State Seal

COMMONWEALTH of VIRGINIA

Office of the Governor

John M. Bennett
Secretary of Finance

P.O. Box 1475
Richmond, Virginia 23218

November 14, 2005

Memorandum

TO:   The Honorable Mark R. Warner

THROUGH:   The Honorable William H. Leighty

FROM:   John M. Bennett

SUBJECT:   October Revenue Collections

October is not a major collections month for general fund revenue. Normal monthly collections are due in withholding, sales taxes, public service corporations, and most other sources. Estimated payments are also filed in October for corporations which use a February through January fiscal year - mainly retailers.

Total general fund revenue collections grew 7.7 percent in October. Most of the October revenue growth was due to strength in payroll withholding, some of which is due to timing of payments. Continued strength in individual nonwithholding, corporate income, and recordation taxes also contributed to the growth. Year to date, revenues have grown 12.8 percent over the same period last year.

Tax policy changes enacted over the last two sessions have been distorting growth rates over the last year - particularly in sales and recordation taxes. Beginning this month, these changes have been in effect for a full year, meaning that monthly growth rates will more fully reflect underlying economic growth. The only remaining anomaly is the additional reduction in the sales tax on food, which went into effect on July 1.

The Department of Taxation continued its conversion process to the new Integrated Revenue Management System (IRMS) in October. The conversion has slowed the processing of individual refunds through the first four months of the fiscal year. Many of the individual and corporate estimated payment vouchers also remain to be entered into the system. Therefore, much of the data necessary to more fully analyze revenue flows is still not available. IRMS is expected to be more fully functional in November and should provide much of the data necessary to provide a comprehensive revenue analysis.

This month’s revenue report displays in the first column the forecast contained in Chapter 951. The last column reflects the percent annual growth required by the estimate as compared to actual fiscal year 2005 collections. These growth rates represent growth needed to meet the amounts on which the current Appropriations Acts is based, and should not be interpreted as an updated forecast. The fall forecasting process will produce a revised revenue forecast in December.

National Economic Indicators

Most recent indicators suggest the national economy was healthy leading up to the hurricanes. More recent data show that the storms temporarily disrupted but did not stall economic growth.

Virginia Economy

In Virginia, payroll employment grew by 1.2 percent in September, compared with the same month last year. In Northern Virginia, payrolls grew by 3.3 percent, followed by Richmond-Petersburg with 2.6 percent growth, the western MSAs with 2.1 percent growth, and Hampton Roads with 1.1 percent growth.

The Virginia Leading Index fell by 1.4 percent in September after rising 1.2 percent in August. Auto registrations, building permits and the U.S. leading Index all contributed to the decline. The only positive component of the index was a drop in initial unemployment claims.

October Revenue Collections

October is not a major collections month for general fund revenue. Normal monthly collections are due in withholding, sales taxes, public service corporations, and most other sources. Estimated payments are also filed in October for corporations which use a February through January fiscal year - mainly retailers.

Total general fund revenue collections grew 7.7 percent in October. Most of the October revenue growth was due to strength in payroll withholding, some of which was due to timing. Continued strength in individual nonwithholding, corporate income taxes, and recordation taxes also contributed to the growth. Year to date, revenues have grown 12.8 percent over the same period last year.

Individual Income Tax Withholding (57% of general fund revenues):   Collections of payroll withholding taxes grew 9.2 percent in October. Growth was boosted by comparison to a very weak October of 2004. Last year, some payments normally received on the last day of October fell into November, producing an apparent 3.4 percent decline for the month. This October’s collections therefore appear stronger than they were. Year-to-date, withholding growth has been 7.8 percent.

Individual Income Tax Nonwithholding (14% of general fund revenues):   October is typically not a significant month for nonwithholding collections. This October, a small number of individuals who filed returns, based on the July-June tax year, made large payments. Collections of nonwithholding were therefore up 34.2 percent for the month. Year-to-date collections of nonwithholding are up 23.7 percent.

Individual Income Tax Refunds:   In October, TAX continued implementing its new accounting system. Processing of refunds improved, but remains below full production levels. In October, TAX issued $31.6 million in refunds, compared with $35.4 million last year. Fiscal year-to-date, $82.0 million in refunds have been issued, compared to $123.2 million in the same period last year.

Sales Tax (22% of general fund revenues):   This monthly report for sales and use taxes represented September sales. Collections for sales and use taxes showed no growth for the month. Rising energy prices likely contributed to the zero growth performance. Year-to-date growth through October stands at 7.1 percent.

Monthly comparisons of sales and use taxes now are based on the same tax rate, but for the remainder of this fiscal year will continue to be influenced by the reduced sales tax on food.

Corporate Income Tax (4% of general fund revenues):   October corporate income tax collections include estimated payments from corporations with a February through January fiscal year, which includes many retailers.

Monthly collections grew 29.9 percent in October. Year-to-date collections have grown 63.9 percent over the same period last year.

Other Revenue Sources

The following list provides data on October collections for other revenue sources:

 
Year-to-Date
Required to
Meet Estimate
Insurance Premiums Taxes (3% GF revenues)
-2.9%
10.7%
ABC Taxes (1.1% GF revenues) 6.1% -0.5%
Public Service Corporations (0.7% GF revenues)
6.8%
0.3%
Interest Income (0.7% GF revenues)*
20.7%
-0.2%

*Interest income for the July-September quarter attributable to nongeneral funds was transferred in October.

All Other Revenue:   All Other Revenue fell by 1.9 percent in October. Substantial growth in the largest component of All Other Revenue - wills, suits, deeds, and contract fees - helped to offset an $11.7 million decline in estate tax collections. Wills, suits, deeds, and contract fees (mostly recordation tax receipts) grew by 16.7 percent in October. For the fiscal year, collections of All Other Revenue are 12.7 percent above fiscal year 2006 - ahead of the annual estimate of a 15.6 percent decline.

Lottery Revenues:   Lottery net profits fell 3.4 percent for the month. An increase of 5.5 percent in gross sales was offset by higher overall expenses. Through the first four months of the year, net profits are 3.3 percent ahead of the same period last year. During the fall forecasting process, the Lottery forecast will be updated to include the estimated impact of a North Carolina lottery.

Summary

Total general fund revenue collections grew 7.7 percent in October. Most of the October revenue growth was due to strength in payroll withholding, some of which is due to timing of payments. Continued strength in individual nonwithholding, corporate income, and recordation taxes also contributed to the growth. Year to date, revenues have grown 12.8 percent over the same period last year.

Tax policy changes enacted over the last two sessions have been distorting growth rates over the last year - particularly in sales and recordation taxes. Beginning this month, these changes have been in effect for a full year, meaning that monthly growth rates will more fully reflect underlying economic growth. The only remaining anomaly is the 1.5 percent reduction in the sales tax on food, which went into effect on July 1.

The fall revenue forecasting process has begun. The Governor’s Advisory Council on Revenue Estimates (GACRE) will meet in November to assess the outlook for the Virginia economy over the current and next biennium, and to review a preliminary revenue forecast. The Council’s review will lead to the revised revenue forecast on which the Executive Budget will be based.


October 2005 Revenue Report (PDF format, 423 K)