Bacon's Rebellion

James A. Bacon


 

Baconometer

 

Burning!

The 65 Percent Solution

 

 

Gov. Warner claims that 65 percent of Virginia taxpayers will benefit from his tax plan. It all depends on how you count the numbers.


 

When Governor Mark R. Warner introduced his proposed tax plan three weeks ago, he closed his presentation with a powerful statement: Despite raising new tax revenues of roughly $500 million a year, 65 percent of all Virginia taxpayers would wind up paying less in taxes. The political calculus was brilliant. Not only would the governor funnel an extra $715 million into K-12 schools and many millions more into protecting the state's coveted AAA bond rating, the fact that nearly two-thirds of all taxpayers actually stood to benefit would nullify the inevitable objections of tax-phobic Republicans.

 

The numbers struck some observers as improbable, however. Columnists Barton Hinkle and Ross McKenzie at the Richmond Times-Dispatch questioned whether the governor was engaging in some budgetary prestidigitation. Writing in Bacon's Rebellion (See "White Men Can't Add," December 1, 2003), Paul Goldman suggested that the only way to make the numbers add up was to claim credit for phasing out the car tax -- a tax cut already promised voters. Then reporter Christina Nuckols at the Virginian-Pilot extracted some crucial concessions from the governor himself. First, the 65-percent number did not include the impact of a proposed 22.5-cent hike in the cigarette tax. Second, the governor used a number of educated guesses and statistical assumptions. But lacking access to detailed numbers, these observers could take their analysis only so far.

 

Remarkably, no one else seemed terribly interested in how the governor determined he could raise taxes by $500 million a year yet have 65 percent of Virginia taxpayers come out ahead. The tax plan was devilishly complex. The governor proposed raising the sales taxes on some goods and lowering it on others, restructuring the income tax with multiple changes to thresholds, exemptions and income brackets, and finishing the phase-out of the car tax, which involved reimbursing taxpayers at different rates around the state. How was it possible, I wondered, to calculate the impact on millions of taxpayers with any degree of precision? Was the governor using hard numbers, or was he throwing out a back-of-the-envelope calculation and hoping no one would dig too deep?

 

Friday, I sat down with Finance Secretary John Bennett for some answers. For more than an hour, Bennett patiently walked me through his calculations and shared extensive financial data that no one else has reported. He was totally forthcoming, answered every question I posed to him and candidly laid bare the limitations to his methodology. Here are the key conclusions I drew from that discussion:

  • Bennett is making reasonable and defensible assumptions regarding the impact of the governor's proposed changes to the income tax and sales tax. Furthermore, he has built in a $50-per-taxpayer margin for error. If, by his calculations, a given taxpayer gained less than $50, he or she was not included among the beneficiaries.

  • Bennett is counting $482 million from phasing out the car tax. His methodology for allocating the benefits of the car tax may skew the data in his favor -- even he admits it has significant limitations -- but is not grotesquely out of line.

  • The secretary is excluding the $146.5 million impact of the cigarette tax.

  • He also is excluding the $28.6 million impact (fiscal 2006) of eliminating of a deduction for taxpayers turning 62.

The bottom line: The 65-percent number accurately reflects those portions of the tax plan that can be measured but omits significant portions -- totaling $175 million, equivalent to 36 percent of total net impact -- whose effects cannot be measured. Change the assumptions and the "65 percent" number evaporates.

 

State Income Taxes

 

Bennett's method for calculating who benefits from the tax plan is quite clever. He starts with a database, maintained by the state Department of Taxation, which contains the files of 2.9 million residents in 2001, the latest year for which the files are available. 

 

Bennett readily concedes that taxpayers in 2001 are not identical to taxpayers in 2005, but most of them will be the same. For calculating the effects of the Warner Tax Plan, he says, the database provides a very close approximation of Virginia's taxpayer profile.

 

Bennett cranked Warner's proposed tax changes -- new thresholds, exemptions, deductions and tax brackets -- through the tax filer database and calculated a precise impact literally taxpayer by taxpayer. Using this technique, not only can he figure out the gain or loss in tax revenues, but he can count an exact number of winners and losers.

 

Very cool. So far, I'm very impressed by Bennett's logic.

 

Sales and Use Tax

 

There is no way to know exactly how much every individual pays in sales taxes. The data simply aren't collected. However, the federal Bureau of Labor Statistics conducts an annual household expenditure survey, which breaks down spending patterns in households by 11 income classes ranging from $5,000 to over $90,000. The survey breaks down spending on 14 different categories including groceries.

 

From that data, Bennett developed a regression equation that relates income to spending on taxable items. He used the equation to estimate food and non-food expenditures for every household filing a tax return. Then he imputed a sales tax to those expenditures, and calculated what the payments would have been before and after the Warner tax plan. In the final step, he applied the expected gain/loss to each individual tax file.

 

No problems here. The methodology isn't perfect, but it's based on real-world data. For the most part, Bennett's estimate probably reflects reality pretty closely.

 

Car Tax

 

The issues are trickier when it comes to estimating the impact of phasing out the car tax. The state reimburses taxpayers based on the value of their cars -- capped at $20,000 but ranging down to less than $1,000. Not all households own the same number of cars. Furthermore, tax rates vary from locality to locality.

 

Due to the complexities, Bennett made a series of what he contends are conservative assumptions. First, he assumed a maximum of two cars per household. Because many households in actuality own more than two cars, he figures he under-

estimated the tax benefit of the phase-out for many households. Secondly, he based the benefit on only two years of phase-out by 2006 -- equivalent to 15 percent of the tax -- rather than the full 30 percent when the phase-out is complete.

 

On the other hand, Bennett knew that applying an "average" car tax benefit based on a statewide average would be meaningless because reimbursements vary so widely across the state. Therefore, he calculated an average tax payment locality by locality. To Fairfax County taxpayers residing in his data files, he applied the average Fairfax County reimbursement. To Bath County taxpayers, he applied the average Bath County reimbursement.

 

Here's where I start having misgivings. Bennett clearly was doing the best he could with the data he had available, and he tried to apply cautious assumptions. But was that good enough? The fact is, even in an affluent locality like Fairfax County -- home to one million people -- there is tremendous disparity in incomes. There are a lot of affluent telecom executives tooling around in BMWs worth way more than $20,000. And there are loads of Salvadoran construction workers driving $3,000 jalopies. By applying a county-wide average, Bennett's methodology overstates the benefits of the car-tax phase-out to the Salvadorans and understates the benefits to the Beamer-driving yuppies. This bias inflates the benefits of the tax plan to low- to middle-income taxpayers.

 

Other Taxes

 

Bennett readily concedes that his car-tax assumptions are imperfect. He just defends them as the best he can devise. I'll give him credit: I didn't raise a single issue that he hadn't thought about already. Furthermore, he's very open about acknowledging the limits of the data. His defense is that he's built multiple layers of conservative assumptions into his methodology. Even if you're squeamish about his car-tax assumptions, he says, he's still built a $50 cushion into his tally of winners. If, according to his methodology, a taxpayer would save only $49, he got numbered among those who would not benefit.

 

I can respect that. But look what Bennett left out. Increasing the cigarette tax to 25 cents per pack would raise $145.8 million in fiscal 2006. But the finance secretary did not crank those numbers into his calculations. Why not? Because only 25 percent of adult Virginians smoke, he says, and he couldn't find any data that would allow him to correlate those smokers with taxpayer status. So, he left them out of the equation. If someone could present him with decent data, Bennett told me, he would willingly include the tobacco tax in his number crunching.

 

I'm sorry, but I don't buy his reasons for omitting the cigarette tax. According to the American Lung Association, 36.7 percent of people with high school educations (or less) are smokers, versus 11.9 percent with B.A. degrees or more. Similarly, according to the National Center for Chronic Disease Prevention and Health Promotion, the least educated education people are twice as likely to be heavy smokers -- 25 cigarettes per day or more than the best educated.

 

If we assume that roughly 750,000 of Virginia's taxpayers are smokers, they share the burden of paying that $145.8 million in cigarette taxes -- or close to $150 per person. Of course, heavy smokers will pay even more. These heavy smoking taxpayers will come disproportionately from the lower income groups that Bennett has counted among the beneficiaries of the tax plan. The heavy burden of the cigarette tax will overwhelm his $50 safety margin -- pushing tens, maybe hundreds, of thousands of taxpayers into the loser category.

 

Finally, there's the issue of eliminating the $6,000 age deduction -- a tax break worth more than $300 -- for taxpayers who turn 62. In fiscal 2006, closing that loophole will deprive near-elderly taxpayers out of nearly $29 million. The number will grow as new cohorts of roughly 50,000 to 60,000 Virginians reach 62 in each successive year. Now, I don't see how someone turning 62 is any more deserving of a special age-related tax break than someone turning, say, 50 (my age), so I have no problem with the repeal. But it is disingenuous not to count this measure in the calculation of winners and losers. If Bennett had included these people, he'd have to chalk up several tens of thousands more taxpayers in the loser column.

 

In sum, I believe that Bennett got close to the mark with most of his calculations. But his decision to omit key elements -- cigarette taxes and eliminating the turning-62 deduction, worth a combined $175 million -- was indispensable to attaining that magical 65-percent number. There may have been methodological problems, as Bennett argues, with including those tax burdens in his taxpayer database. But one is equally entitled to dispute the methodological soundness of a calculation that leaves them out. 

 

-- December 1, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fire back!

 

You can berate Bacon at jabacon@

baconsrebellion.com

 

Or read his profile here.

 

 

 

The Warner Administration

Reveals All!

 

See the numbers behind the Warner Tax Plan here, including projected impact from fiscal 2004 through fiscal 2008.

 

 

 

The Tax Debate Rages...

 

Rebel With a Cause

Warner Goes to China
Historians say only Richard Nixon could have cut a deal with Mao. Is this the political thinking behind Warner's gambit to DROP the CAR TAX Budget CAP, something so fiscally reckless, even "Deficit" Jim Gilmore never tried it?

 

Patrick McSweeney

Where's the Analysis?
In pushing a $500 million-a-year tax hike, Mark Warner appears to assume that higher taxes will not slow the state's economic growth.  But it's hard to know: He offers no numbers to go by.

 

Sen. Emmett W. Hanger

Yes, We Can Reform

the Tax System

 

Gov. Warner and Republicans legislators don't agree on everything, but we should be able to work out a consensus on tax reform.