01/03/13: Virginia’s many budget challenges

This op-ed appeared in The Virginian-Pilot on the date shown.

AS WE WATCH Washington lurch from one fiscal crisis to the next, it is easy to overlook the problems that states, including Virginia, face.

Concern over long-term fiscal sustainability and structural imbalances in state budgets led to the creation of the State Budget Crisis Task Force. Six states were chosen for analysis: California, Illinois, New Jersey, New York, Texas and Virginia.

In its July 2012 summary report, the task force identified six major fiscal threats, observable in varying degrees. Co-chairmen Richard Ravitch and Paul Volcker concluded that the problems facing the states are not cyclical but structural — and “the existing trajectory of state spending, taxation and administrative practices cannot be sustained.”

Individual reports detailing an in-depth, onsite analysis of each of the six states have been released and are available at www.statebudgetcrisis.org. Virginia’s report was released in late November.

There was some good news in the report. Virginia has long been recognized as a well-managed state, winning awards under Democratic and Republican governors over the past 20 years. We have the seventh-highest per capita income in the nation, while enjoying relatively low taxes, ranking 43rd.

Despite this, Virginia ranks 31st in average teacher pay, 40th in support for higher education and an abysmal 48th in per capita Medicaid spending. Aid to local governments has decreased, shifting the stress from the state to localities, although proposed budget amendments seek to restore some of this funding.

Virginia has not suffered the same as other states during economic downturns because of federal spending. The report notes that “Virginia is more dependent on federal spending than any other state,” with direct federal spending and obligations accounting for 32 percent of our economy. In Hampton Roads, the number is even higher: Defense spending accounts for almost 46 percent.

It is no surprise, then, that the report’s authors conclude that such dependence represents a significant risk to us, particularly since about two-thirds of our general fund revenues — the money available for such things as schools — comes from the individual income tax.

Cuts in defense spending will not only cost us jobs but will reduce state revenues while putting upward pressure on spending. Those out of work need unemployment benefits and perhaps Medicaid.

Also identified as a problem was Virginia’s “chronically unmet transportation needs.” The revenues are insufficient, resulting in construction funds being diverted to road maintenance. The report discusses several potential funding options:

• Increasing the gas tax for the first time since 1987 to a level equal to its then-purchasing power would raise $1 billion a year, while taking the rate from 17.5 cents per gallon to 35.5 cents.
• A 1 percent increase in the state retail sales tax would raise about $1 billion a year by 2016. Expanding the sales tax base to personal services, which many states have done, would generate $110 million to $125 million.
• Increasing the motor vehicle sales tax from its current 3 percent to the state’s retail sales tax rate of 4 percent would generate only $150 million per year. The rate would have to be much higher to stop the $500 million a year transfer of funds from construction to maintenance.
• A 10 percent surcharge on the existing income tax would generate $1 billion annually, costing the average taxpayer about $250 per year.

What these proposals all have in common is that they increase taxes, something our representatives in Richmond are unwilling to do. A proposal by Del. Chris Stolle for a 1 percent regional sales tax to fund local projects puts the onus on us to vote to raise our own taxes.

Offering solutions was not the intent of the report. “Such decisions are properly subject to the values and politics of a democratic society,” the cochairmen wrote. “Our essential goal is to inform the public of the gravity of the issues and the consequences of continuing to postpone actions to achieve structural balance.”

With the General Assembly session starting next week, the report provides citizens an opportunity to learn — and act on — the challenges we face.