Emerging Budget Deficit Looms in Virginia

The outlook for the budget includes a $1.2 billion deficit as a result of a slowing economy, tax cuts, and a revenue structure that has not kept pace with investments in education, public safety and transportation.

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RICHMOND – Virginia’s fiscal future for the upcoming budget cycle is precarious. Despite recent years of budget surpluses, the state budget is estimated to be heading for a shortfall of $1.2 billion in the coming two-year cycle, according to a report released today by The Commonwealth Institute for Fiscal Analysis. Amidst recent news of a $200-300 million shortfall in state revenue for the fiscal year that ended June 30, 2007, concerns have been mounting over slowing revenues. Unfortunately, it appears that an even more unpleasant surprise awaits the Governor and General Assembly this winter when they try to craft a balanced budget for the next biennium.

“This new estimate of what the budget future holds for the state highlights that we have some tough choices ahead,” said Michael Cassidy, executive director of The Commonwealth Institute. “State revenue sources are not keeping up with the natural growth of programs that serve Virginians such as education, public safety, health care and transportation.”

The report reveals that Virginia is headed toward a potential budget deficit of $1.2 billion as soon as 2008-2010. This predicted shortfall is conservative, though, since it does not include proposals for new programs, such as the Governor’s pre-K initiative, or expansion of existing programs, including state mental health services.

The Commonwealth Institute’s report finds that recent robust economic growth has actually hidden an underlying budget problem that goes all the way back to the 1999 car tax relief effort. In particular, even though 2004 tax reforms by former Governor Mark Warner did increase state revenue by $750 million per year, these additional resources did not fully replace the $950 million consumed annually by the car tax relief effort. Furthermore, tax cut legislation passed since 2004 by the General Assembly has subsequently eroded a significant portion of the new revenue generated by the 2004 reforms.

One approach to any budget deficit is to cut spending to achieve balance. However, policymakers need to rethink that route, since the current budget deficit is not due to out-of-control spending, but is instead due to inadequate revenue policies. State spending has increased only an average of 3 percent over the last 10 years, once inflation and population growth in the state are factored. In addition, Virginia continues to lag behind the rest of the country in several key spending areas, including education, health care and mental health, despite having one of the highest per capita income levels in the country.

“Even more worrisome,” Cassidy stated, “is that lower-income Virginians are really feeling the impact from this disparity.”

Specifically, the report highlights the state’s budget weaknesses as an outdated, regressive income tax system and the 2004 tax reform plan that was too reliant on general sales taxes and taxes levied on cigarettes and tobacco products, which tend to be more volatile revenue streams.

“To address the impending shortfall, the state should take a realistic look at its revenue structure,” Cassidy said. “If Virginia wants to continue to promote a strong quality of life, which includes maintaining adequate transportation, educating the state’s children and promoting public safety, policymakers should embrace a long-term solution that stabilizes state revenues and restores a balanced budget.”


About The Commonwealth Institute
The Commonwealth Institute for Fiscal Analysis provides credible, independent and accessible information and analyses of state fiscal issues with particular attention to the impacts on low- and moderate-income persons. Our products inform state fiscal and budget policy debates and contribute to sound decisions that improve the well-being of individuals, communities and Virginia as a whole. The Commonwealth Institute is a program of the Virginia Interfaith Center for Public Policy.

This research was funded by the Annie E. Casey Foundation. We thank them for their support but acknowledge that the findings and conclusions presented in this report are those of the authors alone, and do not necessarily reflect the opinions of the Foundation.

For more information
The Commonwealth Institute’s complete analysis of Virginia’s current budget situation is available in “The Other Side of the Coin: What Does the Future of Virginia’s Budget Really Look Like?”

Contact: Michael Cassidy, Executive Director
The Commonwealth Institute, www.thecommonwealthinstitute.org
P.O. Box 12516, Richmond, VA 23241
michael@thecommonwealthinstitute.org
804-643-2474