HJR 532

Commission on State and Local Government
Responsibility and Taxing Authority

July 24, 1997, Richmond

The tangible personal property tax, the personal income growth outlook for citizens of the Commonwealth, and budget pressures were the main topics of discussion during the commission's meeting in Richmond. Lieutenant Governor Donald Beyer presented his personal property/income tax credit plan, followed by three economists who discussed their outlooks for personal income growth over the next five years. The assistant commissioner of finance for the Virginia Department of Transportation (VDOT), discussed VDOT's mandatory expenditures, priorities, and funding for the next two biennia. Finally, staff from the House Appropriations Committee updated the commission regarding budget pressures, particularly in the area of public education.

Beyer's Plan

Under the Lieutenant Governor's plan, single taxpayers with annual adjusted gross income up to $40,000 would receive an income tax credit of up to $150 for personal property tax paid on one motor vehicle. Married couples with annual adjusted gross income up to $75,000 would receive a tax credit up to $250. Individuals who do not pay income tax would not receive the credit. Like former Attorney General James Gilmore's plan, the credit allowed would only apply to personal property tax paid on privately owned vehicles.

The cost of the Beyer plan is estimated to be $202 million annually or $808 million over the next four years.

Economists' Predictions

Economists from George Mason University, the Weldon Cooper Center for Public Service at the University of Virginia, and the College of William & Mary offered their best estimates regarding the outlook for personal income growth among Virginians.

Northern Virginia Forecast

While a strong economic performance in Northern Virginia does not necessarily mean the state's economy will also prosper, it is difficult for the state to maintain expansion without continued growth in Northern Virginia's economy. Northern Virginia's share of Virginia's total personal income was 35 percent in 1996. Strong job growth during the last five years has resulted in low unemployment, with the highest area unemployment rate in May being 3.7 percent in Warren County, while the state rate was 4.2 percent. Because Northern Virginia's economy is expected to continue a strong expansion pattern for the next three years at a minimum, the state's economic expansion is also expected to continue for the same period.

There are some unknowns, however, which could affect the state's economic performance. They are federal spending, the labor market, interest rates and inflation, the national economy's performance, and global stability. Any negative change in these factors would most likely reduce expected growth.

Statewide Forecast

Predictions for average statewide personal income growth rate over the next six to eight years ranged from 5.2 percent to 5.6 percent. Both economists' predictions included inflation as a factor, both took into account historical rates of growth, and both examined forecasts by the WEFA Group and NPA Data Services.

It was also brought to the attention of the commission that even if personal income growth does continue for the next few years, the localities do not directly benefit from such growth. It is logical to assume that along with personal income growth comes an increase in state revenues due to an increase in the amount of income taxes paid. There are, however, no local income taxes. Will taxpayers consume more, thereby causing an increase in sales tax collections, a portion of which is returned to the localities? Will taxpayers spend their money on more real and personal property, thereby increasing real and personal property tax collections? There is no way to be sure. So what is good for the Commonwealth may or may not be as good for its localities.

VDOT Expenditures, Priorities and Spending

VDOT is responsible for maintaining and constructing the third largest state maintained system in the nation, with over 65,000 miles of highways (interstate, primary, secondary, frontage and urban). It is financed from federal, state, and local taxes and tolls and other revenues. Ninety-five percent of state sources are produced by the motor fuels tax, motor vehicle sales and use tax, motor vehicle license fees and state general sales and use tax.

The Commonwealth Transportation Funds have grown an average of 3.1 percent annually for the last 10 years. They are expected to increase at an average annual rate of 2.5 percent over the next six years, from $1.6 billion in fiscal year 1998 to $1.83 billion in fiscal year 2003. Total federal transportation funding for distribution nationally, depending on currently pending federal legislation, is expected to be between $19 billion and $21.5 billion in 1998. For Virginia, current revenue estimates assume an average of $500 million per year for fiscal years 1999-2003.

According to a recently completely needs assessment, VDOT identified total highway needs of $46.7 billion. This assessment is an update of the 1994 Moderate Needs Inventory, which identified $34.7 billion of highway needs.

Budget Pressures Update

Little change in the bottom line occurred since the last meeting of the commission. Required cost increases for the 1998-2000 biennium are still expected to total approximately $1.0 billion. This does not include salary increases and capital outlay, which would raise that amount to over $1.5 billion.

Regarding the area of public education, the Department of Education's preliminary request is for $299.6 million for the biennium. This is actually about $110 million less than the 1996-98 biennium. School enrollment is still growing, but the rate of increase is slowing down as is the increase in special education students. Also, the per-pupil cost actually declined for textbooks, health insurance and instructional support. However, these preliminary numbers do not include some areas in which costs may increase, such as the K-3 reduced class size program, preschool for at-risk four-year-olds, truancy/safe schools, English as a second language programs, reading instruction and remediation, homebound programs, and hospitals, clinics and detention homes instruction.