With Monday’s presentation to the money committees of the General Assembly, we now know that FY 2007 revenues were $234 million short and estimated revenues for FY 2008 will be $407 million less than previously forecasted.
The Governor’s remarks to the committee did not include all of the details. That task was left to Secretary of Finance Jody Wagner. The actual presentation is now available. After perusing this, a few things jumped out at me.
First, the forecasted total revenues (not including ABC profits, lottery profits and transfers) were $15.8 billion, while the actual receipts were $15.6 billion. The forecast variance of 1.5%, while significant in terms of actual dollars, is in line with the norm. Over the last 20 years, the forecast has varied from actual by an average of +/-1.6%. In terms of percentages, the largest negative variance occurred in FY 1990, when revenues were 2.6% less than forecasted. In terms of real dollars, the largest negative variance occurred in FY 2002, when revenues were $230.8 less than forecasted. So while this year’s deficit is large in terms of real dollars, it certainly is not unusual.
After all, forecasting is not an exact science. Take a look at the forecasting done by the ODU Economic Forecasting Project. Each year, they present what they call their scorecard: a comparison of what they forecast to the actual amount. Here are their national scorecard and their Hampton Roads scorecard for 2006. While they hit the nail on the head in some categories, note the wide variance in housing. They predicted that the value of single family housing permits would increase 1.5% but they actually decreased 22.1%. Now, can you imagine what the state revenue shortfall would have been had revenues decreased that much?
When they released their 2007 predictions this past January, they predicted that single family housing permits would decline by 12.9%. From their latest report:
The number of single family housing building permits during the first five months of 2006 declined by 22.8 percent compared to first five months in 2006 and the value of these permits declined by 16.2 percent.
They are predicting that the value of such permits will decline 4% in the third quarter, as the rate of the decline has slowed.
As you can see, the ODU forecast is adjusted as more information comes in during the year. The problem with the VA revenue shortfall is the timing: the biggest contributor to the FY 2007 revenue shortfall was individual income tax refunds ($222.7 million), most of which are in May and June, the end of the fiscal year. It was when the May numbers were tallied that we were first alerted to the possibility of revenue shortfalls, much too late in the fiscal year to make many adjustments.
Income tax refunds were the result of three things: the land preservation credit ($75 million), expansion of the low income credit ($33 million) and a difference in the base forecast of $115 million. The first two of those are the direct result of General Assembly actions. The third is simply a combination of things, higher deductions due to the housing boom among them.
[Wagner’s report indicates there was also a flaw in the methodology used for estimating income tax refunds. The prior method looked at calendar year payroll withholding and the following year’s refunds in estimating the refund activity. This left out any consideration of estimated tax payments, the theory being that no one overestimates their tax payments. (Um – I could have helped out on this one. Yeah, a lot of folks overpay their estimates š¦ ) The new method for estimating refunds will include the estimated payments in addition to the withholding as compared to the refunds in the subsequent year.]
Do not underestimate the effect of housing on the state’s revenues. I recall listening to the ODU presentation the year after Hurricane Isabel hit. The bump in retail sales was measurable, as people stocked up before the hurricane and purchased repair items afterwards. In FY2007, not only were retail sales down, but the corporate income tax payments from housing companies declined significantly, from 16% of the total receipts to 8%.
Looking forward to FY2008, Wagner’s report reflects a downward adjustment in sales taxes, corporate income taxes, recordation taxes, and an increase in individual refunds. In addition, the report reflects the effects of significant tax policy changes implemented by the General Assembly. These constraints will really be felt in the next biennial budget, as full implementation of the programs take place. Much of this has been discussed in report issued earlier by The Commonwealth Institute for Fiscal Analysis. Tax policy changes are expected to reduce revenues by $353.8 million and $365.2 million in FY2009 and 2010, respectively. The largest contributors to these reductions are the estate tax repeal (at $140 million per year) and the funds dedicated to transportation ($185 million and $196.6 million).
One has to wonder if our legislators really understood the financial implications of their votes. Surely they didn’t expect the surpluses experienced in the past few years to continue.
I expect the next few years to be painful ones for Virginia. When one considers just the additional costs that will result from the K-12 rebenchmarking, estimated in The Commonwealth Institute’s report to be $600 million, it’s going to get quite ugly. Unless there are significant savings to be realized from efficiencies and the elimination of programs, I think we are going to see actual cuts in government services. Nonprofits who rely on government grants are likely to feel the pinch as the grants are reduced or eliminated. I doubt if any Virginian will escape unscathed.
[This may be the perfect opportunity, by the way, to take a look at Virginia’s income tax structure. The tax burden in Virginia is relatively low and the income tax brackets are quite compressed, with the top tax rate of 5.75% kicking in at taxable income in excess of $17,000. The corporate rate is a flat 6%. If I can find the time (and the information, of course), perhaps I can come up with some proposals for these.]
VIVIAN J. PAIGE | All Politics is Local 
Vivian,
A couple of points: at the meeting on Monday, Secretary Wagner estimated that SOQ rebenchmarking will be more than $1.1 billion.
My main concern is that revenue growth was 4.9 percent for FY 2007, but yet there’s still a projected shortfall? It seems that the current biennial budget was unnecessarily bloated…if you can’t make ends meet with nearly 5 percent growth, something’s amiss.
First, why don’t they stop the damned predicting? They’re not good at it, and it costs money. How about, “What was last year’s revenue? That’s what we have to spend next year.” In most years, revenue will exceed expenditures, because revenues are generally going up. For the rare occasions when it does not, we have the money that we saved from the previous years.
P.S. — What’s with charging sales tax at the state-run liquor stores. It’s bad enough to have the blatant socialism, but to tax us on the overpriced liquor is like Margarita salt on a cut lip.
Mrs. Mouse:
1. Regarding the ABC I…agree. In Russia they actually had state-run vending machines for Vodka (still do, as far as I’m aware). You put in your ruples, and it spat a couple shots of vodka into a tin cup chained to the dispenser. As far as I know, though, it never charged you sales tax.
I don’t know why the same machine didn’t catch on in Cuba with banana-infused rum, but I feel like we’d have way fewer people coming over on homemade boats and a whole lot more Americans who want to normalize relations with Cuba.
2. You CLEARLY need some better stemware for drinking your margaritas. They’re cheap, they’re disposable, but the sharp-rimmed plastic cups just aren’t worth the suffering.
Even if it does forestall even worse suffering the next morning when you can’t bring yourself to put down that fourth mixer. š
FortyFour – The Commonwealth Institute’s report says that the budget included about $800 million for the SOQ rebenchingmarking and they estimated that it would cost about $1.5 billion, so they said the additional costs (not already budgeted) would be about $600 million. That’s where that figure I cited above comes from. Now, if it is only $300 million more, that’s good.
As for the 4.9% – I hear you. Of course, if the money is supposed to come in, then folks are going to spend it. That’s the government’s way of doing business.
AEM – it would be irresponsible to just use last year’s revenues and not incorporate predicted changes.
I gave up on the glass stemware — they keep breaking after six or eight Margaritas.
C’mon Vivian, the answer is easy: just increase the Civil Remedial Fees and all is well. These legislators in Richmond are smarter than you give them credit for cuz they know the bad drivers of Virginia can and should pay for any shortfall in revenue. [end snark… with rolling eyes]
Damn good post.
I expect some very hard descisons coming down the road. Will Kaine hold steadfast to his core beliefs and fund things like education even in the midst of this data or will he provide the Republicans with just enough to spin that he and the Dems sold Virginia a bill of goods.If Kaine fails to get his school initiatives funded where will the educators in Virginia place their loyalty come the next election cycle if the Dems control both the Executive Mansion and the Senate after this Fall and can’t get it done.