By Paige Cunningham
Sales taxes collected early by Virginia are about equal in size to the 2010 budget surplus trumpeted by Gov. Bob McDonnell.
The governor announced last week a $220 million surplus for the fiscal year that ended on June 30, drawing both praise and criticism from his fellow Republicans. The news came after McDonnell took measures to fill in a $1.8 billion shortfall that grew out of damages to revenue wrought by the recession.
Some conservatives applauded the governor for ending the year with a surplus after revenues for 2009 and 2010 came in $6.4 billion lower than originally predicted three years ago. U.S. Rep. Eric Cantor praised McDonnell for “steady leadership,” while television host Sean Hannity invited the governor on his Fox News show to describe how he achieved the surplus.
McDonnell filled much of the $1.8 billion hole with $1.3 billion in cuts to state agencies. But he deferred pension payments, used next year’s revenues and turned to one-time cash infusions to make up most of the rest, drawing criticism from other fiscal conservatives including Del. Bob Marshall, R-Manassas.
“To say Virginia ended the fiscal year with a surplus when we decided not to pay all the bills…is to be caught speeding with literary license,” Marshall wrote in response to McDonnell’s announcement.
By accelerating sales tax collections, the state picked up $144 million in June — the final month in the fiscal year — that it normally would have garnered in July.
Add to that $83 in sales tax accelerations already imbedded in the 2009 budget, and Virginia dipped into the next biennial budget by $228 million to balance the 2009 and 2010 fiscal years.
Next June, the state will again dip into sales taxes from July and then revert back to the usual practice in following years, says Becky Covey, legislative fiscal analyst for the Senate Finance Committee.
“It’s gonna look like we have a hole this fiscal year until we get to the end of this fiscal year, then they’re going to advance the collection again so it will end up being next year’s collection,” Covey said. “The goal is to have it occur for this biennium we’re starting and then in fiscal year 2013 start reversing this policy.”
The last time Virginia accelerated sales tax collections was during the last national recession in 2001. A few years later the state phased out early collections, Covey said.
While collecting sales taxes early helps states balance budgets in years of ebbing revenues, the practice perpetuates a false sense of security about their finances, says Eileen Norcross, a senior research fellow at the Mercatus Center of George Mason University.
“The financial documents don’t become a good guide to what the state’s situation is,” said Norcross, who has studied the ways states balance their budgets. “It’s rendered the state’s balance sheet immaterial.”
A 2009 shortfall contributed to the $1.8 million hole in 2010. Virginia ended the 2009 fiscal year nearly $300 million short, largely because the state had to return income taxes to taxpayers who’d been overcharged as the economy recessed.
Along with collecting sales taxes early, the state also made decisions weighing on the future by delaying $135 million in fourth-quarter pension payments and putting off a $20 million contribution to state employee pensions until July.
One-time cash infusions included $300 million from the state’s rainy-day fund and $93 million from extra federal Medicaid payments provided by the federal stimulus act. Another $128 million in transfers from various funds and $64 million from the state’s tax amnesty program gave the state enough to plug the deficit with some left over.
Norcross calls the sales tax acceleration and delaying of pension payments “gimmicks” that cloud the ability of lawmakers to make decisions based on states’ real financial situation.
“When states get into trouble and when they balance their budgets, they don’t address the structural drivers that have gotten them into this mess,” Norcross said. “A lot of these things aren’t necessarily illegal, they’re just not good practice.”
