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Is Virginia an economic success or ‘in the ditch?’ Depends on which candidate you ask.

The Washington Post logo The Washington Post 7/13/2021 Gregory S. Schneider

RICHMOND —Glenn Youngkin says he quit his multimillion-

dollar job in private equity to run for governor because Virginia and its economy are wildly off track and "in the ditch."

The Republican’s Democratic opponent, former governor Terry McAuliffe, says he’s seeking a new term to help a thriving state do even better.

When it comes to describing the economy, the two candidates often sound as if they’re running in different states.

Their policy prescriptions reflect it.

McAuliffe has released an 11-page plan calling for a host of steps to improve worker training, require paid sick leave and make child care more affordable.

Youngkin has yet to disclose any formal economic plan. But in media appearances he has suggested one of the most eye-

catching policy changes of the race: eliminating the state’s individual income tax as a way to boost economic growth.

The former Carlyle Group executive’s stances have attracted national attention.

[In Virginia governor’s race, a raging debate about education takes center stage]

“Glenn has been an incredible success and will truly Make Virginia Great Again,” former president Donald Trump said in a news release Friday. “Virginia has so much potential but has been badly hurt by awful economic policy, terrible crime, and the worst education system promoting Critical Race Theory, etc. But Glenn will fix this immediately. . . . If Virginia wants to open up and take advantage of its great and virtually unprecedented opportunity, Glenn Youngkin is the very successful businessman that will get them there!”

But Youngkin’s economic argument has left some political observers scratching their heads. “I’m not sure how he makes the case that Virginia’s in the ditch,” said Mark Rozell, dean of the Schar School of Policy and Government at George Mason University. He noted the state’s low unemployment, fast rebound from the pandemic, $2 billion budget surplus and AAA bond rating.

“Youngkin needs to convince voters that despite all of these economic data, Virginia is not in a good economic situation right now and needs a change in leadership,” Rozell said.

The argument seemed to take a hit Tuesday when CNBC declared Virginia the top state in the country for business, an annual survey that the financial news network says is based on 85 data points across 10 areas of “competitiveness.” Virginia also won in 2019 and has topped the list five times since it debuted in 2007, passing Texas for the most No. 1 rankings.

Gov. Ralph Northam (D) said in a news release that the ranking recognizes not just the state’s business climate but “our world-class education institutions, talented workforce, and shared commitment to equity, diversity, and inclusion . . . and proves that when you lift everyone up, when you treat people right, and when you celebrate diversity, it’s also good for business.”

Youngkin’s campaign dismissed the list for that very reason, saying the criteria rewarded political factors and noting that Virginia actually ranked 32nd in the “cost of living” category and 26th for “cost of doing business.”

“Virginia may be #1 for political correctness, pushing critical race theory in schools, and not requiring a photo ID to vote . . . but Virginia ranks among the worst states when it comes to things that actually determine the success of small businesses and opportunities for workers,” Youngkin spokesman Matt Wolking said via text message.

Virginia was higher rated in categories for workforce, education, access to capital, “business friendliness” and overall economy.

After a campaign rally Tuesday in Richmond, Youngkin told reporters that “I am all for Virginia getting accolades. The unfortunate reality is that Virginia hasn’t performed like the number one state for business over the last eight years.”

Youngkin has made his economic case in multiple interviews with conservative media outlets. He often begins by describing his decision to step down as co-CEO of Carlyle.

“That was my dream job, but Virginia is in the ditch,” Youngkin told Fox News host — and former Trump economic adviser — Larry Kudlow last Wednesday.

He noted that in the “Rich States, Poor States” survey published every year by the American Legislative Exchange Council Center for State Fiscal Reform, a conservative advocacy group, Virginia’s ranking has fallen from No. 3 the year before McAuliffe took office to 17 today.

“We haven’t been competing at all,” Youngkin said and rattled off a litany of Southern states that he says have done better — North Carolina, Tennessee, Georgia, Florida and Texas.

[Virginia, meet Glenn Youngkin — the Republican nominee for governor who both parties are racing to define]

Noting that McAuliffe often talks of creating 200,000 jobs during his term in office, Youngkin pointed out that North Carolina created 350,000 during the same period. What he didn’t mention is that North Carolina was recovering from a deeper economic blow from the Great Recession, with unemployment that hit 9.2 percent in 2013 compared with Virginia’s 5.2 percent.

Democrats, he told conservative radio host Larry O’Connor in April, have put Virginia “in the ditch. They actually made us noncompetitive. We’re not competitive economically.”

A major reason, he said, is taxes — and he pledged to do something about it.

“We are absolutely focused on not just getting our state income tax down, but how can we in fact eliminate it,” Youngkin said on O’Connor’s show. “I have the best senior economic adviser on the planet in Stephen Moore working with me on this.”

Moore is a well-known advocate of tax cuts who was nominated by Trump for a seat on the Federal Reserve Board. He withdrew his own candidacy after bipartisan criticism, including for columns he wrote in the early 2000s that disparaged women. Moore had a prominent role in the effort to dramatically cut state taxes in Kansas beginning in 2012 — an experiment widely seen as a failure, leading the state to slash spending for priorities such as education and transportation when revenue dried up. The legislature eventually rescinded the cuts on a bipartisan vote.

“Kansas didn’t work out so well, but we probably got 10 other examples of states that did really well when they lowered taxes,” Moore said in an interview with The Washington Post.

In Virginia, personal income taxes are projected to account for $31.5 billion over the current two-year budget — or 72 percent of the general-fund portion of the budget that a governor and legislature can control, according to state officials.

McAuliffe’s campaign charges that Youngkin and Moore want to bring the “failed” Kansas approach to Virginia, which “would stall our economy while making dangerous cuts to public education, state police and public ­safety,” spokeswoman Christina Freund­lich said.

Youngkin’s campaign did not specifically answer how he would solve the math of eliminating such a huge portion of state revenue but said that it would not happen all at once and that cuts would turbocharge growth. “He is committed to igniting Virginia’s economy through lower costs, lower taxes, more jobs, and more opportunity,” Wolking, the spokesman, said via email.

Moore said Youngkin is looking at mechanisms for returning excess revenue to taxpayers — as Virginia did a couple of years ago with a budget surplus. The General Assembly is likely to discuss options for the state’s estimated $2 billion surplus at a special session scheduled for Aug. 2. In campaign appearances, Youngkin has also mentioned the possibility of a “tax holiday” for small busi­nesses.

“I think there’s some property tax relief he wants to do, as well,” Moore said of Youngkin’s economic policy, but cautioned that “the plan isn’t really fully formed yet, so I don’t want to speak out of school.”

Asked how he explained Youngkin’s repeated assertions that the state is “in the ditch” and his depiction of a terrible economy, Moore said, “I don’t think it’s terrible, and I don’t think he thinks it’s terrible, but it could be doing better, and it has underperformed other states.”

McAuliffe, who likes to tout his own business prowess as an entrepreneur who has started several companies, made economic development a hallmark of his time in office and won praise from some Republicans for his efforts.

But Virginia’s recovery from the Great Recession was notably slow, in part because the state is so tied to federal contracting. Congress’s budget sequestration in the 2010s, which limited spending, hit Virginia especially hard.

In 2017, Old Dominion University’s annual economic status report on the state cited a “lost decade” of slow growth thanks to federal budget woes.

That stagnation in federal spending contributed to the largest out-migration of residents that Virginia has seen since the 1920s, with more residents leaving for other Southern states than coming in from the Northeast, according to the University of Virginia’s Weldon Cooper Center for Public Service.

Still, Virginia’s unemployment rate fell steadily through McAuliffe’s and Northam’s terms, hitting 2.5 percent in February 2020 — a near-record, topped only by a 2.1 percent rate in November 2000, according to federal Bureau of Labor Statistics data. Then the pandemic destroyed the job market — unemployment zoomed up to 11.3 percent in April 2020. As of May 2021, the state’s unemployment rate was back down to 4.5 percent, below the national average of 5.8 percent.

The Rich States, Poor States list that Youngkin cites in interviews — which is compiled by Moore and conservative economist Arthur Laffer — rewards states for conservative tax and business policies. Virginia gets high marks, for example, for a low minimum wage, no estate tax and for being a right-to-work state, which discourages union membership.

But the state is dinged for “recently legislated tax changes” and for having a marginal corporate income tax rate that’s in the midrange among other states.

Other lists — such as CNBC’s — rate Virginia more highly. U.S. News rates Virginia as No. 7 in its list of “best states,” with the 13th-best economy — ahead of the Southern states cited by Youngkin, though slightly trailing Texas in the economic ranking.

As for tax burden — “Virginia right now does not have very high tax burdens. It’s kind of in the middle of the road right now,” said David Brunori, a professor of public policy at George Washington University and an expert on state tax policy.

The state is literally in the middle, with a lower overall tax burden than Maryland but slightly higher than North Carolina. Nationally, Virginia ranked 24th for total state and local tax burden in 2019, compared with North Carolina at 32, according to the nonprofit Tax Foundation.

Virginia’s top income tax rate for individuals is 5.75 percent, but it kicks in at $17,000 of annual pay. Some Democrats have argued that the state should overhaul its tax code to shift a larger share onto those with very high incomes.

McAuliffe supports taking a look at fairness in the tax code, his campaign said, but policy director Nicky Zamostny said via email: “Terry will not raise taxes, and he will make sure Virginia’s tax code and incentives are generating the best outcomes for schools, small businesses, and our workforce.”

[From alligator wrestler to ex-governor: McAuliffe gets a reboot as ‘Terry 2.0’]

Finding the right balance is tricky, Brunori said.

“It’s more complicated in Virginia than a lot of states,” he said. For one thing, Virginia has a stark economic divide between wealthy districts — urban and suburban — and its vast, struggling rural areas.

Governor after governor has struggled to diversify the state’s economy. Youngkin’s suggestion of eliminating income tax to boost growth mirrors a formula that has worked for some states, Brunori said. Tennessee, for instance, has no personal income tax and has becoming a booming destination for businesses, he said.

“There’s an argument to be made that he’s right. Not everybody would agree with that,” Brunori said. “You will get more economic activity if you cut taxes. The question is, will you get enough to pay for the tax cut?”

Then there’s the matter of Virginia’s coveted AAA bond rating, which is partly dependent, Brunori said, on the fact that the state “has always been fiscally very well run.” A dramatic change to tax formulas could upset that status, he said.

Zamostny, McAuliffe’s policy director and a veteran of the Northam administration, said the candidate’s plans are a “holistic” approach to building up the economy. They emphasize factors such as workforce training, education funding, expanding access to broadband and improving conditions for workers as ways to make the state more attractive to businesses and residents alike.

[Financial disclosures in Va. governor’s race detail wealth of Youngkin, McAuliffe]

Youngkin also highlights McAuliffe’s awkward positioning on another topic of high interest to the business community: Virginia’s status as a right-to-work state, where union membership is not required in workplaces that are unionized.

Liberals in the Democratic Party would like to repeal that law, but McAuliffe is coy, saying that he would sign such a bill if it got to his desk but that the General Assembly would never pass it in the first place.

As the campaigns wear on, such issues are likely to take on more political significance, Rozell said.

How each candidate would handle the economy as the state emerges from the pandemic “is certainly a key to the election,” he said. “I don’t think, in the end, the race is going to come down to ‘critical race theory’ and other social issues that seem to be driving the conversation in the campaigns right now.”

Terry McAuliffe wearing a suit and tie smiling at the camera: From left: Virginia Republican gubernatorial candidate Glenn Youngkin, Democratic gubernatorial candidate Terry McAuliffe. © From left: AP Photo/Steve Helber; Bob Brown/Richmond Times-Dispatch via AP/From left: AP Photo/Steve... From left: Virginia Republican gubernatorial candidate Glenn Youngkin, Democratic gubernatorial candidate Terry McAuliffe.
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