Gov. Terry McAuliffe will announce a shortfall of roughly $1.5 billion in the two-year state budget to the General Assembly money committees on Friday, according to a source familiar with the revised revenue forecast.
The governor will reduce anticipated revenues by about $850 million in the current fiscal year in response to a shortfall of almost $270 million in the year that ended June 30 and increasing pessimism about growth in income and sales tax collections. He will reduce projected revenues in the second year by about $630 million.
The revised forecast, required under state law because last year’s shortfall exceeded 1 percent of major state revenues, substantially reduces projected growth rates for both withholding and non-withholding income taxes, as well as sales tax revenues, the source said.
The size of the projected shortfall comes almost two weeks after McAuliffe consulted with state political and business leaders in a meeting that one legislator called “cautiously pessimistic” about Virginia’s economy, especially with the possibility of potential cuts in federal spending under budget sequestration in the budget’s second year.
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In the last fiscal year, total state general fund revenues grew about 1.7 percent, lagging well behind the forecast of 3.2 percent growth.
The shortfall already has required the governor and General Assembly to suspend raises that had been approved in the budget for state employees, teachers, college faculty, and state-supported local employees such as sheriff’s deputies.
Two years ago, McAuliffe and assembly budget leaders worked closely together to address a projected $2.4 billion revenue shortfall that ultimately turned into a record surplus after tax collections recovered.
But that shortfall was driven by a sudden drop in non-withholding income taxes on investments gains, while the biggest concern this year is lagging income tax collections withheld from payroll, which accounts for almost two-thirds of general fund revenue.