Gov. Ralph Northam and Virginia lawmakers soon will begin work on a new two-year state budget with $1.6 billion banked in reserve, a revenue surplus swollen by federal tax law changes, and more than $431 million earmarked for return to state taxpayers.

Northam offered plenty of good news to the General Assembly money committees Tuesday morning, with assurances that Virginia is better prepared to endure a potential slowing of the state economy while securing promises of record capital investments by businesses that want to move or expand their operations here.

“We start out this budget cycle in a good place, and we all can, and should, take credit for that,” he told the Republican-controlled committees. “We have accomplished a great deal working together.”

Republican legislative leaders said the credit belongs mostly to them, especially in expanding the state’s reserves and returning most of a windfall to taxpayers who paid the state more this year because of the Tax Cuts and Jobs Act that President Donald Trump signed almost two years ago.

“I think he took a little more credit than he actually deserves,” Senate Majority Leader Tommy Norment, R-James City, said after the governor’s speech.

Northam touted a record $20.3 billion in planned capital investment by 378 economic development prospects in deals signed in the 20 months he’s been in office. Those deals will create jobs across the state, he said, citing deals in districts represented by money committee members, beginning with Norment.

“This historic investment means more jobs in communities across the commonwealth and more hard-working Virginians who can support themselves and their families — no matter who they are or where they live,” the governor said in a separate statement.

Northam adopted a generally conciliatory tone in his first key speech to lawmakers from both parties since his blackface scandal erupted in February following the disclosure of a racist photo in his 1984 medical school yearbook.

He reminded lawmakers that, thanks to investments in education and workforce training, Virginia was ranked the best state in the country for business by CNBC last month, which he called “one of my proudest days as governor.”

However, the governor also warned them that Virginia’s strong financial position now doesn’t mean there will be a big surplus to spend in the budget he will propose in December.

Northam cautioned that the next budget will include large, mandatory increases to update spending on K-12 education and Medicaid, as well as additional investments in behavioral health services to make them available uniformly across the state.

“As we go into this new budget cycle, we must be both cautious and strategic,” he said.

This fall, the state will conduct an annual reassessment of its revenue outlook in the face of economic uncertainty heightened by a trade war with China that the governor said has hurt Virginia agricultural exports and farmers, including him.

“Personally, we have soybeans growing on our family farm this year on the Eastern Shore, and they may very well stay in the fields if we can’t sell them,” said Northam, who leases about 65 acres in Accomack County for rotating crops.

Two sources that produce 80% of state revenues — payroll withholding and sales taxes — came up almost $37 million short of their projected growth in the last fiscal year, but they are projected to grow at a faster rate this year than they increased in the last one.

“Unless our trends change, I would think it would be a more conservative forecast going forward,” Secretary of Finance Aubrey Layne said in an interview.

In briefing the committees, Layne said the revenues available to the state “may be cut a little bit” because the state is likely to gain less new revenue than it expects in the current budget.

House Appropriations Committee Chairman Chris Jones, R-Suffolk, agreed that the current projections for revenue growth are “overly optimistic”

“A surplus does not mean there is money to spend, so there’s not much to be excited about,” Jones said in a statement by Republican leaders.

Virginia finished the last fiscal year on June 30 with $797.7 million more in revenue than projected in the current budget, but most of the 7.2% increase represents additional state tax collections because of federal tax reforms, as well as one-time income gains that may not be sustainable.

As a result, what was projected in the budget to be a 3% increase in revenues in this fiscal year is actually 1.2%. Layne said the additional revenue the state received in the last fiscal year was not budgeted because it resulted from tax policies and one-time wealth gains that he said are “not repeatable” in the current fiscal year.

Checks to taxpayers

The state is preparing to return $431 million to taxpayers who will receive one-time checks of $110 for individuals and $220 for couples sometime between Sept. 15 and Oct. 15, weeks before crucial elections to determine political control of a legislature in which Republicans have a narrow edge in both chambers.

An additional $25 million will be held in a “taxpayer relief fund” created this year in a deal between Republican budget leaders and the Democratic governor in response to the Tax Cuts and Jobs Act.

The federal law almost doubled the standard deduction for federal taxes, but state taxpayers saw their Virginia tax bill rise an average of $125 for the last tax year as many forfeited the ability to itemize deductions to claim the higher federal deduction.

The tax refunds promised by legislators and the governor come “pretty darn close to making everybody whole,” said Layne, a certified public accountant.

At the same time, Virginia will boost its combined financial reserves to almost $1.6 billion by next July, with budgeted deposits of $73.6 million in the revenue stabilization fund, also called the rainy day fund, and $270.8 million in the state’s cash reserve fund. An additional $47 million will be held in the Virginia Water Quality Improvement fund.

“We have maintained our triple-A bond rating, put more money in our reserves for a rainy day, and made smart investments in Virginia’s long-term growth,” Northam told legislators.

Virginia’s financial reserves now represent about 7% of general fund revenues, with more than $1.65 billion expected to be deposited by mid-2021. Northam said his goal remains to increase reserves to 8% of general fund revenues by the time his term ends in January 2022.

Jones, who played a key role in creating the cash reserve fund last year, said he wants to double the size of the combined reserves to 14% in the next four years.

House Speaker Kirk Cox, R-Colonial Heights, called the financial results “a trifecta of good news for taxpayers” that he credited to “steady financial leadership from the Republican-led General Assembly.”

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