revenue

The Revenue Forecast









T

he Commonwealth's Growth in general sales and use taxes and public

total revenue consists of service gross receipts taxes al-

two types of resources:

fund revenues so fell short of expectations.

general and nongeneral funds. exceeds forecast for Collectively, the five major

About half of state revenues eighth straight year sources ended the year with a







I

(50.2 percent) are "nongeneral n fiscal year 2000, total surplus of $25.1 million.

funds," or funds earmarked by general fund tax revenues Miscellaneous taxes and

law for specific purposes. For grew 10.5 percent to other revenues ended the year

example, motor vehicle and $10,721.5 million, exceeding by $19.3 million below the esti-

gasoline taxes must pay for $5.8 million the official forecast mate. Most of the shortfall

transportation programs, stu- of $10,715.7 million (10.4 per- was due to lower than ex-

dent tuition and fees must cent growth). pected collections in estate and

support higher education, and

A surplus of $84.4 million gift taxes. Collections of mis-

federal grants are designated

in corporate income tax collec- cellaneous taxes and penalties

for specific activities.

tions offset a shortfall of $39.5 and other miscellaneous reve-

General fund revenues are million in individual income nues also contributed to the

derived from general taxes tax receipts. Collections of shortfall.

paid by citizens and businesses

in Virginia. Because general

fund revenue is not dedicated

to any particular purpose and General fund tax revenue growth expected to be

can be used for a variety of 3.8 and 7.0 percent for the 2000-02 biennium

government programs, these Percent change over previous year

are the funds that the Gover-

nor and the General Assembly

have the most discretion to

spend.

General fund revenues are

derived primarily from five

major revenue sources: corpo-

rate income taxes, individual

income taxes, sales and use

taxes, public service gross re-

ceipts and consumption taxes,

and insurance premium taxes.

Miscellaneous taxes and other

revenues also contribute to the

Data for 2001 and 2002 are forecasts. Source: Department of Taxation

general fund.





A-22 REVENUE FORECAST

The general fund revenue

forecast calls for considerably

lower growth in fiscal year The general fund forecast

2001 than what has been expe- for the 2000-02 biennium

rienced in the past few years.

2000-02 biennium

Although the economic fore-

Actual Forecast Forecast

cast is expected to remain solid 2000 2001 2002

over the forecast horizon, the Major tax sources

outlook for revenue growth is Corporate income 565.9 476.5 514.8

less optimistic because recent Individual income 6,828.9 7,258.4 7,793.3

data reveal that the fiscal year Insurance premiums 251.1 259.5 273.3

2000 base was artificially in- Public utility 104.2 87.4 95.5

flated due to several substan- State sales & use 2,201.5 2,297.5 2,448.1

tial anomalous revenue events.

Miscellaneous 769.9 750.6 778.8

Furthermore, the decline in

the equity markets, after five Total tax revenues 10,721.5 11,129.9 11,903.8

years of double-digit growth, Tobacco Settlement 66.9 271.4 295.1

is expected to slow revenue

growth. Tax revenues are ex- Total revenues 10,788.4 11,401.3 12,198.9

pected to grow by 3.8 percent

Transfers

in fiscal year 2001 and by 7.0 30.2 27.4 27.8

ABC profits

percent in fiscal year 2002. 324.3 314.0 314.1

Lottery profits

Transfers from the

Appropriation Act 83.1 13.6 21.1

Five major sources

account for most Total general fund $11,226.0 $11,756.3 $12,561.9

general fund revenue Dollars in millions. Excludes balances available for appropriation. Figures may not









H

add due to rounding. Source: Department of Taxation.

ere's a look at the

forecast for each of the

major categories of

the business cycle than per- Individual income taxes

general fund revenue:

sonal income taxes. Net individual income tax

Corporate income taxes Corporate income tax col- receipts of $6,828.9 million

lections have been notoriously trailed the official estimate by

Corporate income taxes

difficult to forecast due to: (1) $39.5 million in fiscal year

increased by 34.6 percent in

the tenuous link between prof- 2000. Actual growth over the

fiscal year 2000, attributable

its and tax liability; (2) Virgin- previous year was 12.2 per-

not only to strong growth but

ia’s profit/loss carry-forward, cent. For 2001, these receipts

also to several large anoma-

carry-back provisions; and (3) are forecast to be $7,258.4 mil-

lous payments. Growth in

the varying time lag between lion, a moderate 6.3 percent

corporate collections should

the booking of profits and the increase over 2000. The decel-

return to a more normal rate in

payment of taxes. In addition, eration of growth in this

fiscal year 2001, falling by 15.8

large fluctuations are often source is attributable, either

percent due mainly to large

caused by payments of, or re- directly or indirectly, to the

one-time payments received in

funds to, a few large corpora- recent slump in the stock mar-

fiscal year 2000.

tions. ket. Solid growth of 7.4 per-

The corporate income tax cent is expected in fiscal year

is the most volatile of Virgin- 2002.

ia’s revenue sources and tends

to be even more sensitive to



REVENUE FORECAST A-23

Sales and use taxes ceeded the forecast by $1.5 Nearly half of

Sales and use tax collec- million in 2000. Over the bi-

ennium, collections of insur-

state revenue is

tions grew by 6.6 percent in nongeneral fund rev-

fiscal year 2000, $4.1 million ance premiums taxes are antic-

behind the official forecast. In ipated to continue a path of enue

fiscal year 2001, despite solid slow, steady growth. Fiscal Although most public atten-

consumer fundamentals, sales years 2001 and 2002 collections tion is focused on general fund

tax collections are expected to are expected to grow at 3.4 and revenue, about one-half of all

increase only modestly by 4.4 5.3 percent, respectively. revenue in the state budget is

percent due to higher energy nongeneral funds that are

Miscellaneous taxes and other

prices, reduced wealth effects, revenue earmarked by law for specific

higher interest rates, and a full purposes.

year’s impact of the reduced Miscellaneous taxes and

other revenues fell short of Nongeneral fund revenue is

sales tax on food. Collections

projections by $19.3 million in expected to increase by 10.4

in fiscal year 2002 are expected

2000. Most of the shortfall was percent in 2001 and by 8.1 per-

to grow by 6.6 percent.

caused by lower-than-expected cent in 2002. Nongeneral

Public service gross receipts / collections of estate taxes. Col- funds will comprise about 50.2

consumption taxes lections of miscellaneous taxes percent of total state revenue

and other revenues are ex- during the 2000-02 biennium.

Revenues from public utili-

ty companies fell short of the pected to decline by 2.5 per-

Federal grants

2000 forecast, finishing the cent in 2001 and increase by

year $17.2 million below the 3.8 percent in 2002. Federal grants are the larg-

estimate. Legislation signed est source of nongeneral fund

into law in 2000 will begin the

Tobacco settlement funds revenue (more than one-third

process of deregulation of the The Governor proposes to of the total).

electric utilities on January 1, sell Virginia’s Master Settle- Frequently these grants do

2001. Therefore, collections ment Agreement allocation for not come to the state as simple

from this source will decline future years. This initiative cash transfers. The federal

beginning in fiscal year 2001 as will add another $460 million government mandates many

corporate income tax pay- to general fund revenue dur- program requirements as con-

ments from the electric com- ing the 2000-02 biennium ditions of the grants and often

panies will begin in that same ($223.0 million for 2001 and states must provide matching

year. $237.0 million for 2002). funds. The Medicaid program

As part of the deregulation When these amounts are for indigent health care is an

legislation, a per kilowatt hour taken into account, total gen- example of a federal entitle-

consumption tax on consumers eral fund revenue collections, ment program which requires

of electricity was enacted. excluding transfers, are ex- a state contribution.

Revenues from this tax are in- pected to grow by 5.7 percent In 2000, federal grants and

cluded here. Collections in in 2001 and 7.0 percent for contracts totaled $3.9 billion.

this source are expected to de- 2002. (See detailed discussion of This source is projected to in-

cline by 16.1 percent in fiscal “Tobacco Master Settlement crease by 19.0 percent to $4.7

year 2001 and then grow by 9.3 Agreement funds” at the end of billion in 2001, and then level

percent in fiscal year 2002. this chapter.) off for 2002.



Insurance company Institutional revenue

premiums taxes

The second largest class of

Tax collections on insur- nongeneral fund revenue is

ance company premiums ex- institutional revenue. The



A-24 REVENUE FORECAST

principle sources of this reve- increased travel, growth in Projected collections are ex-

nue are patient fees at teaching motor fuel sales, and higher pected to be lower each year of

hospitals and mental health interest earnings. For 2001 and the biennium, reflecting higher

institutions as well as tuition 2002, total fund revenues from wage and employment growth

and fees paid by students at state sources are expected to and the increase in the fund

institutions of higher educa- grow to $1.90 billion and $1.97 balance factor (solvency level)

tion. In 2000, institutional rev- billion, respectively. These which governs the tax sched-

enue collections were $2.5 bil- amounts are equal to annual ules or formula used to make

lion, nearly one-fourth of all growth of 0.9 percent and 3.5 collections for the Unemploy-

nongeneral fund revenue. In- percent, respectively. ment Insurance Trust Fund.

stitutional revenues are pro- For 2000, actual unemploy-

jected to grow modestly by 2.4 Unemployment ment tax collections were

percent to $2.6 billion in 2001 insurance fund $149.1 million. For 2001 and

and by 1.0 percent in 2002. Unemployment insurance 2002, revenues are anticipated

These growth rates are affected tax collections rise and fall to decrease to $132.6 million

by two offsetting trends: the with trends in the economy. and $141.1 million, respective-

continuation of the freeze on

tuition increases at institutions

of higher education, and the

collection of additional reve- The nongeneral fund forecast

nues at correctional institu-

for the 2000-02 biennium

tions for out-of-state prisoners.

1998-00 biennium 2000-02 biennium

Transportation Fund

State transportation reve- Actual Forecast Forecast

nue comes from several 2000 2001 2002

sources including the motor Motor vehicle fuel tax $822.3 $872.8 $883.1

vehicle fuels tax, the motor Unemployment 149.1 132.6 141.1

vehicle sales and use tax, road compensation payroll tax

taxes, vehicle license fees, state Special highway tax from sales 372.5 390.2 415.6

sales tax, interest earnings, and tax

other miscellaneous taxes and Motor vehicle sales 491.6 479.4 501.7

fees. Money in this fund is and use tax

Other taxes 105.0 103.5 111.6

used to support highway con-

struction and maintenance and Rights and privileges 539.5 564.3 577.1

operating costs. Federal, local, Sales of property and 321.0 334.3 349.5

commodities

and toll revenues are also used

Institutional revenue 2,516.2 2,577.0 2,602.6

to finance transportation pro-

Interest dividends and rents 123.9 109.4 132.8

grams.

Federal grants and 3,912.0 4,656.4 4,689.2

Commonwealth transporta- contracts

tion revenues from state taxes Tobacco Master Settlement 100.41 72.6 788.2

and fees amounted to $1.88 Agreement Funds

billion in 2000, an increase of Other Revenue 912.9 1,154.7 1,185.6

$111.5 million over the prior Total2 $10,366.4 $11,447.2 $12,378.1

year. Total collections ended

at $67.0 million, or 3.7 percent Dollars in millions. Figures may not add due to rounding.

1

Not in Appropriation Act for fiscal year 2000. Appropriated by stand-alone legislation

above the forecast. This vari- (Chapter 880, 1999 Acts of Assembly).

ance was primarily due to a

2

Total excludes balances and bond proceeds available for appropriation, as well as

Lottery, Literary, and internal service funds.

strong economy, greater-than-

expected vehicle purchases, Source: Department of Planning and Budget, based on data submitted by agencies.



REVENUE FORECAST A-25

F

ly. cation in two separate trust inally, the Governor

funds. The Tobacco Indemni- proposes that the MSA

Tobacco Master Settlement fication and Community Revi- allocation for future

Agreement Funds talization Fund receives 50 years be sold to a special-

The Master Settlement percent of the MSA allocation. purpose legislatively created

Agreement (MSA) was signed This share is used to compen- entity that will sell bonds to

between the major participat- sate tobacco growers and to- investors to finance the pur-

ing cigarette manufacturers bacco quota holders for the chase of the allocation. The

and 46 states, the District of economic loss resulting from sale will be made in a series of

Columbia, and five United quota loss or elimination and transactions in 2001 and 2002

States’ territories on November to promote economic growth and will involve the MSA allo-

23, 1998. The settlement and development in tobacco- cation for 2003 and beyond.

agreement releases participat- dependent communities in the The Commonwealth will re-

ing manufacturers from past, Southside and Southwest re- ceive a lump sum payment,

present, and future smoking- gions of the state. rather than continuing to re-

related claims of the states in ceive multi-year payments

The Virginia Tobacco Set-

return for an annual cash during the period for which

tlement Fund receives the next

payment to the states in perpe- the allocation is sold.

10 percent of the MSA alloca-

tuity. These payments are to tion for the purposes of dis- This financing option pro-

be adjusted over time for sev- couraging, eliminating, or pre- vides an up-front payment to

eral factors, including inflation venting the use of tobacco the Commonwealth with

and changes in volume of do- products by minors and for smaller residual payments

mestic cigarette shipments. health care. Programs targeted over the life of the bonds. The

at minors include but are not financing is secured solely by

The participating manufac- limited to educational and the asset of the cash flows gen-

turers are currently making awareness programs on the erated by the annual income

these payments to the MSA health effects of tobacco and stream of the MSA allocation.

Escrow Agent. Disbursement on laws restricting the distri-

of the funds to individual set- The Governor recom-

bution of tobacco products to

tling states started in Decem- mends that the lump sum

minors.

ber 1999 when: (1) each state payments, anticipated to total





F

settled its pending or potential or fiscal years 2001, and approximately $1.2 billion

litigation with a consent decree 2002, it is anticipated that when all payments are com-

and the time for all appeals the Tobacco Indemnifica- plete, be deposited as follows:

against the consent decree had tion and Community Revitali- to the Tobacco Indemnification

expired (i.e. State-Specific Fi- zation Fund will receive $60.5 and Community Revitalization

nality), and (2) at least 80 per- million and $72.6 million, re- Endowment (50 percent of the

cent of the settling states, in spectively, while the Virginia allocation), the Virginia Tobac-

terms of number and dollar Tobacco Settlement Fund will co Settlement Endowment (10

volume of entitlement to MSA take in $12.1 million, and $14.5 percent) and the Higher Edu-

payments, reached State- million over the same period. cation and Economic Devel-

Specific Finality (i.e., Final opment Trust Fund (40 per-

The remaining 40 percent

Approval). cent).

of the MSA allocation will be

The Commonwealth’s plan deposited to the general fund The earnings and a portion

for the use of MSA funds has through fiscal year 2002. In of the corpus of each of the

four elements. First, legisla- fiscal year 2001, the general endowments and the trust

tion passed by the 1999 Gen- fund deposit is estimated to be fund shall be applied as fol-

eral Assembly (Chapter 880, $48.4 million, and in fiscal year lows: (1) in the case of the To-

1990 Acts of Assembly) ear- 2002 it is projected to be $58.1 bacco Indemnification and

marked 60 percent of the allo- million. Community Revitalization



A-26 REVENUE FORECAST

Endowment, to the Tobacco

Indemnification and Commu-

nity Revitalization Commis-

sion, for the purposes set forth

in current statutes; (2) in the

case of the Virginia Tobacco

Settlement Endowment to the

Virginia Tobacco Settlement

Foundation, for the purpose of

discouraging, eliminating, or

preventing the use of tobacco

products by minors as set forth

in current statutes and for

health care; (3) in the case of

the Higher Education and

Economic Development Trust

Fund, to support the debt ser-

vice on obligations to be issued

by the Virginia Public Building

Authority and the Virginia

College Building Authority for

higher education and econom-

ic development projects.









REVENUE FORECAST A-27