainy day fund — into the cash reserve, Layne said the state could address the bond-rating agencies’ concerns and hedge against major refunds to taxpayers in the fall.

“If you have to pay it back, the money’s in reserve,” he said.

His caution is also based on Virginia’s other major sources of revenue, which are tracking close to forecast. Income taxes withheld from paychecks account for about two-thirds of state general fund revenue, and those collections bounced back in April largely because of an extra payroll deposit day that compensated for the loss of a deposit day in March.

Withholding income tax revenue rose 6.1 percent in April compared with the previous year. For the fiscal year to date, those revenues have risen 4.4 percent, compared with a forecast of 3.5 percent, a difference Layne estimated at almost $100 million.

Sales tax collections had been a source of worry because of online retail sales, but those collections also rose by 5.3 percent in April. Year to date, sales tax revenues have increased by 3.2 percent, just ahead of the budget forecast of 3 percent.

“When you take out non-withholding, we are ranging slightly ahead of forecast,” Layne said.

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