RICHMOND, JULY 16 -- As Virginia's tax revenue continues to plunge, two legislative money committees sought answers today to why the shortfall is occurring and why no one saw it coming.
In more than four hours of grilling economic experts, lawmakers heard numerous theories, but few conclusions about the budget shortfall, which was about $400 million for fiscal 1990 and is expected to top $1 billion for fiscal years 1990 through 1992.
The most frequently expressed theory, dubbed "taxpayer behavior" by Finance Secretary Paul W. Timmreck, holds that taxpayers have become more sophisticated since changes in the federal and state tax codes a few years ago and aren't behaving as expected when it comes to paying their taxes.
Also, tax breaks approved for retirees after a U.S. Supreme Court ruling last year may be costing the state more than expected, Timmreck said.
Another cause is a general lag in the economy, which has been most noticeable in Northern Virginia.
State Tax Commissioner William H. Forst said unemployment figures, which show Virginia near the bottom of the states, may be deceptive because companies with fewer than 10 employees are not counted. If layoffs are occurring in the service area, "we won't see them," Forst said.
It's important which theory is correct, according to House Finance Committee Chairman C. Richard Cranwell (D-Vinton).
If the shortfall results primarily from the economy, it is likely to be short-term, given the state's generally solid economic base; if, however, taxpayers have figured out how to take advantage of the new tax system, the problem "will be with us until the millennium," Cranwell said.
Whatever the cause, Gov. L. Douglas Wilder, who was in Michigan today, has said everything but a tax increase is being considered as a solution and has asked localities to draw up contingency plans for spending cuts.
Virginia's tax department is spending $187,000 this year on economic forecasting, on which the state's two-year budget is based.
Gerald Godshaw of Wharton Econometric Forecasting Associates, which has a $39,200 contract to provide data and advice to the state, cited the popularity of home-equity loans as one example of a change in taxpayer behavior.
With the phaseout of interest deductions on many loans, Virginia, which ties its tax policy to the federal code, expected a revenue gain. Instead, Godshaw said, homeowners are using home-equity loans, on which the interest remains deductible, for such things as cars and debt consolidation.
Also, Godshaw said, revenue from capital gains may not be matching expectations because home sales -- the principal source of that tax -- are being put off in anticipation of a reduction in federal capital gains taxes, as recommended by President Bush.
Del. Warren G. Stambaugh (D-Arlington) said "it's hard to believe that behavioral changes added up to $151 million" in last-minute reductions for fiscal 1990, which ended June 30.
Del. Robert E. Harris (R-Fairfax), a House Appropriations Committee member, agreed that the shortfall is "more than an aberration in taxpayer behavior." He said that in Northern Virginia, "employers are refusing to hire, homes are on the market for six months instead of 60 days and people are holding off on buying automobiles and other major purchases."
Looming on the horizon is the effect of the "peace dividend" on the state's economy. Because Virginia ranks high in the number and value of defense contracts and military installations, Godshaw said reductions in defense spending will "greatly impact" the state.
"Virginia has been lucky," Godshaw said, outpacing the rest of the country in growth since late 1982. In the coming years, he said, "it may be more like a normal state."
Del. David G. Brickley (D-Woodbridge) warned that "the party's over. The country is in a real slump." He blamed the federal government for "playing with funny money" for the last 10 years. "Now look at all the for-rent signs." The only sector of the economy that is booming, Brickley said, is bankruptcy.
Among the spectators who packed the House Appropriations Committee room today were several representatives of Northern Virginia counties, who expressed concern that a $60 million tax break for localities, approved by the General Assembly this year, will be rescinded to help balance the budget.
"It's very vulnerable," said Susan Mittereder, who lobbies here for Fairfax County.
Since Dec. 18, Virginia's budget forecast through fiscal 1992 has been reduced $818.4 million, with an additional $300,000 in cuts likely to be needed to bring the current two-year budget into balance.
Timmreck told legislators the state had to come up with $151.4 million in saving in the closing days of fiscal 1990 "so the checks wouldn't bounce." That revision followed earlier reductions, announced in December and February, totaling $248 million.
Tax collections for fiscal 1990 missed the mark by 2.65 percent, with receipts lagging in virtually every major category. Corporation taxes were off the estimate by $20.8 million; individual withholding was off $23.1 million; estimated and final tax payments by individuals were off by $81.9 million; and refunds were $50.1 million more than expected.