Federal money, tax collections boost Virginia revenue, but it won’t be permanent

(The Center Square) – Virginia state revenue increased again in February as it continues to rise through the fiscal year, but a large part of the increase is coming from temporary boosts.

Total general fund revenues increased by 28.5% in February, compared to a year ago, but the boost does not necessarily imply organic economic growth. Because the tax filing season was delayed, the state issued fewer refunds in the month than it otherwise would have, which inflated the monthly numbers.

According to the governor’s office, the Department of Taxation issued $217 million in refunds, which is significantly less than last year’s $427.3 million. At the end of the month, the state only processed 486,000 refunds compared to last year when it processed 941,000. Clearer numbers will be available after these refunds are processed in March.

“February is not a significant month for revenue collections and this report provided no surprises since we announced the mid-session forecast last month,” Secretary of Finance Aubrey Layne said in a statement. “The key to the General Fund revenue forecast will be the fourth quarter, as individual income tax final payments are due on May 1.”

Collections for payroll withholding taxes increased by 6.4% and collections on sales taxes increased by 8.6% when compared to last year. The year-to-date collections for payroll withholding taxes increased by 1.1% and for sales tax by 6.7%. Total revenues increase by 8% in February, which is ahead of the 3% projected growth.

Some of the year-to-date growth can also be attributed to the influx of federal money artificially propping up the economy through the pandemic, but some analysts are warning that these boosts are contingent on federal money flooding into the state.

“Federal spending created an economic sugar high in 2020 and is going to have us mainlining speed in 2021,” Stephen Haner, a senior fellow for state and local tax policy at the free-market Thomas Jefferson Institute for Public Policy, told The Center Square.

“The priority for revenue the state controls should be building the reserves further – still small in comparison to the full budget,” Haner said. “For the new flood of federal revenue, where there is discretion, spend it on one-time projects. If the legislators bake that into the overall budget, at some point the federal tap will turn off and Virginia will be in a bind. Unless addicting us to federal largesse is the point. It may be.”

Last week, President Joe Biden signed another stimulus package, which will funnel money into state and local governments, businesses and average residents through stimulus checks. The influx of more federal money, Haner said, will cause revenues to look better, at least for the time being.

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