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So,
you ask, how outdated is
Virginia’s
tax code?
Let’s
just say we don’t call it the Old
Dominion for nothing.
Item
one. The
highest bracket in the state income tax, kicking in
at a measly $17,001, hasn’t been updated since 1926. Had
the top bracket been adjusted for inflation over the
past 77 years, it would apply today only to
taxpayers earning well over $150,000 –
entrepreneurs and executives, not supermarket
check-out clerks.
Item
two. Despite
Virginia's
transformation over the past two centuries from an
agrarian, land-based economy to a post-industrial
economy built on intellectual property, municipal
governments in the Commonwealth depend upon the real
estate tax for more than half of all tax revenue.
That levy is configured along basically the same
lines – a percentage of the value of land and
improvements – that it was in the 19th
century.
Item
three. The
sales and use tax, enacted in 1966, imposes 4.5
percent levy on the sale of retail goods. In a
throwback to an era when tobacco buttressed the
state economy, the state tax on cigarettes remains
2.5 cents per pack -- an effective rate of about one
percent. Meanwhile, despite the explosion of the
service economy over the past four decades, services
remain untaxed, leaving some $40 to $50 billion of
economic activity untouched.
Item
four. Over
the years, lawmakers have punctured the tax code
with special exemptions for everyone from Holocaust
survivors to Medal of Honor recipients, from
solar-energy manufacturers to purchasers of
pesticide-application equipment. Credits,
subtractions and deductions legislated between 1995
and 2002 alone cost the state an estimated $600
million per
year.
Virginia’s
tax structure has evolved piecemeal over the centuries with scant attention to any principle
other than that articulated by Jean Baptist Colbert,
Louis XIV’s finance minister: "The art of taxation
consists in so plucking the
goose as to obtain the largest amount of feathers
with the least amount of hissing.”
By
almost anybody’s standard, Virginia’s
tax structure is unfair. From the tax collector’s
viewpoint, it’s often inefficient. The tax
structure is pro-business yet, ironically, does not
promote economic growth as effectively as it could.
Lastly, the tax structure creates destructive
economic behavior. The property tax, in particular,
perpetuates a scattered, low-density pattern of land
use that stresses the transportation system and
drives up the cost of state and local governance.
Virginia
needs a tax structure designed for the 21st
century. The Gilmore administration studied the
issues. Under the Warner
administration, the General Assembly has studied
them
again. The numbers have been crunched and
re-crunched. The challenges are well understood.
(Well, some
of the challenges are well understood. I’ll have
more to say about that in the next weeks' columns.)
Now it’s time for lawmakers to act.
The
political planets and stars could be coming into
alignment. Gov. Mark R. Warner has targeted
state-local tax reform as one of his signature
issues in the year ahead. What’s more, with
November 2003 behind them, legislators won’t face
re-election any time soon, perhaps endowing them
with the spinal rectitude to make tough decisions.
If Warner is willing to show leadership on the issue
– stumping the state non-stop between now and
November to sell his vision to the
public – and if Republican legislators transcend
their obsession with depriving a Democratic governor
any legislative accomplishment that might, horrors,
help him look good, then Virginia
can look forward to meaningful
changes.
Those
are two very big ifs.
Neither
the governor nor leaders of the General Assembly
have prepared the public for the dramatic, often
wrenching, changes that are needed. Warner's
intentions can be divined only by parsing scattered
paragraphs in speeches and letters published on the
governor's website. The Joint Subcommittee
did put its recommendations in writing (See the
"Report
of the Joint Subcommittee to Study and Revise
Virginia's Tax Code"), but their proposals
at
the mid-point of their two-year study are not likely
to fire up the voters.
The
subcommittee recommended one bold proposal --
repealing the inheritance tax -- but the governor
vetoed the legislation on the grounds that the tax
should be considered in the context of broader tax
reform. Otherwise, the subcommittee settled for
tweaking the fine print in the tax code: revise
administrative appeals for income taxes (yawn),
adopt new standards for exempting charitable
organizations from sales taxes (your
eyelids are drooping, you are feeling very sleepy),
and address used-car valuations for sales tax
purposes in the casual sale of motor vehicle (zzzzzzzz).
Warner,
at least, has latched onto an issue that, if not
stirring, is at least comprehensible to the
populace: The tax system is riddled with exemptions
that undermine the tax base. “The late 1990s saw
more than 50 different tax credits, subtractions,
and deductions enacted by the Governor and General
Assembly, at an annual general fund cost of more
than $600 million per year - not counting the car
tax repeal,” the governor wrote the General
Assembly budget conferees in February. “When these
tax cuts - along with new spending commitments -
were fully implemented, they set the stage for the
budget crisis of the last 14 months.”
The
governor’s loophole list compiles the detritus
from seven years of special pleading. Tax breaks for
people 65 and older… for qualified agricultural
contributions… for contributions to pre-paid
tuition plans… for military wages… for land
dedicated to open space… and on and on. (See
complete list).
Although
Warner has not stated outright that he would roll
back exemptions in order to broaden the tax base,
that clearly is an option. He also has implied that,
despite his veto earlier this year of the death-tax
repeal, he’d consider getting rid of the state
inheritance tax as part of a broader reform of the
tax code. As he said in a March
wrap-up of the General Assembly session: “I will
work with the legislature to address estate tax
reform next year in our continued efforts to ensure
a fairer tax code.”
Insofar
as it is possible to deduce the governor’s
priorities from his limited public statements to
date, it appears that Warner’s two main themes are
“fairness” and “fiscal responsibility.” The
governor has suggested to the press that one goal of
reforming the state-local tax structure would be to
raise more revenue – something he expected to
accomplish with the cooperation of moderate
Republicans in the General Assembly. Given the
structural nature of the state’s ongoing budget
crisis, he’ll have to find the money somewhere if
he wants to make good on his campaign promise to
finish rolling back the car tax, plus
repeal the estate tax.
Meanwhile,
if Republican budgetmeisters are planning something
big, they are playing their cards
close to their chests. The Joint Subcommittee report
did at least enunciate several principles which should guide
legislators' thinking as the tax debate plays
out in the year ahead.
Efficiency.
Ideally, a tax should not encourage taxpayers to
engage in wasteful, inefficient behavior. Likewise,
it should be simple to comply with and to
administer.
Adequacy.
The tax system should generate a sufficient volume
of revenue to fund the desired level of government
services. The authors of the report did not define,
however, what level of expenditures was reasonable.
Nor did they address concerns by many observers,
like my Bacon's Rebellion colleague Paul
Goldman, that
the state faces a structural mismatch between
revenues and obligations that would create chronic
budget crises in coming years.
Predictability.
The tax base should be stable enough to provide a
predictable flow of revenue that state and local
lawmakers can count on. Surprise revenue shortfalls
create budget crises.
Revenue
neutrality.
The net effect of all tax reforms should neither
increase nor decrease the Commonwealth’s total
annual revenue. In other words, no back-door tax
increases disguised as
"structural reform."
Equity.
There are several ways to look at “equity” or
“fairness” issues. First, taxpayers in similar
circumstances should pay essentially the same amount
of tax. A variant of this principle
requires that there should be a connection between
the size of a tax
liability and the taxpayer’s ability to pay it.
Second,
the beneficiaries of a particular government service
should be the ones who pay the taxes for that
service. In other words, to the greatest extent
possible, taxes should function like user fees.
Unfortunately,
this latter
principle got fed through the sausage grinder during the
2003 session. To maintain the fiction that it
balanced the budget without increasing
"taxes," the General Assembly jacked up
more than 20 different fees – charging far more
than it cost to provide the services -- by a sum
that could amount to $300 million over a two-year
budget cycle. (See Steve Haner’s column, “Fooling
None of the People,”
March
10, 2003
.)
Principles
are fine but in the frenzy of lawmaking, they are
often sacrificed to expediency. That's to be
expected -- it's the nature of politics. What's of
greater concern is the lack of a vision providing a coherent
yardstick against which the legislative horse
trading can be measured. As of early May 2003, neither
the governor nor any senior legislator has offered a
compelling tax reform program with a prayer of
capturing the public imagination. Without a larger
vision that the electorate can buy into, the end
result will be determined by the usual mud wrestling
between special interests.
Here's
what needs to be said: Virginia requires a 21st
century tax code for a 21st century economy.
A
tax code suitable for a world-class competitor in
the global economy means broadening the tax base to
encompass new forms of economic activity and
ensuring that government has the resources to
deliver essential services. It means promoting
broad-based economic growth by taxing consumption
instead of taxing wealth creation. Finally, it means
doing no harm: in particular, redressing rather
than aggravating the inefficient pattern of
development commonly referred to as urban sprawl.
Without
a vision of where we're going and how to get there,
we're stumbling in the dark. If there's any
consolation to our depressing state of affairs,
every other state in the union is fumbling
with the same challenges -- many even more ineptly than we are.
In
the next two editions of Bacon's Rebellion, I will
lay out a vision for restructuring Virginia's tax
code in line with two strategic objectives:
expanding the economy and tax base, and reforming our dysfunctional
land use patterns.
Stay
tuned. Until then, fan the flames. Spread the
Rebellion.
--
May 5, 2003
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