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With
the General Assembly elections now behind us, it is
time for Virginia’s
political leadership, both in the executive and
legislative branches, to come forward with sound,
visionary proposals to reform Virginia’s
tax code. This
will not be easy. It
will require courage and forethought, but elected
officials should not go it alone. They should call
upon experienced professionals, like Certified
Public Accountants, who deal in tax preparation and
counseling on a daily basis.
One
thing I have learned in 25 years of practice is that
if there is a one constant in business, it is
change. And
over the past several decades Virginia’s
businesses have dramatically evolved, moving from an
agricultural and manufacturing base to a high-tech,
services and tourism base.
Unfortunately, Virginia’s
tax system hasn’t come close to matching this
evolution. Instead,
the Commonwealth’s tax system remains rooted in
its past, with very few significant changes through
the years. Today,
90 percent of the state’s revenue comes from the
individual and corporate income taxes and the sales
tax. Local
governments rely heavily on property taxes.
There
is general agreement that our state tax system must
be overhauled, but disagreement on the best process.
Acknowledging the need for change raises two
crucial questions. First,
what attributes should the new system possess? Then,
will the new system make Virginia
more economically competitive?
First and foremost, the state
must develop a comprehensive tax policy that
provides a rational basis for taxing decisions.
That policy must be rooted in sound economic
theory and capable of evolving effectively and
efficiently as the Commonwealth changes.
The price for ignoring a cohesive tax policy
will be needless complexity and citizen frustration
that will, in turn, result in reduced compliance.
Short-term fixes, politically expedient measures and
a failure to understand the economic base upon which
a tax system will be built aren’t key elements of
good tax policy, much less cohesive tax policy. Thus, the first step in revamping
Virginia’s
tax policy must be to develop a tax policy against
which all proposed legislative initiatives should be
measured.
Implementing
a comprehensive tax policy is only the beginning.
A tax system must be designed around that tax
policy, considering equity, simplicity, adequacy and
predictability. Equity
means that the tax system (or individual tax under
consideration) is fairly distributed among the
taxpayers impacted by the tax.
In considering whether a tax is “fair”,
one issue is whether the beneficiaries of the
government services being funded should pay a
“user fee” versus having the expense funded
through a tax levy. Then
there is the issue of whether taxpayers with greater
means, i.e. higher incomes or more valuable
property, should bear a greater portion of the tax.
Simplicity
means the tax is easy to understand and administer,
thus enhancing compliance.
Given the modern business environment, some
complexity must exist, but should be eliminated
whenever possible. Additionally,
simplicity implies that the tax is neutral and
doesn't significantly alter the taxpayer’s
economic decision making.
Adequacy
means that the tax system generates the revenue
necessary to fund the state programs put in place by
the General Assembly.
Finally, predictability means that revenues
can be estimated accurately, thereby facilitating
appropriate, long-term fiscal planning and
responsibility.
At
first glance, these factors seem to complement each
other. In
fact, they are frequently competing factors that
must be carefully balanced against each other.
For example, equity demands that the system
be “fair” to all citizens and businesses.
However, perfect equity brings with it
substantial complexity, which then places equity at
odds with simplicity.
Deciding the balance to strike among and
between the various factors is a key decision in the
restructuring process.
Even
this is only the start. Other difficult issues that must be addressed
include the extent of local taxing options,
integration of state and local tax policies, federal
conformity and, of course, the impact of politics on
all of this. However, no matter what the difficulty,
the fiscal health and future economic viability of Virginia
depends on the development of a modern, policy based
tax structure. We,
as citizens, should demand nothing less.
--
November 17, 2003
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