Tax Reductions Under Youngkin Have Been Significant

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Governor Glenn Youngkin (R) and the legislators of both parties who have given him at least some of the tax reforms he asked for need to stop being shy and take a real victory lap. He has been in office less than two years and has diverted $5 billion from tax coffers back to Virginia’s citizens so far, with more to come in 2024 and beyond.

Most of that was approved by the 2022 General Assembly and is now in effect for a second full tax year, but the 2023 General Assembly just sweetened the pot. The long-delayed budget compromise approved September 6th added more than $1 billion in single-shot refunds and long-term tax cuts.

  • Two years ago, the standard deduction claimed by most Virginians paying income tax was $9,000 for a married couple, and that is now $16,000 and for Tax Year 2024 will go to $17,000. That saves that couple up to $1,265 over the three years.  It lowers total tax income taxes more than $1 billion per year.
  • People paying income tax (and remember many business operators pay on the individual tax returns) will now receive a second tax rebate. The rebate was up to $500 per couple for 2022 and will be another $400 for 2023, adding up to $900. They returned almost $2 billion.Looked at another way, that is equivalent to shielding more than $15,000 more of that couple’s joint income from tax.  For many low-income Virginians, their income tax liability was wiped out entirely.
  • The sales tax on unprepared food purchases was 2.5% two years ago and is now 1%. Basically, the state share of the tax is gone but the local tax remains.  That was estimated to save Virginians $115 million in the fiscal year that ended June 30.  Rising grocery prices make that tax break better every year.
  • Two years ago, Virginia provided no special tax treatment for military retirement pay. The 2022 General Assembly created a subtraction for that income, phasing in over a few steps, for retirees above a certain age. The 2023 compromise has now extended that tax break to younger retirees, who will eventually be able to shield another $40,000 of their income from tax. That was worth almost $145 million per year with the age floor, and without the age floor it is almost a $200 million annual tax break.
  • Two years ago, Virginia recognized the Earned Income Tax Credit, a federal provision that provides a major tax break for lower income people with jobs.  Now Virginia’s EITC not only lowers their taxes, but for some it provides a refund, in effect a grant to supplement their income.  The value of that to those families was pegged at $159 million in the fiscal year that ended June 30. It was not changed by the recent Assembly actions.

Those are five significant changes that reached virtually every Virginia household. Governor Youngkin had proposed far more tax relief, of course, and was left with only part of his plan.  Far more was financially possible, and the state finds itself with unprecedented cash balances despite giving up these revenues. These were the tax breaks for which he could garner bipartisan, bicameral support.

That bipartisan support started with Youngkin’s predecessor. Following Youngkin’s victory where he promised tax reforms, outgoing Governor Ralph Northam (D) prepared a draft budget that incorporated some of them, including the sales tax break on food and the refundable EITC. Having those baked into the introduced budget helped.

But the bipartisanship only went so far. The early roll calls on the approved provisions were hardly unanimous, the Virginia Senate during both years showed the greatest resistance to lowering revenues. Those who are seeking new terms may claim it was only a negotiating position and they were planning to agree eventually. The voters should think about that, at least.

The Democrats have attacked Youngkin’s failed plans to lower the top individual tax rate from 5.75 to 5.5%, and to lower the corporate income tax from 6 to 5%. The quarter point drop in the individual rate probably faltered because it was so small few taxpayers would get excited about it, and the business community greeted the corporate tax proposal with total silence and indifference. Their loss.

Between now and the election, just after they claim credit for various tax reforms they initially opposed, many candidates will now say something like “we put people over rich corporations.”  The line was trotted out during the recent special session. Corporations are just groups of people, and business taxes always come out of the pockets of human beings of all income levels, but those facts are lost to the voters they target.

Whether Virginia can continue to lower taxes will depend first on the election outcome and second on the continued performance of the state’s economy.  Both will be clear when Governor Youngkin makes his next major push to the legislature with the introduction of his first real budget bill in December.  As Cato always concluded with the demand that Carthage must be destroyed, the Jefferson Institute will always return to the demand that the Virginia tax code must be indexed to inflation.

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Jefferson Institute Asks SCC To Endorse Reliable Thermal Generators

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The following has been submitted to the State Corporation Commission via the public comment portal it has established for Dominion Energy Virginia’s pending 2023 Integrated Resource Plan. It was drafted by Jefferson Institute Senior Fellow Stephen D. Haner.  Dominion Energy Virginia is acting reasonably and prudently by planning to maintain most of its natural gas generation and perhaps some of its coal generation for the foreseeable future, despite narrow votes in the Virginia General Assembly in favor of eliminating their use. That is the only aspect of the pending Integrated Resource Plan review (PUR-2023-00066) on which the Thomas Jefferson Institute for Public Policy is offering an opinion. However, the opinion is strongly reinforced by data put on the case record by the State Corporation Commission’s own professional staff and cited below. The modern proverb that all models are wrong, but some models are useful must have been devised by somebody doing long-range utility planning. It is unlikely any utility, Dominion Energy Virginia included, can project 15 or 25 years into the future and make accurate calls on customer demand, commodity prices, or government policy. The other stakeholders in the current Dominion integrated resource planning also lack the gift of prophecy. Yet the debate so far in this dispute seems to focus almost entirely on the projected future demand for electricity within Dominion’s Virginia jurisdictional territory. Outside experts retained by various parties and the SCC’s own consultant have offered fairly strong reasons to doubt the utility’s fairly aggressive projections of future demand. It is their models versus Dominion’s. That overlooks a key point.  Even if the demand does not grow as rapidly as projected by the utility, the need remains to maintain reliability as the solar and wind assets proliferate. The risk to energy stability from intermittent renewables is now being widely recognized, not least by the very regional transmission organization to which Dominion and Virginia belong, PJM. The recent official comments PJM filed with the U.S. Environmental Protection Agency, raising concerns about the impact of its efforts to drive fossil fuels out of the energy generation mix, seem equally applicable in the discussion now before the SCC. If not made an official part of this record, the SCC should at least keep PJM’s warnings in mind. Your own staff is also pointing directly to the problems. See for example Matthew Glattfelder’s testimony, which among other things challenges Dominion’s claims about the effective load-carrying capacity, of ELCC, of the massive wind and solar fleets Dominion plans to have online within a few more years. The fact that Dominion is making such optimistic predictions about the value to reliability of those additions, predictions that exceed PJM’s own view of the matter, is far more troubling than the debate over future demand growth. Glattfelder also raises questions about Dominion’s optimistic projections of how much energy it will receive from the massive solar facilities and the small number of onshore wind facilities it included in the plan. Again, PJM data indicate existing projects produce less power than Dominion is expecting from these new installations. Even a one percentage point reduction in the 22% solar capacity factor matters when Dominion is planning to add 11 gigawatts of solar in the next 15 years. The doubts about ELCC and solar and wind capacity factors raised by Glattfelder make the retention of the more reliable thermal generation sources all the more important. The proper mix between the various sources to maintain reliability is a complicated engineering decision, but if less future demand materializes, surely that should lead to fewer solar and wind installations and not just fewer thermal resources. Andrew Boehnlein’s testimony finds “significant headwinds” against Dominion’s claims it will use demand side management programs to reduce its demand 5%, especially since it cannot name what methods it will use and so far the company has a weak track record of getting customers to participate. This undercuts the many witnesses from environmental advocacy groups who asserted that Dominion should rely even more heavily on energy efficiency incentives. Again, we will continue to need reliable thermal generation. Finally, there is the evidence provided by the cost models. The bill impact spreadsheets in Anna L. Clayton’s testimony (mirroring Dominion’s own) show a continued upward trend in the long-term costs. The residential, commercial, and industrial bill illustrations for the end of the planning period are slightly higher than those filed with previous IRP documents. These only go up with time. A year ago, the projections were that the bill for a residential user of 1,000 kilowatt hours would reach $185.81 by the end of 2030 and $213.36 by the end of 2035, using the Commission’s preferred methodology.  Now those figures are $193.12 by 2030 and $235.40 by 2035, a 103% increase over May 2020. Dominion projects lower figures but does so by assuming the much higher levels of demand, the levels of demand disputed by so many witnesses. Those monthly costs are for Plan B in Dominion’s plan, the scenario that keeps most of the thermal generation online and even adds additional natural gas generation. As high as the projections are, they are lower than the projected customer costs under Dominion’s Plans D and E, the plans which remove all those plants. Plan D has the highest cost, topping out at $254.40 per month, an increase of almost 120% (over $1,600 per year) above May 2020. As with all the models under discussion, cost models rely on a raft of assumptions, but the indication is clear that continuing with some thermal generation is the lower-cost approach. Ignoring the dictates of the Virginia Clean Economy Act would be lower still, as Dominion’s Plan A illustrates, but that is probably not an option under current law. (Plan A’s 2035 monthly cost is pegged at $217.36.) For a reliable energy future, Dominion’s customers need at least the level of thermal generation it now has in Plan B to continue in operation.  Please support that in your final order. Virginians are encouraged to offer their own comments in support of reliable and affordable energy by clicking here.
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Virginia’s Balance Sheet Almost Embarrassingly Strong

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A full bag of dollars on a dark table

“Our balance sheet couldn’t be stronger…this is our moment to soar.”

So said Virginia Governor Glenn Youngkin Wednesday.  Every year, our governors come to the legislature to report on the end of the fiscal year financial result, and often they say something like that.  They always prefer to bring a happy message over one of caution or doom.

This time, however, it is true.

The headlines are always about the so-called revenue surplus, if there is one, which is the amount of taxes collected in excess of the official revenue forecast.  The current two-year budget was adopted in early 2022, about 18 months ago, and the revenue it initially predicted for the 12 months ending June 30 was fully $3 billion lower than the amount of taxes the Commonwealth actually collected.

Details can be found in Secretary of Finance Stephen Cummings’ presentation to the legislators, which followed Governor Youngkin’s more general remarks.  The surplus is only one sign the state has an embarrassment of riches.

On top of that unplanned revenue, Cummings announced that the state spent $1.6 billion less than was planned in the budget in the same 12-month period.  The various agencies and operations often end the year without spending 100% of their budgets, but $1.6 billion is an unprecedented amount.  This also happened last year when the state operations failed to spend $1.2 billion in their budgets.

And that is just on the General Fund, or general tax-funded, side of the budget.  The state’s Non-General Fund operations, funded by user fees, transportation taxes and federal funds, also ended the year with cash left over.  The Non-General Fund agencies ended the fiscal year with $16 billion (no, the decimal is not missing) in account balances.   That is double what their cash balance was as of June 30 four years ago.

The state’s general ledger account balance as of the end of June was $29 billion.  Four years ago, it was just $9 billion.  The standing daily cash balance has tripled in four years.

The state’s transportation program is on the Non-General Fund side of the budget, and its tax revenues also exceeded projections for the twelve months ending June 30, although by only about $43 million.  The Commonwealth Transportation Fund is now just under $5 billion annually, which was the size of the General Fund not that long ago.

Youngkin and Cummings both mentioned the state taking major steps to cut unnecessary spending.  The fleet of state cars, deemed to be underutilized, has been trimmed by 800 vehicles.  A planned office building in Richmond, $400 million in cost, was also scrapped. Pressed by legislators, Cummings denied ordering agencies to stay under budget, but mentioned efforts at the end of the fiscal year to prevent them from using excesses to buy things not in that year’s budget.

State law allows for the state to accumulate cash reserves to protect against an economic downturn, with a target of saving 15% of the General Fund spending amount.  The reserves of $3.8 billion as of June 30 met that 15% target. More cash is set to flow into the reserves and raise it to $4.6 billion (an 18% cushion) a year from now.

In the business world, those various metrics point to an operation generating healthy free cash flow, with income well above expenses. Dare one say profit?.  Per media reports, less than $1 billion of that will flow back to the taxpayers as a rebate, and not to all taxpayers. But the fate of Youngkin’s abandoned proposals for broader tax cuts is not the focus of this discussion.

What is in focus here is how possible it all was, as the opportunity now appears to be slipping away. Youngkin said it again in his prepared remarks, the state can easily provide tax cuts and continue to increase spending in key categories.  At the end of Wednesday’s meeting, he signaled to reporters that he can accept the one-time rebates and will restart the push for long term tax reform with the 2024 General Assembly (still to be elected.)

After all, the 2022 General Assembly did approve major tax cuts.  All of those sterling financial results for the past year happened even after the 2022 “one time rebate’ coupled with real tax cuts saved Virginians $2.5 billion in those twelve months. (If approved, what is coming will be the third “one time rebate” since 2019.)

In the absence of more tax reform, the big winner as the legislature finally divvies up all this excess cash will likely be local public schools.   The year that just ended saw spending on the per pupil direct aid grow 22%, after having grown 5% and 10% in the previous two years.  Expect a raging debate on this over the remaining ten weeks of the election season.

We are now in Fiscal Year 2024.  As was the case with FY 2023, the revenue assumptions are cautious, dampened by fears of a possible recession.  The fear is abating but it is not gone. So the baseline General Fund revenue prediction for FY 2024 is $27.3 billion, lower than was collected in both FY 2022 and FY 2023.

The revenue prediction is flat even though the state’s labor participation rate is at the highest level since 2012.  Also, there are indications that Virginia is now seeing net in-migration of population, reversing years of slow population loss, mentioned by Youngkin and Cummings.  State employment grew 2.7% last year, beating the estimate of 2.5%.  The 2024 budget is based on an assumed addition of 1.1% in  job growth and income growth of only 4.1%.  Beating those assumptions is very possible, if not highly probable.

One month of the new fiscal year is in the books, July, and both the General Fund and Commonwealth Transportation Fund are running ahead of forecast.

In other words, the budget is being low- balled.  This is a cautious and prudent approach, but it also gives Youngkin a chance that when he introduces his own full budget in December, he will have more great news of excess funds piled here and there — funds he will earmark, at least in part, for tax relief. The question now is whether voters will give him enough new legislators willing to join him in that effort?

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Only One Army Showing Up in War Over Fossil Fuels

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The front line in the war against fossil fuels in Virginia has now shifted back to the State Corporation Commission, and as usual only one side has fielded an army and brought heavy weapons to the battlefield.  Those who might defend the continued use of coal and natural gas are missing in action.

Various interest groups seeking to end the use of coal and natural gas to generate electricity in Virginia earlier this month filed expert testimony from eight witnesses. All ask the SCC to reject Dominion Energy Virginia’s proposed 2023 integrated resource plan (IRP).  The utility’s decades-long capital plan, as previously reported, has reversed course and now calls for retaining and even adding to the utility’s fleet of natural gas generators.

One group, representing Virginia’s data center industry, filed testimony from its president in support of Dominion’s proposed generation additions.  “The bottom line is that Dominion’s investments are required to support and grow the economic drivers of the 21st century,” wrote Josh Levi of the Data Center Coalition.

But Levi testifies mainly about the economic benefits of his industry, not actually being disputed in front of the Commission.  His testimony avoids the key question being posed to the regulators:  whether intermittent wind and solar generation are sufficiently reliable, as the environmental groups claim, or whether Dominion is wise to maintain its more dependable natural gas plants or even add to them.

No other business or industry group with a major stake in Virginia’s future energy choices offered expert testimony, but there is still time to join the debate.  The expert testimony on the case record can (and should) be supplemented by public comments.  The portal for groups or individuals to express their views is here.  The deadline for public comments is September 12.

Dominion can file rebuttal testimony responding to the eight experts, and in the next few days the SCC staff will be filing its own observations and recommendations on the IRP.   A hearing is set for September 18-19.

The massive IRP before the regulators is just a plan, and even if approved as “reasonable and prudent” it binds nobody to anything.  If Dominion wants to build a new natural gas or nuclear facility, that will be a fresh application.   But Dominion’s retreat from its previous position that natural gas could be abandoned is important.

The 2020 Virginia Clean Economy Act allowed some flexibility on future natural gas use to maintain system reliability, but the overall goal of ending fossil fuels was clear.  When they controlled the legislature and Governor’s office, Democrats added other statutes stating the same goal.  The SCC is being asked to enforce them, and a ruling against the IRP on that basis could seal the fate of fossil fuel generation.

Then there are the political implications, as Virginia’s Democrats have now made a central message of their promises to end predicted “climate change” by forbidding fossil fuels in all forms. So, three environmental activist groups and a renewable energy coalition took up the challenge and recruited eight experts among them, from as far away as Massachusetts and California.

The hundreds of pages filed in opposition can be summarized into a handful of basic arguments.

First, they claim that Dominion is overstating the future load growth it is predicting, much of it tied to the expansion of those energy-hungry data centers.  If Dominion’s future load doesn’t grow as predicted, that undercuts the need for maintaining existing coal or natural gas plants, adding a new plant or adding nuclear generation.

One of the witnesses on that point is Gregory Abbott, a retired SCC analyst now hired by Appalachian Voices, who also believes there is a disconnect between the data center growth expected in Northern Virginia and Dominion’s plan, which seeks to add a new gas-fired plant in the Richmond area and suggests Southwest Virginia as the location for a future nuclear facility.

Second, several claim Dominion is underestimating how effective various energy efficiency and demand management strategies would be in addressing that future demand.  If true, wouldn’t that also call into question the need to add all the wind and solar projects Dominion is still including?  The question of the size of future demand is separate from the debate over how to maintain the most reliable generation, and reliability is the main reason to maintain or even add new fossil fuel or nuclear power.

Third, witnesses stress that Dominion’s change in direction violates the spirit and perhaps the letter of the Code of Virginia.  Several aspects of the Virginia Clean Economy Act are cited, not just the deadline of 2045 for ending all fossil fuel use.   Witnesses also argue Dominion’s continued reliance on fossil fuels will cause it to violate the new U.S. Environmental Protection Agency power plant emission rules, proposed but being hotly contested at the federal level.

Finally, a University of Michigan professor provides a long treatise on “environmental justice” topics and chides Dominion for not holding stakeholder meetings specifically geared to “environmental justice communities.”  Summarizing his 97-page filing, Justin Schott writes:

“…these same communities which are excluded from the planning process disproportionately experience a range of environmental injustices, including high energy burdens, high rates of disconnections, and exposure to extreme heat waves and urban heat islands. Nearly half a million of Dominion’s residential customers cannot afford their energy bills; upwards of 40% of households in environmental justice communities are chronically cutting back on other basic needs or keeping their homes at unsafe temperatures…these environmental injustices affect Black, Indigenous and Latinx households at double to triple the rates of higher income, predominantly white communities.”

Schott’s focus on how the higher costs hurt those with less income is useful.  He seems to have done original research on the impacts by race and income level.  If all that is true, then the key issue is what future generation mix best keeps costs in line.  There are many who join Dominion in doubting the wind-solar-battery model advocated by these activist groups is cost effective or even viable, but their views are not formally in front of the SCC.

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Return of “The Stupid Party”

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From the ‘50s to the mid-‘70s, the Republican Party was known as “the stupid party” – locked in the past, making foolish decisions, promoting unwise and counterproductive policies.

Today, in Virginia, “the stupid party” has returned. But it is no longer Republican.

The current battle over Virginia’s budget and the prospects for tax reduction and reform affirms the Left’s governing philosophy: What the government has belongs to the government and what the taxpayer has is negotiable.

With a $5.1 billion surplus exceeding the last Fiscal Year’s projections, Governor Glenn Youngkin proposes to return $1 billion — less than 20 percent — to the taxpayers from whom it came in the form of permanent rate reform. He would spend the remainder on education, behavioral health, law enforcement and other projects. Senate Democrats, on the other hand, want to spend all of it offering, at best, a one-time rebate giving them “first dibs” on future excessive tax revenue.

It is a philosophy locked in the past. Nothing demonstrates it better – on taxes and other key issues — than the recent VCU Wilder Commonwealth University Poll.

My colleague, Steve Haner, has already documented the VCU poll’s biases which asked, for example, if voters want Youngkin’s $1 billion tax cut or spending on school construction – without informing the respondent that Youngkin’s proposal includes spending $2.4 billion on such projects.

Nonetheless, the survey provides an important snapshot of the tide of public opinion, and on issue after issue, the Left swims against the tide.

Take the simple question “What is the most important issue facing Virginia?” By two-to-one over the next highest response, the number one issue is “Inflation or the rising cost of living.” A smart party would focus on reducing the components of rising costs it can control – starting with the tax hikes passed by Governor Ralph Northam raising nearly 28 percent more tax dollars than before those hikes were passed, a full ten percentage points higher than the inflation rate over the same period.

Support for tackling the cost-of-living issue cuts across every region, age group, education and income level. Importantly, support includes 47.3 percent of Independents – higher than even among Republicans.

The issue can be addressed with tax reforms adjusting the tax code to inflation, increasing the standard deduction to comport with changes made by the Feds four years ago, and adjusting the top tax rate that kicks in at $17,000. Some of those ideas are captured in Governor Glenn Youngkin’s tax plan but seem lost in the miasma of secret budget committee discussions.

Instead, House of Delegates Democratic Leader Don Scott says “No,” dismissing voter concerns by declaring a tax-cut “irresponsible.”

It is not just taxes.

Asked if they have personally “experienced impacts from climate change,” 59 percent say “No,” including more than 56 percent of Northern Virginians, where one would expect the climate change canon to be strongest.

Yet, that 59 percent is being instructed by the Left, in party-line votes, to sacrifice their less expensive vehicles through a legislatively imposed ban on the sale of new gasoline-powered cars and trucks. This forced consumer spending comes despite the known higher cost of Electric Vehicles, their higher repair costs, the fact that most drivers will change cars before an EV will pay off, and that some cars are cheaper to fuel with gas than electric.

Those party-line votes stopped efforts to prevent localities from requiring the replacement of natural gas heating and stoves with electric, as has taken place in New York and California. Those retrofits are calculated to cost consumers as much as $27,000.

These are government-imposed increases, piled onto the rising cost of living, where grocery prices are high, gas prices are high, and mortgage rates have hit the highest in 20 years, putting the American Dream of home ownership out of reach for many.

So determined is the Left to impose a California agenda on Virginians that they ignore traditional allies in Black Virginians. Pounded unconscionably by school shutdowns resulting in massive learning loss and drops in test scores, 28 percent of Black voters name education as their top issue. Not far behind were Hispanic voters, naming education their number two issue, at 33 percent. Yet, elected Democrats snub the pleas of parents seeking quality alternatives for their children, even voting against using COVID funds to help parents find tutoring for their children.

Thus, Virginia Democrats have become “the stupid party” … ardently devoted to its most extreme wing, willing to ignore a long-standing base of its own voters, stepping most on those seeking only to make a better life for themselves and their families.

Whether Republicans have become “the smart party” – willing and able to sell their solutions to the public beyond the give and take of darkened Capitol hallways – on that, the jury is still out.

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