Less clear is whether lawmakers in the General Assembly will use the money to fund Youngkin’s agenda of tax cuts, with lingering uncertainty over the coronavirus pandemic inspiring caution even among his fellow Republicans.
“If we think we can do it, if the numbers crunch — we’ll absolutely look at it,” Del. Barry D. Knight (R-Virginia Beach) said of the tax cuts. But only, he added, if they can be done “without cutting services.”
Knight is in line to chair the House Appropriations Committee, which wields enormous power over the state budget, if Republicans hold on to a 52-48 majority that resulted from the Nov. 2 elections. Two close races are subject to recount, which means a 50-50 power-sharing split is still a possibility.
Democrats take credit for the surpluses, which clocked in at a record $2.6 billion for the 2021 fiscal year — which ended in June — and could amount to more than $3.5 billion above projections for each of the next two years, according to recent state estimates. Those unprecedented figures arrive a little more than a year after Gov. Ralph Northam (D) had to freeze spending because of the pandemic.
“Despite the challenges that we’ve had, quite clearly our leadership — Governor Northam’s leadership — Democratic leadership has put our economy on the right track,” said House Speaker Eileen Filler-Corn (D-Fairfax), who is set to become minority leader in next year’s legislative session if the Republican majority holds.
“I hope that the new administration embraces all of what we have accomplished,” she said. “I am prepared to work with them. . . . However, if they decide to try to reverse our progress we will be there to hold them accountable.”
According to state officials, the booming revenue reflects an unexpectedly fast recovery from the economic downturn caused by the pandemic. Consumer spending, skyrocketing real estate prices and rising wages all generated extra tax revenue.
On top of all that, several rounds of federal stimulus and coronavirus relief money showered Virginia’s state and local governments with more than $26 billion in aid. More than $1 billion of the state’s allotment from the American Rescue Plan Act remains unspent, and hundreds of millions more are expected from the Biden administration’s infrastructure package.
“I’ve been doing this almost three decades and worked in two other states — Texas and Minnesota — and I’ve never seen it like this before,” Virginia Finance Secretary Joe Flores said in an interview.
When Northam took office, he pointed out, the state’s rainy-day fund stood at about $200 million. Those reserves will soon top $3 billion and could exceed the maximum amount allowed by law, he said. “The incoming governor is coming into a pretty remarkable situation,” he said.
Virginia requires the outgoing governor — Northam — to prepare a spending plan that the new governor will inherit. He will do that in mid-December, and then it will be up to Youngkin and the new General Assembly to amend that document to their liking.
With Democrats maintaining a 21-19 advantage in the state Senate, every action will require bipartisan compromise.
House Appropriations Chairman Luke E. Torian (D-Prince William) acknowledged that “perhaps the incoming governor may want to give some kind of tax relief [because] we have left the commonwealth in a great financial situation.”
Some Democrats have shown interest in Youngkin’s campaign promise to do away with the state’s grocery tax. “That . . . would provide some relief to lower-income people,” Flores said.
He noted that lower-income workers, particularly in service industries, bore the brunt of the economic downturn and have not recovered as quickly as more affluent Virginians.
Youngkin has proposed one-time rebates to state taxpayers, something the General Assembly approved in 2019 at a cost of about $400 million — a possible expense that Appropriations Committee staffers have already begun baking into budget projections.
Lawmakers have also expressed support for increasing funding for schools and law enforcement and providing tax relief for military veterans. But Youngkin’s push for an across-the-board cut to personal income tax rates will be a tougher sell, because that would reduce revenue on an ongoing basis at a time of uncertainty.
“I think we need to be cautious in what we’re doing,” said Sen. Frank M. Ruff Jr. (R-Mecklenburg), a member of the Senate Finance and Appropriations Committee. He said any reduction in income or corporate tax rates should be incremental to minimize disruption of state finances.
A spokeswoman for Youngkin declined to comment on his economic policy plans, but The Washington Post obtained a recording of his remarks on Monday to the Governor’s Advisory Council on Revenue Estimates (GACRE), a group of business leaders and lawmakers who meet in private to help craft the state’s economic outlook.
Youngkin ran for office on rhetoric about Virginia’s economy being “in the ditch,” despite the state having a lower unemployment rate than the national average and winning CNBC’s coveted “Top State for Business” award twice in a row.
The former private-equity executive was more measured in his GACRE remarks, saying that “the near-term outlook feels to me to be pretty solid.” But beyond that, he said, the outlook is uncertain.
“This is an incredibly important moment where I think we do have as much difficulty assessing where we are today as we did a year ago, and I think we have to be careful to temper our outlook,” Youngkin told the group.
He then laid out three basic economic concerns. The first is that businesses are facing unusual supply and demand pressures that drive up both revenue and expenses. He cautioned that he believes much of that dynamic is being driven by government intervention in the economy. “And as a result,” he said, “we can’t trust it.”
Second, Youngkin emphasized a need to focus on competition. “We have to remember that there is somebody trying to eat our lunch every day of the week,” he said. “Every morning we get up, there’s someone trying to hire our employees, steal our customers and oh, by the way, North Carolina, Tennessee, Maryland, South Carolina, Georgia, Florida, Texas, you name them, are trying to beat Virginia. So we have to compete.”
And third, he stressed a need to get Virginians back to work, suggesting that 235,000 fewer jobs around the state are filled today than in 2019 because people aren’t applying for them.
“If we can’t . . . cause them to switch from not working to working, we have a real challenge,” Youngkin said. He then pledged to create “a sustainable economy and not one that is overly impacted by government.”
Addressing the business leaders, he said that people are “going to absolutely love working for the increased wages and salaries you all are paying. This is how we’re going to build a sustainable economy that’s going to lift Virginians — all Virginians — up.”