Virginia’s Next Agenda: Exploring Governor McAuliffe’s Two-Year Budget

(image by Kate Welling

by Mitchell Cole

Last semester, I previewed some things to look for in Governor McAuliffe’s first two-year budget. Now that his actual proposal has been released, we can actually see what he decided to do in these critical areas as the General Assembly begins its deliberations.

Medicaid Expansion

Predictably, the governor chose to expand Medicaid in his proposed budget, but this expansion does not include cost-sharing provisions or premiums for the newly covered population.

In the current proposal, this expansion creates $157 million in state budget savings that can be used for other public services. The administration has attempted to tie these freed-up funds to other spending that is popular with Republicans in the legislature, including a cut in the corporate income tax rate, economic development initiatives, and boosts to school funding.

Of course, lawmakers have ample room to maneuver. Given the partisan divide in the General Assembly, expansion opponents can strip out this part of the governor’s proposal while still finding ways to pay for their own priorities elsewhere.

Education Funding

The governor has proposed boosting funding for K-12 schools in several ways. The biggest piece of ‘new’ money for Virginia’s schools is actually just the increased costs of current policy. Almost $430 million of additional funding for schools in the governor’s budget is just for updating the state’s education funding formula to account for rising salaries, growing enrollment, and inflation.

The proposed budget does go beyond this required update. It includes $139 million for about 2,500 additional instructional staff in public schools. The governor has also proposed $50 million in additional funding for at-risk students, $41 million to help Northern Virginia schools pay for their particularly high costs, and $83 million for a 2 percent raise for state-funded teachers.

Nevertheless, state funding for Virginia’s schools will still lag behind pre-recession levels. Furthermore, this proposal does little to correct many of the permanent and arbitrary cuts made to the state’s education funding formula made after the last recession.

Revenue

On the revenue side, the current budget proposal expects economic growth in Virginia to underperform the rest of the nation in the next couple of years due to cuts in federal spending. Nevertheless, it expects revenues to grow about 3 percent in the first year of the new budget and 3.4 percent in the second, a stark improvement over recent years.

The governor’s proposal also reduces revenues in a couple of important ways. It continues to limit the use of nonwithholding taxes – taxes mostly levied on investment income. This approach has had bipartisan support since this revenue source tends to be volatile, but prevents the state from investing more than $380 million in critical public services.

Surprisingly, the governor has proposed a cut in the corporate tax rate, albeit a relatively small one from 6 percent to 5.75 percent, costing $64 million in lost revenue over the next two years.

The governor has also proposed reducing the number of retailers subject to the accelerated sales tax – a budget gimmick often used in tough times. It requires some large retailers to pay an extra month of sales taxes early, shifting funds from one fiscal year to the next. Of course, this costs the state revenue to unwind, so the governor’s proposal costs another $64 million in reduced revenue during the next two years.

Lastly, the current proposal increases the personal exemption for income taxpayers from $930 to $1,000. The additional exemption for the blind and the aged also increases from $800 to $900. Together, these cost the state $42 million in revenue. This results in a small tax cut, but one that is not particularly targeted at the low- and moderate-income families that pay the highest share of their income in state and local taxes.

Next Steps

Less than two years ago tensions flared over the state budget, resulting in a months-long stalemate between the governor and House leaders. Though the process has only just begun for the next budget cycle, many divisions still run deep. Now that the governor has made his proposal, it’s up the General Assembly to make their revisions. And as recent history has shown, surprises are always lurking around the corner.

 

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