By Sarah Vogelsong
With Virginia raking in about $1.9 billion in windfall revenue last fiscal year, Gov. Glenn Youngkin’s administration is proposing to invest $400 million in a new state taxpayer relief fund.
“The right thing to do is to return unplanned revenue to taxpayers,” Republican Youngkin told members of the House and Senate committees overseeing Virginia’s budget process on Friday. “It’s not our money. It belongs to Virginia’s hardworking taxpayers.”
But some Democratic lawmakers said the money, much of which comes from taxes on investments, would be better used to raise public workers’ salaries, provide government services and capital improvements such as an estimated $25 billion in costs for to finance the replacement of schools.
“We have to deal with these ongoing issues, and to automatically say everything goes into tax cuts just isn’t realistic,” Del said. Vivian Watts, D-Fairfax, who previously chaired the House Finance Committee when Democrats controlled the chamber.
Del. Sally Hudson, D-Charlottesville, and an economist at the University of Virginia, said that as corporate profits have increased, “the payouts to their shareholders have increased as well.”
“It seems fair that as corporate profits grow, you reinvest that money back into infrastructure…that allows for a healthy business climate to be maintained,” she said.
About three-quarters of unplanned income came from non-withholding taxes, a category that includes taxes on capital gains, partnerships and S corporations, IRA distributions, interest and dividends, and self-employment income.
Tax revenues of this type usually follow the ups and downs of the stock market.
Treasury Secretary Stephen Cummings called the growth in non-withholding tax revenue, which rose 71% between 2019 and 2022, “incredible”.
Corporate taxes have also seen “dramatic growth,” he noted, rising nearly 110% over the same period and 30% over the past year. But Youngkin spokeswoman Macaulay Porter said they didn’t materially impact Virginia’s $1.9 billion windfall in revenue because the state had actually forecast collections in that category would be higher.
Other revenue streams such as corporate income taxes “are still much higher in dollar terms than 2019, but were more or less in line with caboose budget assumptions,” she said, referring to the budget governing the last several months of the fiscal year, which ended June 30 ended, “while the withholding tax was way above what everyone expected.”
Data provided by Cummings also showed an increase in payments excluding withholding taxes of over $100,000 over the past year. While just under 1,200 payments for capital gains and ancillary wage income exceeded this threshold a decade ago, there were more than 4,700 such payments last year.
“You can see dramatic growth in those breaking the $100,000 mark,” Cummings said.
Disagreements about the optimal use of the proceeds
Youngkin repeatedly stressed his belief that the windfall revenue “is not the government’s money” and any surplus “belongs to the taxpayers.”
Together with about $1.2 billion approved but not spent by the General Assembly last year, government revenues are currently more than $3 billion higher than expected.
But much of it was already earmarked for specific uses by legislators during the last fiscal cycle. State law requires about $900 million to be paid into the state’s Rainy Day Fund, Youngkin noted, while other large portions are used for purposes such as the state pension fund, capital improvement overruns and street widening.
The $400 million the governor is asking for a taxpayer relief fund would be created “after accounting for any earmarked uses of that cash surplus,” he said.
Each proposal requires the approval of the General Assembly.
“This $400 million is a down payment,” he told reporters after his speech. “This is the beginning of the realization that if we do indeed have large cash surpluses, driven by taking way too much money and overtaxing Virginians,” the government “can grant significant tax cuts to Virginians in the future.”
Republicans hailed the proposal as needed relief for Virginians suffering from record inflation.
“Across Virginia, families and small businesses continue to grapple with near-record-breaking inflation,” Terry Austin, R-Botetourt, vice chairman of the House Appropriations, said in a statement. “Today’s announcement of Gov. Youngkin’s earnings makes it clear that we have not only an opportunity, but an obligation, to provide even more relief to taxpayers when we return to Richmond in 2023.”
But Watts said the tax break proposal was “just not in touch with the real world out there”.
Pointing to staffing shortages among teachers, state mental health providers and law enforcement officials across the Commonwealth, Watts said Virginia faces “crisis gaps” in employment. And while the General Assembly recently approved wage increases of 10% and more for all these workers, effective July 1, “inflation is eating away at everything,” she said.
“I’m just frustrated that that awareness wasn’t expressed locally,” she said. “To just say it automatically, we’re giving it back to the people — well, people need kids in classrooms with trained teachers in a classroom that isn’t double-staffed because one teacher is free.”
Youngkin acknowledged after his speech that “we continue to see staff shortages,” but said he was “hopeful” that the pay rises “will go a long way in closing a historic wage gap.”
He also signaled that the government would seek more tax cuts, calling Virginia’s taxes high compared to surrounding states like North Carolina and Tennessee.
“We have to consistently lower the tax burden in Virginia,” he said.
