Mysterious, confusing, dirty. Hidden behind committee room doors, buried in stacks of bills and papers. Virginia's state budget draws little notice by the population at large, but within it lies the core of everything we call “government” in Virginia. In this article, we will “follow the money” in our state government and try to make sense of how it works.

In late November, Bob Zahradnik from the Center on Budget and Policy Priorities shed some light on Virginia's fiscal policy in a session organized by the Virginia Organizing Project and attended by representatives of organizations from around the state. In a two-part series, we will summarize his insights and comments. Part One will focus on revenue (the money coming in) and expenditures (the money going out). Part Two, in the April 2001 edition of virginia.organizing, will focus on our state's budget and tax policies and discuss some of the problems in our system.

Taxes: Where the Money Comes From

Most of Virginia's revenue comes from taxes, 58.9 percent. Referring to Figure 1 below, other revenue sources include federal aid (13.6 percent), miscellaneous general revenue (10.7 percent) and current charges for services (16.9 percent.) There are a number of tax categories used in our state:

1. Sales Tax.

Nationwide, sales taxes provide 36 percent of state and local revenue. In Virginia, it provides only 31 percent. There are two main types: general and selective. General sales taxes apply across the board, while selective sales taxes target specific products like cigarettes, gasoline or meals bought in restaurants

Virginia's state general sales tax rate is 3.5 percent, meaning that it is three and a half percent of the price of what is being purchased. (The local sales tax is 1 percent.) The U.S. median rate is 5 percent, so we are significantly less than most states. Our state taxes food at a lower rate than other goods, only 3 percent, but over half of the states have no sales tax on food purchases.

Virginia also has selective sales taxes. They apply to gasoline (17.5 cents/gallon), cigarettes (2.5 cents/pack), wine ($1.51/gallon) and beer (26 cents/gallon.) Our cigarette tax is the lowest in the nation, courtesy of a strong tobacco industry.

2. Personal Income Tax.

Virginia, like most states, taxes personal income based on a graduated rate system. Those who make less pay a lower rate and those who make more pay a higher one. Unfortunately, Virginia's tax brackets have not been adjusted for many, many years, so that in effect the rates have collapsed, or flattened.




Since many workers make over $17,000, the rate system has become almost meaningless

3. Property Tax.

There are two types, tax on real estate and personal property tax (cars, business equipment, boats, etc.) This revenue source provides 51 percent of the income for local governments in Virginia. Thus, when Governor Gilmore cuts the car tax, the state has to reimburse localities for the income they lose.

4. Corporate Income Tax.

The corporate income tax rate is 6 percent, though the median for all the states is 7.5 percent. Otherwise, Virginia has a fairly typical corporate income tax structure.

5. Lottery Proceeds.

The Virginia State Lottery was created on December 1, 1987, after being approved in a statewide referendum. Ticket sales generate the income. The proceeds are divided as follows: 50-55 percent go to players as prizes, 5 percent goes to retailers who sell tickets, 7-10 percent is for operating expenses and 35 percent is left to fund other programs (now designated for education.)

Figure 2 shows the type of tax listed above and who levies it, being either state or local government. It should be no surprise that most of the tax burden falls on individuals via income and property taxes, while corporate income tax provides the least government revenue.

Income Inequality Increasing

Looking at the average numbers, Virginia looks good compared to the country and the region in terms of our citizens' economic indicators. State median income from 1997-99 was $44,884, tenth highest in the nation. Our poverty rate was 9.8 percent, thirty-seventh out of fifty states. Those without health insurance made up 13.6 percent of our population, twenty-ninth nationally. And our unemployment rate in 1999 was 2.8 percent, forty-seventh nationally.

However, income inequality has greatly increased in Virginia since the 1970's. Adjusted for inflation, the poorest fifth of our citizens lost 3 percent of their income comparing the late 1980's to the late 1990's. The middle fifth lost 1 percent of their income, but the income of the richest fifth rose 13 percent during that same period. In fact, from the late 1980's to the late 1990's, the bottom 80 percent of Virginians lost income while only the top 20 percent gained.

Expenditures: Where the Money Goes

In light of this income inequality, how does Virginia spend its money? Figure 3 below shows the various categories of state and local government expenditures: 36 percent goes to education, welfare and Medicaid receive 12 percent, transportation gets 11 percent and health and hospitals receive over 7 percent.

Overall, we are a low spending state, the second lowest in our region. We rank at the bottom regionally in our spending on welfare, significantly behind such states as Alabama, Tennessee and South Carolina. That said, our spending on welfare has increased over 13 percent between 1989 and 1997, so we have gone from awful to merely bad.

Looking at our figures for 1997, we spend less than the region on health, with only Maryland behind us. On housing, we rank fourth in our region and below the U.S. average. We spend more than the national average on higher education, but less than most states in our region. We are below average in our spending on elementary and secondary education. Our per pupil spending on education is almost $1,000 below the U.S. average, but average for our region. State and local per pupil education spending declined in Virginia between 1989 and 1997.

Finally, one cannot talk about expenditures without also mentioning debt. Governments, like individuals and businesses, must borrow money at times. For many years, Virginia has had a pay-as-you-go policy toward debt. The Debt Capacity Advisory Committee has set our ratio of tax-supported debt as a percent of revenue at 5 percent. The legislature and the governor have authorized a little over half of that as a ceiling. On the positive side, that means our state government will not have a high debt burden to trouble us in a slow economy. On the negative side, many needs around the state go unfunded, even in good economic times, because the government will not borrow money to finance them.

Next issue: Fiscal Virginia, Part 2: Evaluation of Virginia's Budget and Tax Policies.