According to this report, Gov. Tim Kaine has ordered state agencies to prepare for significant cuts, as revenues have failed to meet projections.
More than a year ago, I wrote about what the Commonwealth would be facing in this biennial budget:
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.
I’m no economist but I could see the handwriting on the wall. Things look about as bad as I thought they would.
One of the few tools that could reverse Virginia’s fortunes would be a tax increase. As I mentioned earlier, Virginia’s income tax rate is fairly low and a bump of 1/2% would generate an addition $750 million in revenues, 3/4% would generate $1.1 billion. Alternatively, reversing one of those tax policy changes – the car tax cut – could generate $950 million. Unfortunately, the governor is committed to no tax increases, which, given the Republican control of the House, would probably be DOA, anyway.
I have a feeling that Virginia is a long way from turning the corner economically. I don’t expect that this round of cuts will be the last.
VIVIAN J. PAIGE | All Politics is Local 
I have slightly higher hopes for FY2009 if the energy market continues to look for ways to increase efficiency of consumption along with diversification of sourcing. The downturn in the housing market (which, thank God, is not as bad in this region as it in is other areas like SoCal, Nevada, and Florida) directly influences revenues associated with real estate taxes; the pinch in the national energy market indirectly influences sales tax revenues in a number of ways, both by lowering consumer confidence broadly and logistically by influencing consumers to conserve gas by simply driving less (meaning they’re not going as many places where they’ll go and spend money on non-essentials). Coupling this with problems in the financial sector while lenders come to grips with the fact that, no, they’re not actually going to recoup most of their losses, and you can see that consumers are going to be able to draw on less debt to finance their lives–probably a good thing in the long run for individual consumers if it encourages them to use a limited amount of debt more-wisely, but in the short term that really will suck for pretty much everyone, including local, state and federal governments.
After listing all of those problems, why am I optimistic? Because the housing market’s resetting (historically, existing home sale prices should be around 14 times the annual cost of renting, but unsavy consumers armed with cheap, risky loans were paying as much as 25 times the annual cost of renting at the high-water mark of the housing bubble, and oh my God why did you all do that…). While supply-siders in Congress have argued ad nauseum about the benefits of putting more domestic oil in the market sometime around the year 2022, consumers (who suddenly got a whole lot more savy) remembered that there’s a “demand” component of the supply/demand pricing relationship, and that “demand” is the part they can actually exercise any direct control over. We have a lot of challenges left to get the economy back on track: a lot of people are stuck with underwater mortgages, and the lenders holding that debt can’t recoup the value of their investment, which is the sort of thing that makes investors leave the financial market and invest in something else, which affects the amount of available capital for investing in everything from new home purchases to business loans to, well, everything. But given the right leadership from individuals who understand the economy well enough to know how to work with it rather than against it, who will accelerate it’s momentum towards a new sustainable paradigm rather than clinging to the old ideas of an unsustainable status quo, I can already see the rest of the pieces falling back into place to help get the American economy (and, by extension, Virginia’s economy) moving forward again.