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Virginia Finances: Looking Forward

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Federal Aid. Personal Income. Tax. Sales Tax. Corporate. Income Tax. Property Tax. Fees, Charges ... Virginia faces a host of challenges. Regionalism and ... – PowerPoint PPT presentation

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Title: Virginia Finances: Looking Forward


1
Virginia Finances Looking Forward
  • VAR Leadership Academy
  • July 2007
  • Wintergreen, Virginia
  • John Petersen, Professor, School of Public
    Policy, George Mason University

2
Past and Future
  • Lets look first at all states where they have
    been and are now heading.
  • State spending has changed greatly in last
    half-century, but the basic revenue sources have
    stayed much the same (except that many bases of
    tax have been constricted).
  • After looking at the past, I muse on the
    challenges of the next few years especially
    for Virginia.

3
The Setting The Roaring 1990s
  • The states, as the U.S. economy, had an amazing
    run in the 1990s
  • What a deal! Tax rate cuts along with spending
    increases it worked!
  • A philosophy took hold and drove the state fiscal
    agendas Smaller state government that cuts taxes
    and gets out of the way of private sector.
  • Abiding faith in market-driven growth

4
Early 2000s Sharp Reversal in State Fiscal
Fortunes
  • In 2000, stock markets dropped, then economy
    slumped, and revenues fell
  • Legacy of the 90s was increased elasticity in
    tax revenues
  • Personal income taxes capital gains
  • Sales tax narrowing the base
  • Estate Tax a key target
  • Corporate income tax diminished
  • Fees charges fair game

5
State Stresses in early 2000s
  • In FY 2002, states had sharp revenue declines.
    State budget shortfalls reached 50 billion
    nationwide, about 1 billion in VA.
  • Early steps to close budget deficits had many
    one-shots and cosmetic cures.
  • By FY 2003, serious spending cuts started Higher
    education, welfare, local schools took spending
    cuts.

6
Post 2003 Relief Recovery?
  • After the depths of 2003, state revenues have
    climbed strongly.
  • Recovery due to economic rebound rather than
    tax rate raising or tax base expansion.
  • State tax collections up by 10 for 2004-05, now
    growing at 6.
  • Spending growing at a bit slower rate. States
    have built reserves.

7
Some History How States Have Financed Themselves
  • The next few charts review changing state
    revenues structures
  • The big revenue dip of the early 2000s
  • How states have legislated tax changes over the
    past 20 years (changing the tax base or rates)
  • Role of federal aid

8
Composition of State Own Source Revenues
1950-2004
100
90

80
70
60
50
40
30
20
10
0
1950
1960
1970
1980
1990
2000
2004
Sales
Ind. Inc
Corp Inc
Gas Tax
Other
9
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10
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12
Volatility of State Taxes
  • Over time, states have squeezed tax bases and
    increased the rates on those restricted bases.
    Greater use of fees.
  • Reliance on fewer taxpayers and transactions for
    most taxes. This has shifted systems to
    teeter-totter effect
  • Small changes in economy have greater impact on
    revenues.

13
State Tax Systems More Volatile
14
Volatile State Tax Revenues
15
Changes in State Spending
  • Health care costs have come to dominate state
    budgets
  • Education struggles for position
  • Public support waning, NCLB quandaries
  • Costs keep going up
  • Higher education moves to a fee basis
  • Transportation slips to the back of bus
  • Pressure of costly public employees

16
State Spending By Purpose Percentage
Composition 1950-2004
100
1/ Other includes

90
public safety, natural
resources, general
80
administration.
70
60
50
40
30
20
10
0
1950
1960
1970
1980
1990
2000
2004
Education
Soc. Serv.
Highways
Other 1/
17
Health Care Medicaid
  • A rapidly growing, persistent cost issue.
  • High-cost Medicaid users are the disabled and
    elderly. Eats up about 25 percent of state
    general fund budgets.
  • Rate of increase in Medicaid cost has been around
    10_at_yr and is projected to rise at 8_at_yr over the
    next 5 years.
  • Rising employee and post-retirement health
    benefits GASB 45.

18
Education Higher and Lower
  • States are major financiers of public education.
    Big increase in state effort in the 1970s-1980s.
  • Subsequently, other expenditures have pressed
    into educations share.
  • Higher education took large hits in state budget
    cuts of early 2000s move to a user fee
    basis.
  • Public schools and NCLB The Federal government
    de facto standards setter.

19
Transportation
  • Traditional state function, but highway spending
    has stagnated and state trust funds are waning.
  • Federal Highway trust fund running down as
    maintenance takes most of funds. States borrowing
    against future.
  • Opposition to gas tax increases.
  • Privatization/tolling of roads appears to be
    coming fast. Passing off needed increases.

20
Employee Pensions
  • Funding public pensions is a continuing
    hangover from better times.
  • Stock market downturn greatly reduced values of
    investments funds are only recovering some seven
    years later.
  • Net result unfunded liabilities, which may
    lead to tax increases to pay.
  • Employee pension benefits are usually legally
    protected cant be cut.
  • Retiree Health Problem (OPEB Rule 45)

21
Fiscal Meltdowns to Come?
  • Built-in state deficits? Now, most states need
    good times to balance budget.
  • States are stuck in the middle of the
    governmental system, with expensive programs
    health, education.
  • Federal government in poor long-term condition.
    Its cure will reverberate.
  • Over time, unavoidable large cuts in spending
    unless there is high growth.

22
Remedies? No Easy Ones
  • Federal payments represent about 32 of all state
    revenues and are now budgeted for only 1_at_yr
    growth in domestic spending over next decade.
  • Pressure of entitlements on the Federal budget
    plus unknown defense needs.
  • Volatile state revenues and decline in federal
    assistance spell continue shrinkage in spending
    for most states.

23
And Where is Virginia?
  • Great Advantage State economy is lightly
    burdened by taxes compared to the rest of the
    nation. Virginia ranks 48th in taxes as of
    personal income.
  • State tax system is balanced among income,
    sales, charges, property taxes.
  • Low reliance on Federal Aid, but
  • Virginia has avoided damaging constitutional
    restrictions on taxes and spending. Flexibility
    remains.

24
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25
State and Local Revenues By Category as a
Percentage of Personal
Income Virginia and US State Average
25
20
15
10
5
0
Total State-Local
Federal Aid
Personal Income
Sales Tax
Corporate
Property Tax
Fees, Charges
Revenues (FY
Tax
Income Tax
2004)
Virginia
U.S.
26
Virginias Challenge Diversify Economy ...
Integrate Regions
  • States economy is a long-term challenge The
    overriding importance of Federal spending.
  • Dependence on defense spending, especially No.
    Virginia and Tidewater.
  • Problems of fast-growing outer suburbs and
    resuscitating older small cities.
  • Extending growth along the states major
    transportation corridors.

27
Motor Fuel Tax Mystery
  • Virginia, despite growing transportation needs,
    has not increased its basic gas tax since 1986.
  • At 17.5 cents/gal. gas tax ranks 40th in nation,
    below that of its neighbors.
  • State allowed real motor tax receipts to erode.
    Total collections less in real terms than in
    1986, although miles traveled have gone up 80 per
    cent.

28
Highway Revenues 1987 - 2007
29
The Northern Virginia Problem
  • High-income, urban area uncomfortably fitting
    with the rest of the state.
  • New transportation authorities with taxing
    authority may lead to a de facto richer/poorer
    regional realignment.
  • Foreshadowed by earlier actions and an
    intensified by political split. No tax belief
    versus service needs dilemma.

30
Virginia Local Option Taxes
  • Virginia does allow three regional authorities to
    levy an added local gas tax (2 of wholesale
    price).
  • Transportation Act of 2007 extends the concept of
    regional taxes to regional transportation
    authorities.
  • State is depending on surplus and higher fees and
    fines watch out!

31
More Regional Government?
  • Transportation Act State will spend surpluses
    and shift most program funding to local
    governments in Northern VA and Tidewater.
  • Not a long term solution, state share will come
    apart at the next recession.
  • Long-term More fiscal autonomy for growth areas
    and less redistribution through state taxes.

32
Federal Role
  • Federal governments fiscal posture is critical
    to Virginia, flowing out from NOVA and Tidewater
    to rest of state.
  • Cutbacks in domestic spending hurt, but military
    procurement is the key.
  • Long-term repairing of federal revenue/expenditure
    system will have large implications for all
    states.

33
Federal Spending in Virginia, Northern Virginia
and US Average
(FY 2004) Dollars Per Capita
25000
Federal Defense Spending
19246
in Virginia is 4.5 times US
20000
per capita average . In
Northern Virginia, it is 9.2
times US average.
15000
12150
10594
10000
8651
7223
6985
6075
5166
5000
1148
0
Total
Defense
Non-Defense
Virginia
No. VA.
USA
34
An Aging Virginia
  • Demographics will be important.
  • Virginia (like most America) is aging. State
    population will grow 38 between 2000 and 2030.
    But those over 65 grow by 134. Median age
    increases from 35.7 to 37.8 years.
  • School age population will grow by 30 Most
    impact on outer suburbs in NOVA and Richmond
    area.

35
Growing Senior-Related Spending 2007 2030
(state GF budget in billions)
36
Senior-related Spending
  • Because older population grows faster, as do
    prices for health care, this share of budget will
    rise the next 20 years.
  • Under conservative assumptions, senior and
    disability costs will rise from 2.5 to about 12
    billion a year by 2030.
  • This means increase from 15 now to about 25 of
    General Fund budget in 2030.

37
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38
Summing Up
  • Virginia faces a host of challenges
  • Regionalism and different needs/tastes
  • Transportation Needs
  • Reliance on Federal government
  • Aging Population Needs
  • Virginia, with strong and lean finances, has lots
    of running room. But state has been reluctant
    to use it.
  • Need fiscal leadership (a difficult chore)

39
End of Presentation
  • Thanks for your interest
  • John Petersen
  • School of Pubic Policy
  • George Mason University
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