|
TO:
House
Republican Caucus Members
FROM:
Speaker Bill Howell, Chairman
Vince Callahan
DATE:
January 13, 2004
RE:
Major Principles to Guide Our Tax and Budget
Deliberations
As you know,
the debate over tax and budget policy has begun in
earnest with the disclosure of the Governor’s tax recommendations and his proposed budget, which
relies on more than $1 billion in higher taxes during the next
biennium. Some
legislators also have proposed a large increase in
taxes.
It
is important to view this unfolding situation in
context.
First, the historic tax increase being proposed by
Governor Warner is
contrary to actions being taken in most other
states, where tax increases are being avoided to
assure a strong economic recovery.
As news reports have indicated,
the tax increases being considered in Virginia
are, in both magnitude and complexity, far
greater than anything being considered in nearly all
other states. The reluctance of other states to raise
taxes is based to a large extent on concerns that
tax increases would
negatively impact job opportunities and economic
growth during an incipient – and still fragile –
economic recovery.
As
U.S. Senator George Allen has pointed out, the
federal government has acted decisively to reduce
taxes in order to stimulate the economy, and there
is increasing evidence daily that those policies
are working. There
is a very real danger that the positive economic
effects of these federal actions could be negated
for people here in Virginia
by passage of a
large tax increase at the state level.
A
recent economic analysis completed by CapAnalysis, a
nationally respected analysis firm
headed by Dr. James C. Miller III, a veteran
economist, academic, and former presidential budget
director and cabinet-level economic advisor, has
concluded that Governor Warner’s huge sales
tax increase would hit Virginia’s economy very
hard – costing Virginians nearly 28,000 jobs, and
reducing Virginia’s economic growth (as measured
by personal income) by almost $10 billion in
2006.
The CapAnalysis report shows that the negative impact of the Warner tax
plan on Virginians’ household income will be
severe at all income levels, with the income loss
more than wiping out the modest tax savings claimed
by the Governor. The claim that 65% of Virginians will pay
less in taxes under the Warner plan is, as we all
now know, utterly misleading – especially since
the tax increases in the Warner plan are
front-loaded and the decreases are deferred until
the next governor’s term.
But even if the Governor’s numbers are
taken as true, the CapAnalysis report shows that the
Warner plan’s negative impact on income and jobs
will far outweigh the meager tax relief he is
promising down the road.
The Warner plan is especially regressive – indeed, it’s a cruel
hoax – for those on the lower rungs of the
economic ladder. Not only will the Governor’s proposed 22%
increase in the sales tax fall hardest on those
least able to pay. The CapAnalysis report shows that the plan
will have an even more harsh negative impact on
household income for those working Virginians who
are struggling to get by.
They will also bear the brunt when jobs are
lost due to large tax increases.
The Warner plan’s threat to businesses’
bottom line is clearly understood by the owners of
small businesses that are the backbone of our
economy. The
National Federation of Independent Business (NFIB),
the widely respected voice of small business, has
come out strongly against the Governor’s tax increase package.
Its statewide survey of the coalition
representing 5,000 small businesses and local
employers found that 61% oppose the Governor’s
overall plan.
The
negative economic effects of the Warner tax plan
shown in the CapAnalysis report should come as no
surprise. It
is folly for the Governor to continue to suggest we
can pass the largest tax increase in Virginia
history and suffer no negative economic impact. Tax cuts at the federal level have
successfully stimulated the national economy;
passage of a massive tax increase here in Virginia
plainly will have the opposite effect.
Indeed,
if in prior decades we had followed the tax-hike
course charted by Governor Warner rather than the
low-tax path trod by most of his predecessors,
including Democratic Governor Wilder, our state’s
fiscal challenges would be much greater today. Dr. Mark Crain, an expert on economic policy at
George
Mason
University, has documented in a recent book (“Volatile
States”) that Virginia’s longstanding low, flat and stable tax
structure and resulting business-friendly
environment have produced strong business
investment, job creation and dramatically rising
living standards. As a result, over the last 30 years Virginia’s per capita, inflation-adjusted income grew by
nearly 2% a year – a growth rate faster than in
all but 6 other states. Dr. Crain also notes, however, that if Virginia’s per capita income instead had only grown at the 50-state median rate during
those three decades, Virginians would be earning
roughly 13 to 14% less than they do now, and our
state would be collecting $3-to-4 billion less
in revenue each year.
Every Virginian would be markedly worse off,
and so would our state budget.
Similarly,
a study by the American
Legislative Exchange Council (ALEC), the nation’s
largest bipartisan, individual
membership organization of state legislators, has
found that states –
like Virginia
–
that avoided tax hikes during the last recession
experienced significantly stronger economic growth during the remainder of the 1990s than states that raised taxes.
The
evidence is compelling that a large tax increase
would place Virginia’s economic future – and the sustained revenue needed for core
services – at risk.
The need to reject the temptation of a quick-fix tax increase that will
destroy jobs, reduce family incomes, and depress
revenue growth is especially urgent now, when the
economy is just beginning to turn solidly upward
again here and around the country. Our state’s tax revenues are beginning to
show healthy growth levels again. Indeed, the Governor’s own 2004-2006 budget
assumes nearly $1.5 billion in additional
revenue from economic growth and carry-over
surpluses, and further upward adjustments in revenue
projections appear increasingly necessary.
Second, the people of
Virginia
have been unfairly excluded from the conversation
about these proposed tax increases.
We all know that
Virginia
voters were promised repeatedly in the 2001
gubernatorial campaign
that there would be no tax increases. Governor Warner says that “changed
circumstances” justify breaking that
pledge. But
“changed circumstances” cannot justify
intentionally delaying disclosure of the
Governor’s tax increase proposals until after the
2003 elections in a calculated attempt to avoid
accountability to taxpaying voters. In addition, the Governor promised during
his 2001 campaign that he would “let the
people decide” on any proposed tax increases
through referendum, but he has recommended no method
for the people to decide about his current
tax-increase proposals.
Third, the impact of the tax and spending
policies we embrace in this session will be felt for
decades, making it essential that we take the long
view.
This means carefully considering the long-term economic
impact of our tax and spending policies, and making
prudent investments for the future. Certain actions, such as reconstituting the
Rainy Day Fund, are essential to provide security
against future economic downturns and reinforce our
triple-AAA bond rating.
In addition, investment in education must be
assigned the highest priority. That means meeting our Standards of Quality
obligations and ensuring continued implementation of
our Standards of Learning reforms, and it also
should mean adoption of a prudent long-term policy
to invest in new K-12 construction, renovation and
technology infrastructure as the economy grows.
By assisting local governments with school
construction (as we recently agreed to do for higher
education) and by taking other prudent steps, we can
begin a long-term effort to remedy the real
structural imbalance in Virginia
– the imbalance between state and local
resources and responsibilities, and the resulting
undue reliance on real estate taxes at the local level. As you know, the Governor’s tax plan
ignores this central issue.
It is apparent that the House of Delegates
must be the forum for a thorough consideration of
the Governor’s tax-increase proposals – one that
looks beyond short-term budget fixes to the
development of long-term growth strategies,
infrastructure investment, and structural reform for
the Commonwealth.
GUIDING
PRINCIPLES FOR TAX & BUDGET DELIBERATIONS
To assist in our
deliberations on these issues in the coming weeks,
Chairman Callahan and I have identified the following major principles that should serve as our
guide.
If
we, and all members of the House, will remain
faithful to these principles as the debate unfolds,
I am confident that not only will we emerge from the
session with a sound tax and spending blueprint.
But most important of all, we will
emerge from the session with the ability to look the
taxpayers of Virginia squarely in the eye and say we
did right by them:
1.
RESTORE THE RAINY DAY FUND.
We
must take steps to restore funding to the Rainy Day
Fund, both to cushion the effects of future economic
downturns and to fortify our triple-AAA bond rating.
2.
PROTECT EDUCATION FUNDING.
We
must fully meet our education obligations by
assigning the highest priority in the appropriations
process to funding the Standards of Quality, and to
making certain that student achievement as measured
by our successful Standards of Learning continues to
improve through early reading initiatives and
successful remedial programs.
In
addition, we must begin to put in place a long-term
investment strategy that allocates a percentage of
growth revenues – together with bond proceeds when
feasible – to meeting Virginia
localities’ pressing needs for capital
construction, renovation, and technology
infrastructure in our elementary and secondary
schools.
We
must also support higher education and develop
innovative ways to ensure that our colleges and
universities remain the envy of the nation.
3.
PROTECT VIRGINIA’S JOBS AND ECONOMY BY EXHAUSTING
EVERY REASONABLE OPTION FOR BALANCING THE
BUDGET WITHOUT A TAX INCREASE.
In
contrast to the Governor, who developed his massive
tax increase plan without considering his
proposals’ economic impact, we must reliably
evaluate all tax proposals to determine their
probable impact on jobs and family incomes in
Virginia and on the Commonwealth’s economy before
acting on them.
At
a minimum, we must take care to do no harm to a
recovery on which Virginians are pinning their hopes
for more job opportunities and family economic
security.
To
prevent an adverse impact on the Virginia economy,
we must exhaust every prudent option for developing
a balanced budget that reduces government costs,
protects core services, and avoids an increase in
the general tax burden on Virginians.
4.
ADOPT STRATEGIES TO PROMOTE ECONOMIC GROWTH,
AND TO ENSURE THAT LOCALITIES PARTICIPATE
FULLY IN
THE RESULTING REVENUE GROWTH.
Using
the best economic impact forecasting tools available
to us, we should consider individual tax law changes
that will promote long-term economic growth and
prosperity in the Commonwealth.
For example, repealing the unfair Virginia
death tax remains important; the loss of jobs,
investment and tax revenues to other states if we
keep the tax in place will likely outweigh the
revenues produced by the tax itself, and even the
Governor now concedes that the death tax is a
job-killer. Other
sensible changes should also be considered, so long as
they are consistent with long-term economic growth
in the Commonwealth.
In
addition, the House should take the lead in
promoting structural changes that will assure that,
as the economy
grows, localities participate more fully in the
revenues produced by that growth, thereby relieving the upward pressure on local real estate taxes.
As I said in remarks several weeks ago
to the Virginia Chamber of Commerce, a
state-supported K-12 capital investment policy and a
sharing of state growth revenues with localities are
among the options for beginning to redress this
state-local structural imbalance.
Finally,
to ensure sustained investment in our
Commonwealth’s transportation infrastructure,
we must take steps to protect the integrity of the
Transportation Trust Fund. Largely funded by dedicated revenues paid by
motorists, the Fund must be used as intended and as
advertised, rather than raiding it to pay for other
government programs unrelated to transportation.
--
January 19, 2003
|
