Times Are Tough

We are in the second year of the worst U.S. economic downturn in at least a generation, which has resulted in severe state tax revenue declines.

Since 2007, Governor Kaine has proposed, and the General Assembly has approved, $7 billion in budget cuts.

The cuts would actually have been even steeper this past year if it were not for Virginia receiving federal stimulus funds, which will expire in 2011.

By this fall, it was clear that another $3.5 billion in cuts were needed because of a continuing revenue shortfall.

Just Getting Tougher

In Virginia, a governor’s last two-year budget plan is made prior to a new governor being inaugurated.

That was the case last Friday as Governor Kaine made his presentation to a joint meeting of the General Assembly money committees.

The revenue forecast he presented showed a general fund revenue decline of 2.7 percent in the current fiscal year.

This is the second yearly revenue drop in a row, which is the first time that has happened in Virginia.

This is in sharp contrast to the past. For 29 out of the last 40 years, yearly revenue growth has been at least six percent.

In fact, in 17 of those 40 years, revenue growth was at least 10 percent from one year to the next.

School and Workforce Cuts

The Governor proposes that, for the first time in recent memory, public school funding will be less in the next fiscal year than in the current fiscal year.

He proposes cutting administrative and support personnel and local employee health insurance funding, but not reducing classroom educational programs.

There have been 1,651 layoffs in the state workforce since 2007, and this budget proposes that another 664 workers will lose their jobs.

State employees, who face a furlough day in May 2010, have not received raises since December 2007, and will receive none through July 2012 under this budget.

Tax Increases?

Governor Kaine has proposed budget reductions of only $2.3 billion out of the over $3.5 billion needed.

To make up the difference, he would reallocate funds now going to other programs and increase taxes.

The Governor proposes taxing property insurance premiums and increasing the E-911 fees we pay as part of our phone bills.

He proposes ending retailer reimbursements for sales tax collections and grabbing $950 million now going to local governments for the car tax cut.

In order to prevent local governments from having to return to taxing automobiles and other personal property, he proposes a 1% income tax increase.

Under this proposal, all of this new income tax revenue would go back to the localities in which it was raised in exchange for them eliminating the personal property tax.

In a Quandary

I do not see any possibility of the General Assembly passing an income tax increase during the 2010 session.

But, without it, the House and Senate are going to have to cut state spending even more drastically. But, what can they cut?

That is the tar baby that the outgoing governor has thrown upon the laps of the 140 members of the General Assembly.

Do they increase taxes in an economic downturn or further cut state programs at a time when demand is even greater for them?

It looks like watching the 2010 General Assembly session is going to be a great spectator sport.