General Fund Revenues and the Virginia Economy

Fiscal Year 2010 and Recent Trends

A Briefing for the VML 2010 Annual Conference

John R. Layman Director/Chief Economist Revenue Forecasting Virginia Department of Taxation October 4, 2010

Both The U.S. And Virginia Economies Performed Near Expectations In Fiscal Year 2010
Summary of Key U.S. and Virginia Economic Indicators Percent Change Over the Prior Fiscal Year
FY10 Forecast U.S. Real GDP Consumer Spending Employment Personal Income Wages & Salaries Virginia Employment Professional/Business Construction/Mining Personal Income * Wages & Salaries * -2.6 -3.4 -12.3 1.3 0.1 -2.1 -1.5 -11.8 1.6 0.2 -0.7 0.2 -3.3 -0.8 -2.6 0.8 1.3 -3.0 0.1 -2.4 FY10 Actual

* FY10 Actual is estimated based on three quarters of actual data and one quarter of forecast.

As measured on a fiscal year basis (July through June), estimated real GDP increased 0.8 percent. Rising inventories supported growth, offsetting modest consumer spending in the face of employment losses and shrinking incomes.
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Recent National and State Economic Indicators

Current national indicators suggest that the slow economic expansion has weakened. The National Bureau of Economic Researchs Business Cycle Dating Committee has determined that the recession began in December 2007 and ended in June 2009. At 18 months, this was the longest recession since World War II. According to the second estimate, real GDP grew at an annualized rate of 1.6 percent in the second quarter of 2010. Although growth slowed from the 3.7 percent rate in the first quarter, this marked the fourth consecutive quarter of growth.

The labor market remains weak. Payroll employment fell by 54,000 jobs in August; however most of the losses were associated with the ending of the census. The private sector added 67,000 jobs in August, suggesting the recovery is sustained, albeit very weak. Also, the job loss in July was revised from 131,000 to only 54,000.
The national unemployment rate rose from 9.5 percent to 9.6 percent in August. Employers added jobs for the second month in a row in August July 2010 was the first month of job growth since August 2008. Payroll employment in the Commonwealth grew 0.5 percent in August from August of last year. As compared to August of last year, Northern Virginia posted a modest gain of 1.2 percent, Hampton Roads grew 0.9 percent, and Richmond-Petersburg turned positive with a 0.1 percent increase. The unemployment rate remained unchanged at 7.0 percent in August, below the peak of 7.8 percent in February.
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Recent National and State Economic Indicators

Initial claims for unemployment rose by 12,000 to 465,000 during the week ending September 18 the first increase in the last four weeks. The four-week moving average dropped from 467,000 to 463,000. The increase in claims indicates that the labor market remains weak and is not improving at a steady pace. The manufacturing sector continues to expand. The Institute of Supply Management index rose from 55.5 to 56.3 in August, marking the thirteenth consecutive month above the expansionary threshold of 50.0. The Conference Boards index of leading indicators rose 0.3 percent in August, after increasing 0.1 percent in July. The small gain in the index is consistent with a slow recovery. The Conference Boards index of consumer confidence rose from 51.0 to 53.5 in August, following declines in June and July. The index remains at a very low level, suggesting consumer spending is not likely to accelerate.

Inflation remains low the CPI increased 0.3 percent in August from the previous month. This was the second consecutive monthly increase in the CPI, following three consecutive monthly declines. Core inflation (excluding food and energy prices) was flat in August and stands 1.0 percent above August of last year.
The Federal Reserve announced at its September meeting that it will keep the federal funds rate target unchanged at 0.0 to 0.25 percent.
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Fiscal Year 2010 Revenues and Transfers Finished $228.5 Million (1.6 Percent) Above Forecast
Summary of Fiscal Year 2010 Revenue Collections (millions of dollars)
Major Source Withholding Nonwithholding Refunds Net Individual Sales Corporate Wills (Recordation) Insurance All Other Revenue Total Revenues ABC Profits Sales Tax (0.25%) Transfers Total Transfers Total General Fund $ Forecast $ 9,153.4 1,813.2 (2,006.5) 8,960.1 3,043.0 730.7 299.0 242.5 713.3 $ 13,988.6 42.2 204.5 322.9 569.6 $ Actual $ 9,176.2 1,906.8 (1,994.7) 9,088.3 3,082.5 806.5 290.2 261.9 690.2 $ 14,219.5 50.0 209.4 307.8 567.2 $ $ $ Variance Dollars Percent $ 22.8 0.2 % 93.6 5.2 11.8 (0.6) 128.2 1.4 39.5 75.8 (8.8) 19.4 (23.2) 230.9 7.8 4.9 (15.1) (2.4) 228.5 1.3 10.4 (2.9) 8.0 (3.2) 1.7 % 18.4 2.4 (4.7) (0.4) % 1.6 % Annual Growth 0.4 % (17.5) 1.4 (4.1) 6.2 24.4 (7.7) 2.7 (3.2) (0.7) % 13.3 (1.9) 106.6 39.5 % 0.4 %

$ 14,558.2

$ 14,786.7

Total revenues declined in two consecutive years for the first time in 50 years. The only other years in which revenues fell were fiscal year 1991 and fiscal year 2002.

Total General Fund Revenue Collections Improved Markedly Over The Last One-Third Of Fiscal Year 2010
Growth in Total General Fund Revenue Collections FY10 Monthly and Year-to-Date
8% Monthly 6% 4% 2% 0% Year-to-Date

Without AST = +6.5%.

Without Tax Amnesty = -1.8%.

Forecast: -2.3%
-2% -4% -6% -8% -8.1% -10% Jul
Monthly Growth: -8.1%

-0.7%

-4.4% -4.7% -7.6% -7.3% Aug

-6.6%

-4.1% -4.8%

-3.6%

-3.3%

-6.8%

-7.4% Sep
-7.5%

Oct
-8.0%

Nov
-2.9%

Dec
5.5%

Jan
-6.5%

Feb
-5.9%

Mar
3.0%

Apr
0.4%

May
-0.2%

Jun
21.4%

After declining for the first eight months of the year, total general fund revenues increased three of the last four months. The March increase broke a streak of 19 consecutive monthly declines dating back to August 2008.

Payroll Withholding Tax Collections Exceeded The Annual Estimate By $22.8 Million (0.2 Percent) In Fiscal Year 2010
Growth in Withholding Tax Collections FY10 Monthly and Year-to-Date
8% 6% 4% 2% 0.2% -0.4% 0% -2.3% -2% -4% -6% -8% -10% Jul
Monthly Growth: -7.1%

0.4%

-1.8%

-2.3%

0.0%

Forecast: 0.2%

-2.3% -5.3% -7.1% -3.9%

-3.1%

Monthly Aug
-3.4%

Year-to-Date May
7.5%

Sep
4.0%

Oct
-8.2%

Nov
0.6%

Dec
0.7%

Jan
1.4%

Feb
-6.0%

Mar
18.2%

Apr
-4.5%

Jun
2.5%

Annual collections increased 0.4 percent compared with the forecast of a 0.2 percent increase. The accuracy of the withholding forecast was directly attributable to the insights of economists, business leaders, and General Assembly members during the fall 2009 forecasting process.
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Individual Income Tax Nonwithholding Exceeded The Annual Estimate By $93.6 Million (5.2 Percent) In Fiscal Year 2010
Growth in Estimated and Final Payments, FY92-10 Percent Growth Over the Prior Year
60 50 40 30 20 10 0 -10 -20 -30 -40
92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 10

Estimated Payments Final Payments

The large surplus was attributable to a better-than-expected performance in individual final payments, which only declined 25 percent compared with expectations of a 39 percent decline. Taken together, total nonwithholding collections declined 17.5 percent in fiscal year 2010 compared with the annual estimate of a 21.5 percent decline.
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Individual Income Tax Refunds Were Near Expectations In Fiscal Year 2010
Individual Refunds

Individual refunds finished $11.8 million (0.6 percent) below the annual estimate in fiscal year 2010.
Individual Income Tax Refunds by Component (millions of dollars)
Forecast Base 1,761.5 Land Preservation 150.0 Low Income 95.0 Total 2,006.5 Actual $ variance % variance 1,756.8 -4.7 -0.3% 123.4 -26.6 -17.8% 114.5 19.5 20.5% 1,994.7 -11.8 -0.6%

After increasing 24.1 percent through December and 12.1 percent through March, individual refunds finished the year only 1.4 percent ahead of fiscal year 2009.

Net Individual Income Taxes

Taken together, withholding, nonwithholding, and refunds, i.e. net individual income taxes, declined 4.1 percent in fiscal year 2010, ahead of the annual forecast of a 5.5 percent decline by $128.2 million a forecast variance of 1.4 percent.
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Sales And Use Tax Collections Exceeded The Annual Estimate By $39.5 Million (1.3 Percent) In Fiscal Year 2010
Large Sales Tax Payments April-June Collections (millions of dollars)
Sector Housing Warehouse Clubs/Supercenters Department Stores Grocery Stores Retail Trade Restaurants Wholesale Trade Gasoline Stations Other Total # of Firms 173 6 113 20 98 76 73 17 336 912 FY09 $96.7 89.6 79.8 72.1 55.7 29.8 12.3 12.6 43.2 $491.7 FY10 % change $111.8 15.6% 87.3 -2.6% 87.6 9.8% 72.5 0.6% 64.8 16.4% 33.1 11.3% 14.3 16.3% 12.3 -2.4% 44.0 1.8% $527.7 7.3%

Removing accelerated sales tax (AST) payments received in June, collections declined by 1.5 percent in fiscal year 2010 compared with the policy-adjusted forecast of a 3.0 percent decline. Collections were down 3.8 percent on a year-to-date basis through March. However, base collections for April through June increased 5.8 percent. For April through June, sales tax receipts from department stores, restaurants, and housing-related retailers increased 12.8 percent over the same period last year.
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Corporate Income Tax Receipts Exceeded The Annual Estimate By $75.8 Million (10.4 Percent) In Fiscal Year 2010
Growth in Net Corporate Income Tax Receipts, FY82-10 Percent Growth Over the Prior Year
50 40 30 20 10 0 -10 -20 -30 -40
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 10

Corporate income tax collections, one of the most volatile revenue sources, increased 24.4 percent in fiscal year 2010, ahead of the annual forecast of a 12.8 percent increase after a 19.8 percent decline in fiscal year 2009. The annual surplus was primarily due to a few large, one-time payments.
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Most Other Revenue Sources Were Close To Expectations In Fiscal Year 2010
Wills, Suits, Deeds, and Contracts (Recordation Tax) Wills, Suits, Deeds, and Contracts (primarily recordation tax collections) finished $8.8 million (2.9 percent) below the annual forecast. Collections declined 7.7 percent in fiscal year 2010, below the projection of a 4.9 percent decline. Insurance Premiums Tax Insurance premiums tax exceeded the annual estimate by $19.4 million (8.0 percent). The annual surplus was primarily attributable to some large, one-time payments. All Other Revenue All Other Revenue finished $23.2 million (3.2 percent) below the annual forecast. The shortfall was primarily attributable to interest income, which fell short of expectations by $21.2 million (18.3 percent) in fiscal year 2010. Most of the underperformance was attributable to a shortfall in nongeneral fund interest captures and unexpected losses on the sales of investments.
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Commonwealth Transportation Fund (CTF) Revenues Exceeded The Official Forecast By $64.4 Million In Fiscal Year 2010
Summary of Fiscal Year 2010 Revenue Collections Commonwealth Transportation Fund (millions of dollars)
Revenue Sources Motor Fuels Tax Road Use Tax Vehicle Sales Tax Vehicle Licenses State Sales Tax Recordation Tax Priority Transportation Fund Insurance Premiums Tax Int'l Registration Plan Interest Earnings Rental Tax Aviation Fuels Tax Miscellaneous TOTAL $ $ FY2009 Actual 827.9 9.4 413.2 241.6 499.4 35.7 20.0 132.3 59.0 27.7 29.1 2.1 12.9 2,310.3 $ FY2010 Actual 817.3 11.2 444.1 230.2 490.7 35.2 20.0 129.1 59.8 23.0 29.6 1.7 12.7 $ 2,304.5 FY2010 Forecast $ 813.3 8.6 392.8 239.9 478.3 33.5 20.0 129.1 58.6 23.9 27.3 2.1 12.7 $ 2,240.1 Percent Change 2009-2010 Actual Forecast -1.3% -3.5% 7.5% -4.7% -1.7% -1.4% 0.0% -2.4% -20.4% -55.4% -7.0% 0.0% -13.4% -0.3% -1.8% $ -3.5% -4.9% -0.7% -4.2% -6.2% 0.0% -2.4% -30.6% -50.6% -3.5% -6.0% -11.4% -3.0% $ Forecast Variance Amount Percent 4.0 2.6 51.3 (9.7) 12.4 1.7 1.2 (0.9) 2.3 (0.4) 64.4 0.5% 30.2% 13.1% -4.0% 2.6% 5.1% 0.0% 0.0% 2.0% -3.8% -3.6% 6.3% -2.3% 2.9%

As required by Section 33.1-23.03:8A(2) of the Code of Virginia , all revenues that exceed the official forecast are deposited into the Priority Transportation Fund.

The revenue surplus was attributable to solid growth in motor vehicle sales tax collections.
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Growth in Total General Fund Revenue Collections

FY11 Monthly
6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% Monthly -5% Jul
Monthly Growth: -16.3%

Forecast: 2.6%

Aug
5.3%

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Total general fund revenue collections rose 5.3 percent in August. On a year-to-date basis, total revenues fell 5.7 percent, trailing the annual forecast of 2.6 percent growth. Adjusting for the accelerated sales tax (AST) program, total revenues grew 3.3 percent through August, lagging the economicbase forecast of 4.2 percent growth.

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Growth in Withholding Tax Collections

FY11 Monthly and Year-to-Date
6%

5%

4% 3.2%

3%

2%

1.9%

Forecast: 2.4%

1% Monthly 0% Jul
Monthly Growth: 1.9%

Year-to-Date May Jun

Aug
4.5%

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

With an extra deposit day compared with last year, collections of payroll withholding taxes grew 4.5 percent in August. Year to date, withholding collections grew 3.2 percent compared with the same period last year, ahead of the projected annual growth rate of 2.4 percent.
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Individual Nonwithholding

Not a significant month. Collections through August were $64.2 million compared with $71.7 million in the same period last year, falling by 10.4 percent and trailing the annual estimate of 11.0 percent growth.

Individual Income Tax Refunds

Not a significant month. Through August, TAX has issued $78.8 million in individual refunds compared with $113.0 million in the same period last year, a 30.3 percent decline and ahead of the annual estimate of a 3.5 percent decline.

Net Individual Income Tax

Through the first two months of the fiscal year, collections of net individual income tax rose 5.3 percent from the same period last year, close to the annual estimate of 5.5 percent.

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Growth in Sales Tax Collections

FY11 Monthly
4.0% Monthly 2.0%

0.0%

-2.0%

-4.0%

-6.0%

-8.0% Jul
Monthly Growth: -59.6%

Forecast: -6.5%
Aug
-0.2%

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Jun

Collections of sales and use taxes, reflecting July sales, fell 0.2 percent in August. On a year-to-date basis, collections declined 30.7 percent, behind the annual estimate of a 6.5 percent decline. Adjusting for AST, sales tax collections grew 6.2 percent through August, ahead of the economic-base forecast of a 0.8 percent increase.
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Net Corporate Income Tax Collections

Not a significant month. Through the first two months of the fiscal year, $8.4 million has been collected in this source, compared with $27.6 million over the same period last year. The drop in year-to-date collections is due to a few large corporate refunds issued in July.

Recordation and Insurance Premiums Tax

Recordation The housing market showed some signs of stability in August as collections increased 2.7 percent for the month. Collections have declined 9.5 percent through August, trailing the forecast of 8.2 percent growth. Insurance Not a significant month. Collections are zero as the required transfers to TTF are being completed.
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Summary of Fiscal Year 2011 Revenue Collections July through August

As a % of Total Revenues 64.4 % 14.5 (13.2) 65.7 19.8 5.4 2.2 1.9 5.0 100.0 % Percent Growth over Prior Year YTD Annual Actual Estimate Variance 3.2 % 2.4 % 0.8 % (10.4) 11.0 (21.4) (30.3) (3.5) (26.8) 5.3 5.5 (0.2) (30.7) (69.6) (9.5) NA (12.1) (5.7) % (6.5) (1.7) 8.2 4.8 6.3 2.6 % (24.2) (67.9) (17.7) NA (18.4) (8.3) %

Major Source Withholding Nonwithholding Refunds Net Individual Sales Corporate Wills (Recordation) Insurance All Other Revenue Total

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While The National Economy Has Performed Near Expectations, The Near-Term Outlook Is Slightly More Pessimistic
U.S. Economic Performance Official (October 2009 Standard) and August 2010 Standard Source: Global Insight
Real GDP (annual % change) Consumer Spending (annual % change) Official August Official August 09Q4 2.6 5.0 0.3 0.9 (3.8) (4.0) (1.7) (0.9) (4.5) (3.3) 70.17 76.03 10.5 10.8 0.677 0.565 10Q1 1.8 3.7 1.1 1.9 (2.4) (2.3) 1.5 2.2 (0.3) 0.7 65.00 78.80 10.4 11.0 0.764 0.617 10Q2 1.8 2.4 1.6 1.6 (1.1) (0.6) 2.3 2.3 1.9 1.1 64.00 77.91 10.6 11.3 0.824 0.602 10Q3 2.2 1.7 3.4 2.3 (0.1) 0.1 3.5 3.5 2.9 2.0 67.00 76.46 11.6 11.6 0.899 0.577 10Q4 2.7 2.2 2.8 2.7 0.8 0.5 3.9 3.7 3.5 2.4 70.00 75.33 12.2 12.2 1.005 0.642 11Q1 2.8 2.7 1.8 2.6 1.4 0.7 3.8 3.4 3.9 3.1 73.00 79.50 13.0 12.6 1.132 0.715 11Q2 3.6 2.1 1.8 2.0 1.8 0.5 3.9 3.2 4.0 3.2 76.00 81.17 13.5 12.9 1.256 0.796

Employment Official (year-ago % change) August Personal Income Official (year-ago % change) August Wages & Salaries Official (year-ago % change) August Oil - WTI ($ per barrel) Light Vehicle Sales (millions of units) Housing Starts (millions of units) Official August Official August Official August

Much of the additional weakness is attributable to the renewed downdraft in housing.

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The Normal Fall Forecasting Process Began In September

Significant revenue elements used in the fall forecasting process will be available over the next few months and will be incorporated in the fall forecasting process. September: Individual, corporate, and insurance estimated payments are due. October: Retailer corporate estimated payments are due. Joint Advisory Board of Economists (JABE) reviews economic projections for current and next biennium. November: Corporate refunds from extension returns peak. Governors Advisory Council on Revenue Estimates (GACRE) reviews revenue forecast for fiscal years 2011 and 2012. December: General fund revenue forecast finalized. Governor McDonnells amendments to the 2010-2012 budget are presented to the Joint Money Committees.
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