If
you read the press release from the governor's
office announcing his "Commonwealth of
Opportunity Tax Reform Plan", the first reason
given in support of the proposal is this: "65%
of Virginians pay less". This 65 percent
number made me curious. Read the press release
further, and you will find that 65 percent of Virginia
taxpayers will "pay less in their overall tax
burden."
If
you read the press release from the governor's
office announcing his "Commonwealth of
Opportunity Tax Reform Plan", the first reason
given in support of the proposal is this: "65%
of Virginians pay less". This 65 percent number
made me curious. Read the press release further, and
you will find that 65 percent of Virginia taxpayers
will "pay less in their overall tax
burden."
"Overall burden," I
said to myself. Interesting. The reporters I have
spoken to were not shown a detailed analysis behind
this figure. But it seems clear to me that Warner is
basing this number on his promise, as stated in the
press release, to "finally phase out the car
tax by FY 2008." Counting the benefits from the
final phase-out of the car tax -- a phase-out that's
already on the books -- seems to be the only way to
make the numbers work.
Using current dollars, moving from the current 70
percent phase-out to 100 percent phase-out will cost
about $400 million in the first year and hundreds of
millions more eventually.
Assuming
my logic is right, the $400 million in car tax
payments goes disproportionately to Warner's
political base in NOVA and to certain other
high-income areas where families have two late-model
cars. In order to raise the money to pay for this
new $400 million in payments, Warner is using
primarily the sales tax and cigarette tax, the
burden of which fall disproportionately on less
affluent, largely rural Virginians.
This is one reason the Roanoke Times has
called the Tax Plan "anti-rural." Indeed,
the benefit from the 100 percent phase-out may fully
offset the proposed higher income tax bracket for
many high-income Virginians owning two late-model
cars.
The whole car tax maneuver should be of interest to
any Democrat, as should another plank in the
governor's Tax Plan that gives a handful of the
states wealthiest families $100,000 to $1
million-and-up windfalls by repealing much of estate
tax. Several months ago, the governor was calling
such windfalls unfair, unconscionable and
unaffordable given our budget situation. Perhaps I
am too sensitive to this issue, having led the
fight, right here on Bacon's Rebellion to show the
governor and senate Democrats that they needed to
join me in blocking this give-away to the super
rich.
The
governor did join the fight, and he has cited his
veto of the GOP Windfall plan as one of his major
achievements at the 2003 General Assembly. So I
guess we all can understand why the press release
touting his Tax Plan says only that it
"eliminates estate taxes for working farms and
family-owned businesses" while neglecting to
mention that he was actually eliminating the estate
levy for 99 percent of the wealthiest families in
Virginia.
Given
the criticism the Warner Administration has directed
at "Deficit" Jim Gilmore, the former
governor no doubt will find it ironic that his car
tax plan is apparently the linchpin to Warner's
claim to allowing his successors to make his 65
percent claim.
These considerations prompted me to try and figure
out how the administration is intending to game-play
his Tax Plan push. What follows are based on my own
logical deductions. I perceive three basic parts to
the administration's strategy. The first is a "dot.com
bust-era accounting play", a political version
of the now SEC-banned maneuver akin to booking your
costs as "revenues." The second part
addresses a maneuver that appears to be
unprecedented in Virginia history, but absolutely
legal under the current state law regulating the new
budget he will be submitting by December 20th if not
sooner.
Finally,
the third part is right out of Godfather 1,
which inspired me to write the opening scene of Goshfather
1. For space considerations, we have put that in
another story. Read
it here.
White
Men Can't Jump, but they Can Jump Start a Tax Plan
Tax plan strategies always start with the math,
since the guy who gets to define the numbers usually
wins the debate. Some say Finance Secretary John
Bennett cooked up the following. Others say it has
all the earmarks of former Democratic Majority
Leader Dickie Cranwell.
Whomever gets the credit, he's no amateur, as he
took a page right out of the telecom and dot.com
bust era, when companies cooked the books to lure
investors by padding top-line revenues to make
things look better.
What alerted me was the claim in the press release
saying the plan would "generate approximately
$500 million a year in new revenue." Now, I
might have let it go at that, but for a curious
factor: A member of the press told me that Secretary
of Finance John Bennett had not put out data
documenting this claim.
If I had ever advised doing this to candidate Warner
or candidate Wilder, they would have fired me.
So I asked myself: What was going on here?
Then, while jogging at the University of Richmond
track, a thought hit me: Did the press release mean
that the plan would net $500 million the first year,
each year, or an average over a period of years?
The more I thought about it, it seemed clear the
plan netted more than $500 million in the 2004 FY
budget, starting on July 1, 2004 and ending June 30,
2005. This is the key one for Warner, his last full
budget year as governor, the one that generally
leaves a lasting impression.
The sales tax increase will raise $800 million to
$900 million in FY 2004, depending on various
assumptions. The cigarette tax increase will
basically offset the estate tax elimination in the
beginning, but not after a while as revenue losses
mount. The phase-out of the senior deduction starts
later. I don't know what the data shows on the up
and down moves in income tax brackets. Some have
told me it is a net-revenue loser, others a
net-revenue gainer.
But most important, the increased car tax phase-out
doesn't really start until January 1, 2005, halfway
through that budget year, since the taxes come due
on
a calendar basis while the state budget is on a
fiscal year basis. Given how the car tax
reimbursement program works, the full cost of this
phase out step will not be paid out of his 2004 FY
budget.
Bottom line: John Bennett, Dickie Cranwell,
whomever, has done his job and given Warner a lot
more than $500 million to spend on his political
priorities in that key budget year. Indeed, if you
do the math, the huge cost of the final 100 percent
phase-out does not hit until Warner is out of office
-- that is to say,
until his successors have to deal with the budget.
Indeed,
when we get another economic turndown -- and they
always come -- the 100 percent phase out costs will
grow much faster than the revenue from his extra
sales tax revenue, as we know from the experiences
the last few years.
Thus, by the time you get to Year Six under the
Warner Tax plan, it is possible that most of the new
revenue it raises will be consumed by the car tax
phase-out, the estate tax windfall and the fact the
real costs of these things have been historically
underestimated when the promises were made. Indeed,
the mushrooming structural deficit could easily get
worse, not better, under this Tax plan if things
don't go according to Hoyle.
Bottom
line: Warner gets to play with all the new sales tax
revenue, with most of the costs coming due in the
outlying years -- after he's gone. Thus, the dot.com
beauty of it all: the "new" revenue
available at the start is purchased at a future
cost: the cost of the full car tax phase-out, the
escalating cost of the Estate Tax elimination, and
of course the assumption that future General
Assemblies actually will raise those taxes on
seniors.
The
governor's staff has said the boss' tax plan was
aimed at making the tax code less archaic, and they
have lectured us like children all these many months
on that point, making us feel like dunces.
But what does the governor's tax plan do? Using his
own definition, it makes our tax code more
archaic, not less, raising another $800 million to
$900 billion a year or so by increasing the sales
tax 20 percent on that same narrow set of retail
goods he said was 100 years out of sync with the
times. Moreover, the Tax Plan, by the laws of the
marketplace, create an even bigger disadvantage for
Main Street merchants trying to compete with AOL and
other online sellers. The plan will drive more
Virginians to buy goods online -- not on Main Street
— where they can avoid sales taxes.
In the press release, the Governor's staff says the
plan makes the "tax system more fair."
This has been a mantra for months in their lectures
to us unfair thinkers.
But how is the tax system more "fair" when
you give the biggest tax breaks to the wealthiest
Virginians by eliminating something the governor
said made the system more "unfair" a few
months ago? Indeed, how is the state tax system more
fair when the Tax Plan further weds us to the Rube
Goldberg scheme of raising
regressive state taxes so that we can then use this
money to pay off a local tax bill by a scheme the
governor has said was unfair for several years now?
Finally, this tax plan was supposed to deal with our
mushrooming structural deficit. But given that the
Tax Plan commits the state to 100 percent phase out
of the car tax -- an open-ended commitment we
already know is subject to continual increases
as taxpayers game the system -- it can make the
structural problems even worse down line because we
are now obligated to this ahead of full funding of
education and other priorities.
If You Spend it They Will Come
Kevin Costner found his field of dreams in an Iowa
corn field. Gov. Warner has found his in unprecedented
action, the submission of a budget proposal based on
his Tax Plan.
No one has ever tried this before. The law, §
2.2-1508, defining the content of the Governor's
budget submission, is broadly drawn. It suggests
that the Warner 2004-2006 budget proposal should be
based on the governor's "economic
assumptions" leading him to make certain
"revenue projections" relative to how much
money the state will take in.
This may suggest his budget proposal should be
funded only by existing revenue streams. But it
doesn't say so explicitly. Thus, there is nothing to
stop him from basing his budget on his assumption
that the General Assembly will pass the tax he
proposes, since the law also says the Governor shall
prepare his budget to reflect his "proposed
goals, objectives, and policies."
The political beauty of doing it this way is clear:
By
including his Tax Plan in the document, he can put
into the budget the new spending that would be
possible on account of the new revenue.
Thus, the Governor gets to take credit among voters
for the many hundreds
of millions of dollars he is giving to education,
social services, job creation, wherever he likes,
plus offer the Windfall tax cuts to those very
powerful families, many of whom will be funding what
Warner says will be a multimillion-dollar
"educational" campaign aimed at getting
the General Assembly to see the light.
All the hype over the new taxes has the media and
the pundits looking the wrong direction for Warner's
big play.
Right now, it is a tax plan. But once he has
a budget and can talk in specific terms about how
much money he wants to spend on popular programs,
the press curve figures to change and thus the
public will perceive the whole issue differently. Or
so goes the strategy.
As a political chess player, I've got to say this
part of the strategy brings a smile to my face. But
Speaker Howell and his allies may not be nearly so
smiley, feeling it violates the spirit of the law.
Still, expect the Governor to campaign in
all corners of Virginia touting the spending in his
proposed blueprint.
This will be a first-ever such campaign in Virginia,
backed up by an unprecedented $2 million expenditure
to "educate" voters, not pressure
legislators. Having run a few statewide campaigns, I
can tell you that $2 million dollars, if spent over
the course of the next few months and targeted at
certain Republican lawmakers, is going to create a
situation unlike any in state history.
That
wraps up our conventional analysis and sets us up
for The
Goshfather 1, an inside look at the coming
budget
showdown.