Virginia's Tax Bonanza From Stock Market Doesn't Convey An Accurate Picture Of Economy Throughout The State

Feb. 8, 1999 -- Adjectives like "booming," "flush," "raging" and "robust" have been used to describe it.

Although Virginia's economy is indeed performing nicely, the picture has been exaggerated by a roaring stock market and simply mirrors the national economy, including being vulnerable to world problems, a University of Virginia economist says in a new report.

An inevitable slowdown or reversal in the national economy and stock markets at some point will have a major negative impact on the state's currently rosy tax-revenue scenario, warns John L. Knapp, professor and director of business and economic research at U.Va.'s Weldon Cooper Center for Public Service.

"Buoyed by capital gains in a strong bull market, the state government's individual income tax collections in recent years have conveyed the impression of more economic growth than has occurred," Knapp writes in the current issue of the center's Virginia News Letter.

Furthermore, "not every part of the state has been an equal participant in the good times," Knapp says, with Northern Virginia's strong showing overshadowing problems of such slow growth areas as Southwest Virginia, Southside Virginia and the Eastern Shore. Northern

Virginia, Hampton Roads and the Richmond area accounted for more than two-thirds of the state's employment growth in 1998, with Northern Virginia alone responsible for 44 percent.

In the 1970s and 1980s Virginia's economy grew faster than the nation's. But in the 1990s, with the downsizing of the military at the end of the Cold War, the state's economic growth has basically tracked the national average, Knapp says. Virginia's per capita income is still above the national average but has fallen compared to the nation's in the 1990s.

"Most forecasters agree that the national economy will slow in 1999 due to stagnant profits, flat exports, and slower growth in consumer spending," he says. "There are still risks of a meltdown in international markets and a major correction in the U.S. stock market, developments that would have dire economic effects on the nation and the Commonwealth."

"The Virginia economy is retooling itself to become a leader in telecommunications, semiconductor manufacturing and biochemicals," Knapp says. But there will be challenges "competing in a world economy that is going through rapid change."

Virginia's population growth has slowed during the 1990s and dropped below the national rate in 1998 as fewer people have moved into the state seeking jobs.

The state's general fund revenues, fueled by large increases in individual tax collections, are growing faster than the economy itself, Knapp says. "The reason for this appears to be the booming stock market."

State revenue forecasts assume modest increases in tax collections in the next two years. But a major stock market downturn with a long period before recovery would hit the state hard, Knapp says. "Such an outcome would have a major negative impact on general fund revenues, not only because of lower income tax receipts from capital gains but also because reduced consumer and business confidence would be reflected in less consumption and business investment."

For additional information or interviews John Knapp may be reached at (804) 982-5604 or at knapp@virginia.edu. Television reporters should contact the TV News Office at (804) 924-7550.

Contact: Bob Brickhouse, (804) 924-6856.

FOR ADDITIONAL INFORMATION: please contact the Office of University Relations at (804) 924-7116. Television reporters should contact the TV News Office at (804) 924-7550.
SOURCE: U.Va. News Services

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