Yes, Virginia, we have a budget. Democrats are happy; Republicans are happy; and when they see tax rebates in the mail, Virginians will likely be happy too.
None of them should be.
At a time where inflation is at its highest in a generation, and “stagflation” has time-traveled from the 1970s [1], the donkeys and elephants in Richmond turned themselves into ostriches. The result is a Keynesian blowout that, if anything, will accelerate the already problematic price hikes we’ve been seeing here.
It didn’t have to be this way. Just because Glenn Youngkin went full-throated Keynesian on his proposed tax reductions didn’t mean Democrats (or even his fellow Republicans) had to follow him [2]. Yet follow him they did [3].
The centerpiece of the budget is a sharp increase in the standard income tax deduction, from the current $4,500 for individuals and $9,000 for joint filers to $8,000 and $16,000, respectively.
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The increases take place only if state revenue continues to grow by certain amounts, and are set to end before the 2026 tax year. The budget also eliminates the 1.5 percent state tax on groceries but leaves intact the additional 1 percent grocery tax that localities may levy.
All of these reductions – assuming they actually happen – would spur aggregate demand, with little impact on aggregate supply. But rather than try to bring in supply-side reforms to the tax code, legislators paired it with higher spending, roughly $6 billion if you consider the differences in the general fund [4]. That’s a roughly 10 percent nominal increase in demand-fueling stimuli. Never mind that unemployment is at a mere 3 percent in the Commonwealth.
I understand that tax cuts and salary hikes are popular – and probably even deserved. However, stagflation is a supply problem, not a demand one. The above measures will put more money in more pockets, but in the process they will also make everything that money can buy more expensive.
The lack of vision on the need for supply-side reform wasn’t limited to taxes. Once again, the largest cause of our health care inflation and shortages – the Certificate of Public Need [5] regime – has as firm a vice-grip on Virginia as ever.
What’s that you say? COPN reforms don’t belong in a budget? Tell that to the folks who used the budget to create a new weed misdemeanor [6].
Democrats have had a long history [7] of ignoring supply-side issues, but Republican are supposed to know better. Well, for those still willing to be Charlie Brown, the RPV is still Lucy with the football.
For the rest of us, we can only hope the COVID-driven supply-side hang-ups get resolved before the additional money coming our way becomes effectively worthless.