Opinion: Commentary: Early Economic Impact of COVID-19

Opinion: Commentary: Early Economic Impact of COVID-19

Virginia is gradually and cautiously opening up after the coronavirus lockdown. However, we must navigate a rough fiscal road ahead due to a precipitous drop in tax revenues due to the economic impact of this crisis. And, with approximately 25-30 million Americans, who were working just 50 days ago, now out of work, we are looking at jobless levels not witnessed since the Great Depression. The Virginia seasonally adjusted unemployment rate rose 0.7 percentage point to 3.3 percent in March, with the best estimate that the unemployment rate in Virginia right now is north of 10 percent. Virginia ranks #2 in the country in terms of processing unemployment requests. The Virginia Employment Commission has paid out over $2 billion in benefits to workers since the week of March 15th and remains focused on standing up all the components of the new federal programs to ensure that eligible individuals receive their benefits as quickly as possible.

This week I attended, albeit remotely, our first Appropriations meeting since the conclusion of the April General Assembly reconvene session. We received our monthly economic and revenue update delivered by Secretary of Finance Aubrey Layne. This was the first report to the Appropriations Committee that included data reflecting the economic effects of the COVID-19 pandemic. What looks good on first blush is that April collections of individual income tax withholding, which makes up 62% of our general fund revenues, rose by 4.2%. As a result, year-to-date, these collections have grown to 4.7 percent, matching the original annual estimate, pre-crisis. Though May’s data will give us a clearer picture as there were also two more deposit days in April as compared to last year. Individual income tax nonwithholding makes up 18% of general fund revenues. April is typically a significant month for collections in this source, with final payments for the previous tax year coming due, and the first estimated payment for the next year both due at the beginning of May. This year, however, due to COVID-19, the filing date has been extended to June 1, so it is unclear right now as to how many payments will be delayed.

What is clear is that tax collections in nonwithholding this year were $470.1 million, compared with $1.2 billion in April of last year, which is a decline of 61.8 percent. Total general fund revenues decreased by 26.2 percent in April. The deferral of the payment date to June 1 for individual and corporate income tax payments resulted in expected lower levels of revenue.

If there is a silver lining, it is that increased online purchasing, as well as grocery and ABC sales prevented a much larger decrease in revenue, which would have been closer to 4.0 percent. As a whole, sales tax collections increased by 7.4 percent, which was right on target with the original revenue forecast. And, because our economy was very strong going into this period, and some parts of it have never closed entirely, like defense, the federal government, and the technology sector, we are only looking at one billion dollars down for the fourth quarter. Recordation taxes are up (due to mortgage refinancing), and though corporate income taxes are down, companies are still filing.

Heading deeper into May and on into June, we will continue to see payouts of individual income tax refunds, and we will have a more accurate view of the effects of the COVID-19 pandemic on withholding and sales tax collections to come. A significant number of waivers from businesses for payment of their Accelerated Sales Tax (AST) bill are expected due to numerous businesses that have been closed for a significant period of time during the pandemic.

While the federal Coronavirus Relief Fund (CARES Act) has gotten a lot of attention, there are more than sixty other sources of federal dollars that can be expected to flow to us in Virginia that will be a significant help. In total, these federal grants will exceed $6.1 billion in relief. Virginia’s estimated share of the Coronavirus Relief Fund is $3.3 billion. This includes $1.8 billion for the state, and $1.5 billion for local governments. Here in Fairfax County, we meet the population requirements to qualify for direct federal aid to local governments. This amount is estimated at $200 million. In addition, these totals do not include the more than $21 billion in non-grant funding flowing to the Commonwealth, primarily from the Paycheck Protection Program (PPP) administered by the Federal Reserve Bank, that is providing some immediate assistance to Virginia small businesses that have received $13 billion in loans from the Paycheck Protection Program ($8.7 billion in the first round, and $4.3 billion in the second round). Over 95,000 loans have been made to small businesses through both rounds of funding.