Virginia faced a serious revenue shortfall prior to the tragic events on Sept. 11.
Now its situation is much worse, although that subject is being avoided by the
gubernatorial candidates of the two major parties. The shortfall is likely to be
large, and it is doubtful that the problem will be acknowledged until after the election.
Because Virginia operates under a balanced budget rule, spending reductions will
be necessary. But because people in state government are dodging this unpleasant
truth, the cuts likely will have to be crammed into the last four or five months
of the fiscal year under a new governor and a new General Assembly.
Virginia is vulnerable, particularly Northern Virginia, which leads the state in
growth and income. This area has faced an interruption of air service, a devastating
drop in tourism and a slowdown in its high-tech sector. The Hampton Roads area is
also likely to be adversely affected as large numbers of military personnel leave
for foreign duty.
Nevertheless, state spending decisions continue to be based on a general fund
revenue-growth forecast of 7.2 percent. (By way of comparison, revenues in the
preceding year grew 2.9 percent.) The forecast, which was made eight months ago,
was based on economic conditions in October. Most forecasters assume much slower
national growth now, and Virginia is unlikely to be immune.
A factor adding to Virginia's revenue woes is that individual income tax refunds
that normally would have been made last fiscal year were deferred to the current
year. According to the department of taxation, the delay was caused by extra
processing time connected to the redesigned tax form, but the result is that the
refunds will be subtracted from this year's revenue.
What about the "rainy day" fund of $716 million? By law, it can be used to make up
only half of a shortfall measured in terms of the original revenue forecast in the
2000-2002 Appropriation Act. For example, if the shortfall is $800 million, only
$400 million can be appropriated from the fund. If the revenue problems persist into
the next two-year budget cycle, the fund will be available only if revenues fall more
than 2 percent below forecasts. Because those forecasts already will have factored in
the recent terrorist events, it is unlikely that this trigger will be met, at least
in FY '03.
The problems of state finance are not limited to the general fund either. The major
sources of tax revenue for the transportation fund are the motor-fuels tax, the motor
vehicle sales and use tax, and the retail sales tax. Reduced tourist travel on the
highways will affect fuel-tax revenue. If fuel prices increase, this also will reduce revenue.
For many years the 3 percent sales tax on new and used vehicles has been an important
source of growth. But even before the terrorist attacks, car and truck sales were slowing,
and now worsening consumer sentiment may take a greater toll on sales. Further complicating
matters, the one-half percent of the general sales tax earmarked for transportation is likely
to grow slowly.
This is a somber economic picture for Virginia, but it is a reality that the commonwealth's
leaders need to recognize and handle, sooner rather than later.
