RICHMOND — Gov. Glenn Youngkin (R) said he plans to seek tax cuts in his budget proposal for next year despite acknowledging that a possible economic recession could weaken the state’s finances.
“One of our key priorities is not to be in a circumstance where we get over our skis on either side of this — tax cuts or in spending,” Youngkin said this week in brief remarks to reporters after meeting with a panel of business leaders to assess the state’s economic outlook.
Youngkin presided over the annual closed-door meeting of the Governor’s Advisory Council on Revenue Estimates, a group of corporate and financial leaders — as well as lawmakers from General Assembly money committees — who provide economic forecasts that help frame the budgeting process.
Youngkin said the panel’s broad consensus over two hours of discussion was that some degree of economic slowdown seems likely. “Generally, there is expectation that there will be a recession next year,” he said. That requires budget officials, he added, to be “very prudent in what we do, particularly next year as we head into a storm — and we really all believe it will be a storm; we’re just not sure whether it’s a tropical storm or a hurricane-level storm.”
Inflation, Russia’s invasion of Ukraine, supply-chain issues that linger from pandemic-related shutdowns, and the Federal Reserve’s steady increase of interest rates to fight rising prices all contribute to economists’ expectation of a coming recession. But Youngkin pointed out that Virginia is in an unusually good position to withstand the drop in tax revenue that could go along with a cooler economy.
That’s because two years of federal pandemic relief, combined with a sharp rebound by corporations and the wealthiest taxpayers, have left state coffers filled to the brim. Thanks to measures passed by the General Assembly and signed into law by Youngkin and his predecessor, former governor Ralph Northam (D), Virginia is set to achieve an all-time high in its budget reserve funds.
By the end of next year, Youngkin said, the state’s reserves will top $4 billion, or roughly 15 percent of the state’s general fund — a level state lawmakers once thought was nearly unattainable. Those reserves help protect Virginia’s prized triple-A bond rating and can safeguard finances if revenue comes up short. In addition, the state finished the last fiscal year with a surplus of $3.2 billion.
“The commonwealth is in its best financial position ever,” Youngkin said, although he has also argued that some of that fiscal cushion is the result of over-taxation during Democratic administrations in Richmond.
Youngkin’s office reported strong tax-revenue figures for October, with collections up 3 percent compared with the same month a year ago. That included the state paying out a round of taxpayer rebates, as well as the first impact of an increase in the standard deduction for personal income tax filers that the General Assembly passed in its session earlier this year.
If not for those factors, October revenue would have been up 10.3 percent compared with a year ago.
Youngkin took office in January promising tax cuts, and the divided legislature — Republicans control the House of Delegates, and Democrats control the Senate — delivered $4 billion’s worth over the next two years, including nearly doubling the standard deduction. That change is expected to reduce state revenue by about $50 million per month.
But Youngkin failed to win approval for his proposed suspension of the gasoline tax, and while he got lawmakers to agree to end the state’s 1.5 percent tax on groceries, a local grocery tax of 1 percent remains in place. Democrats — and even some Republicans — expressed concern that more extensive tax cuts would reduce the state’s ability to fund its obligations in a time of economic uncertainty.
“We’re in such unsettled waters,” Senate Finance and Appropriations Committee Co-Chair Janet D. Howell (D-Fairfax) told reporters in August. “Hopefully, we’ll be able to do some tax relief, but it’s not necessarily in the bag, and I wouldn’t want people to get their hopes up.”
Senate Majority Leader Richard L. Saslaw (D-Fairfax) said in an interview this week that he is highly skeptical of the idea of cutting taxes during an economic downturn. “If we hit a recession [and cut taxes], we’re going to be shutting down half the government,” he said, adding that Virginia still lags in efforts to boost pay for teachers and law enforcement and in providing mental health services.
“We need to take care of functions that people expect us to,” Saslaw said.
The legislature is set to convene a new session on Jan. 11, and Youngkin has said he will propose a $397 million “taxpayer relief” fund and has expressed interest in cutting the corporate tax rate, among other possible cuts. He will lay out his budget priorities on Dec. 15, when he proposes amendments to the two-year spending plan that went into effect July 1.
On the positive side of the balance sheet, job growth has returned to Virginia since the end of shutdowns and business restrictions that came with the pandemic. The state’s unemployment rate was 2.7 percent in October, a point below the national rate, and wage growth is up.
But Youngkin, a former private-equity executive who delights in discussing state finances, outlined several potential weaknesses that could affect tax revenue next year. The biggest portion of state revenue comes from taxes withheld from residents’ paychecks, he said, and that would suffer from recession-related job losses.
Non-withholding taxes — tied to the stock market or other capital gains — “are much harder to predict,” Youngkin said. “We’re going to be appropriately cautious on that forecast,” given the steep rises and falls the markets have experienced in the past year.
Corporate profits are another major source of state tax revenue, and Youngkin said he expects those to be under pressure next year if the economy slows. And consumer spending, which drives sales tax revenue, “has generally been pretty healthy. There’s been some decline in the overall balance-sheet health of the consumer, but it’s still good relative to even where we were prior to the pandemic. But that can change quickly. And so we’re watching that very closely,” he said.