Gov. Abigail Spanberger already has signaled that the legislature won't have any extra money available for the new budget until a full revenue forecast is complete next fall, but the new monthly revenue report shows that while tax revenues remain well ahead of projections through the first eight months of the fiscal year, the potential surplus is shrinking.
With the job market slowing and the war in Iran threatening fuel prices, Spanberger said Thursday: "Considering the rising global instability and this month's anemic national jobs report, it is clear that macroeconomic headwinds are certainly present for the next biennium."
"Caution must be the watchword when looking out over the next 12 to 24 months," she said.
The Senate is counting on $500 million more in tax revenues than projected this year in its proposed budget to help pay for a nearly $500 million one-time rebate to taxpayers with a comparable tax liability. However, the margin narrowed from $521 million in January to $487 million last month.
"We're watching it, but we're confident we only spent money that's in the bank," said Sen. Creigh Deeds, D-Charlottesville, one of five Senate budget conferees.
Budget negotiations have been stalled because of disagreement over the Senate's proposal to repeal the 16-year-old sales tax exemption on data center equipment, which creates a $1 billion gap between its budget and the House of Delegates' spending plan. The chambers needed to produce a budget by Thursday night to deliver it to General Assembly members at least 48 hours before voting and adjourning its legislative session on Saturday, under House rules.
"I don't think there's much chance we can get anything done by Saturday," Deeds acknowledged.
If not, the assembly will have to get two-thirds of each body to agree to extend the session or rely on Spanberger to call for a special session to complete work on the budget.
Spanberger, who opposes repealing the data center tax break because of the potential damage to Virginia's business reputation, raised the possibility on Wednesday of a potential consumption tax on electricity supplied to the data center industry. Data centers use enormous amounts of power and would place an even higher demand on the state's lagging supply of power generation to run energy-intensive artificial intelligence data applications.
House Appropriations Chairman Luke Torian, D-Prince William, confirmed that a potential consumption tax “is one of the things we’re talking about.”
“I think we’ll have a budget soon,” Torian told The Times-Dispatch on Thursday morning.
In addition to revenue uncertainty, the tax rebate proposed in the Senate version of the budget — $100 for individuals and $200 for couples filing taxes jointly — has raised concern among some advocates who say the people who need it most wouldn't be eligible because they wouldn't have enough tax liability to qualify.
"Lawmakers should amend the rebate proposal to ensure everyone with low incomes can get a check this fall," said Ashley Kenneth, president and CEO of the Commonwealth Institute for Fiscal Analysis, a liberal think tank. "In previous years, non-refundable rebates left out people with the lowest income, while millionaire hedge fund managers got a check they didn’t need."
Kenneth also said that the Senate's proposed increase in the standard deduction — for taxpayers who don't itemize their tax deductions — "should be paired with increases to the refundable Earned Income Tax Credit, to ensure low-income people are also not left out at tax time."
The Senate budget would raise the standard deduction by $450 for individuals and $900 for couples. It would extend until 2030 both the currently standard deduction and the refundable earned income tax credit, which helps lower-income working households. The current levels, raised over the past six years, are due to expire at the end of the year. The House budget would keep the levels the same, but make them permanent.
The latest revenue report adds to the economic uncertainty that Virginia already faces because of deep cuts to the federal workforce and spending by President Donald Trump, reductions in federal support of state safety net programs, reduced federal health insurance subsidies and erratic tariff policy.
One of the biggest uncertainties is the labor market, after a negative jobs report recently caught economists and elected officials by surprise. Fueled by federal layoffs and buyouts, Virginia's unemployment rate has risen to 3.6%, almost a percentage point below the federal rate of 4.4%, but was 0.7% higher in December than at the end of 2024, before Trump took office.
Virginia Works, the state's workforce development agency, reported on Thursday that the state received 4,198 initial unemployment claims in the week that ended Saturday, an increase of 66% during the same week a year earlier. Continued claims were down slightly at 20,560, but still remained almost 16% higher than a year earlier. The big jump arose primarily from a flux in manufacturing workforce in Southwest Virginia.
"While the unemployment rate remains relatively stable, job growth has stagnated in both the United States and Virginia," Secretary of Finance Mark Sickles said in his monthly revenue letter to the governor.
Sickles also raised concerns about slowing growth in state collection of income tax withheld from paychecks — the single largest source of revenue for the general fund budget — which increased by $29.5 million in February but still fell short of projections by $24.3 million. Corporate income taxes grew by about $39 million, boosting a $75.5 million increase in total revenues in April, while tax refunds increased and sales tax collections rose by about $9 million.
In the first eight months of the fiscal year that began on July 1, Virginia revenue collections are more than $1.2 billion ahead of the same period a year earlier and ahead of the budget forecast by almost 3 percentage points.
"February revenues came in roughly according to our expectations," Sickles said in the governor's revenue announcement. "We have, however, seen a slowdown in payroll withholding and sales tax revenue. Those are the two key sources we pay attention to when thinking about the Commonwealth's economic health."
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