With unexpectedly high state revenues, Youngkin calls for more tax relief

With Virginia taking in roughly $1.9 billion in unanticipated revenues over the past fiscal year, Gov. Glenn Youngkin’s administration is proposing putting $400 million toward a new state taxpayer relief fund. 

“The right thing to do is return unplanned revenue to taxpayers,” the Republican Youngkin told members of the House and Senate committees that oversee Virginia’s budget process on Friday. “It’s not our money. It belongs to the hardworking taxpayers of Virginia.” 

But some Democratic lawmakers said the money, much of which comes from taxes on investments, would be better used to bolster public worker salaries, provide state services and fund capital improvements such as an estimated $25 billion in school replacement costs. 

“We have to deal with these ongoing problems, and to automatically say that all of it goes into tax cuts is just not realistic,” said Del. 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 risen, “so have the payouts to their shareholders.”

“It seems fair that when corporate profits soar, you reinvest that money in the infrastructure … that makes it possible to maintain a healthy business climate,” she said. 

Roughly three-quarters of the unplanned revenues were from nonwithholding 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 kind tend to follow rises and falls in the stock market.

Finance Secretary Stephen Cummings described the growth in nonwithholding tax revenues, which rose 71% between 2019 and 2022, as “incredible.”  

Corporate taxes also saw “dramatic growth,” he noted, rising nearly 110% over the same period and 30% over the past year. However, Youngkin spokeswoman Macaulay Porter said they did not significantly affect Virginia’s $1.9 billion in unanticipated revenues, since the state had actually forecast that collections in that category would be higher. 

Other revenue sources like corporate taxes “are still much higher in dollar terms than they were in 2019, but were more-or-less in line with the assumptions embedded in the caboose budget,” she said, referring to the budget that governs the last few months of the fiscal year that ended on June 30, “whereas nonwithholding was way above what anyone expected.” 

Data presented by Cummings also showed a spike in nonwithholding payments greater than $100,000 last year. While a decade ago, just under 1,200 payments for capital gains and non-wage income exceeded that threshold, over 4,700 such payments were made last year. 

“You can see dramatic growth in those that clear that $100,000 bar,” said Cummings. 

Disagreement over best use of revenues

Youngkin repeatedly emphasized his belief that the unanticipated revenues are “not the government’s money” and any surplus “belongs to the taxpayers.” 

When combined with roughly $1.2 billion that the General Assembly appropriated last year but has not been spent, state revenues are currently more than $3 billion higher than expected. 

But much of it has already been designated for particular uses by legislators during the last budget cycle. State law requires that roughly $900 million be deposited into the state’s rainy day fund, Youngkin noted, while other large chunks will go toward uses such as the state’s retirement fund, capital improvement overruns and road widening. 

The $400 million the governor wants for a taxpayer relief fund would be created “after accounting for all earmarked uses of this cash surplus,” he said.

Any proposal will require approval by the General Assembly.

“This $400 million is a down payment,” he told reporters after his speech. “This is the beginning of recognizing that when we in fact have big cash surpluses driven by taking in way too much money and overtaxing Virginians,” the government can “provide meaningful tax reductions to Virginians going forward.” 

Republicans praised the proposal as needed relief for Virginians suffering from record inflation.

“All across Virginia, families and small businesses continue to struggle with near record inflation,” House Appropriations Vice Chair Terry Austin, R-Botetourt, said in a statement. “Governor Youngkin’s revenue announcement today 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 relief proposal was “just not in touch with the real world out there.” 

Pointing to staffing shortages among teachers, state mental health care providers and law enforcement officers across the commonwealth, Watts said Virginia is facing “crisis gaps” in employment. And while the General Assembly recently approved pay raises of 10% and higher for all these workers that went into effect July 1, “inflation’s just eating it up,” she said. 

“I’m just frustrated that this on-the-ground awareness was not expressed,” she said. “To just say automatically, we return it to the people – well, the people need kids in classrooms with trained teachers in a classroom that isn’t doubled up because there’s a teacher vacancy.” 

Youngkin acknowledged after his speech that “we continue to see staffing shortages” but said he is “hopeful” that the pay increases “will go a long way towards covering a historic pay gap.” 

He also signaled that the administration will seek further tax cuts, calling Virginia’s taxes high relative to surrounding states such as North Carolina and Tennessee.

“We’ve got to be consistently lowering the tax burden in Virginia,” he said.