Category Archives: Taxes

Ed Gillespie Tax Plan Checks All the Right Boxes

Ed Gillespie addresses the GOP convention in Roanoke.

Ed Gillespie addresses the GOP convention in Roanoke. Photo credit: Washington Post.

Republican Ed Gillespie has issued a blueprint for tax cuts that could define the terms of debate for Virginia’s 2017 gubernatorial campaign. It is a fiscally credible plan. It offers a well-articulated vision for how to jump-start Virginia’s economy. That’s not to say the plan is unassailable, but it is too big and bold to be ignored. Indeed, Republican rival Corey Stewart rolled out his own tax cut plan just a few hours after Gillespie’s announcement. Democratic candidates likewise will be forced to respond.

There are two parts to the Gillespie plan. The first is an across-the-board cut of 10% to state income tax rates, which the campaign says will put nearly $1,300 per year back into the pockets of an average family of four. Gillespie would phase in the tax cut over a five-year period, paying for it out of an anticipated $3.4 billion in state revenue growth, leaving about 60% of the new revenue to fund core services.

The second part would sunset three anti-business, “job-killing” taxes levied by local governments: the Business and Professional Occupancy License tax (or BPOL), the machinery & tools tax, and the merchants tax. To replace lost revenues, he would allow local governments to utilize alternative revenue streams from an unspecified “menu of options” that will be “collaboratively developed.” One option the menu will not include is a local income tax. Localities would be free to re-enact the business taxes or choose from the options.

Not only will the tax restructuring boost disposable income for an average household for four when fully phased in, Gillespie claims, it will stimulate $300 million a year in new economic activity, create 50,000 additional private-sector jobs (25% more than would be created otherwise), and help recruit and retain talented workers. These economic estimates are based upon the work of the Thomas Jefferson Institute for Public Policy using economic modeling tools of the Beacon Hill Institute.

The vision. The underlying premise of the plan is that Virginia’s economy is sluggish and needs a jolt to get moving again. Says the plan overview:

Our approach to economic development is antiquated and tired, and Virginia is losing ground to other states. Our economic growth rate has trailed the national average for five straight years. … Virginia’s antiquated ta code was designed in a bygone era and our income tax rates have never been lowered since they were established in 1972. Our tax climate ranking fell to 33rd in 2017, falling behind neighboring states like North Carolina, Tennessee, and West Virginia. Our business rankings are falling, and more people are moving out of Virginia than moving in.

What won’t revive Virginia’s economy, says Gillespie, is picking winners and losers with subsidies, tax breaks and other preferences.

The plan will raise take-home pay for hard-working Virginians squeezed by stagnant wages and higher costs, orient our economy toward start ups and raise ups, entrepreneurs and small businesses, and make Virginia more competitive and attractive to businesses, retirees and veterans. …

Instead of solely focusing our efforts on throwing taxpayer dollars at big corporations and hoping they move to Virginia, this plan is crafted to foster natural, organic economic growth over the long term through a more patient approach that will help start ups, entrepreneurs, and existing small businesses. …

The path to diversifying our economy will be charted by entrepreneurs given greater freedom to invest and innovate. They will identify the new sectors, services and products to flourish in Virginia, not a top-down government approach that picks winners and losers in the marketplace, and too often makes the wrong bets with your tax dollars.

The fiscal math. Gillespie has structured the plan to fend off the inevitable criticism that his plan will crimp funding for critical government services. First, he says, he will offset revenue reductions by eliminating “special interest tax preferences, cutting wasteful spending, and conducting a full review of economic development programs.” Second, he will build in revenue triggers to protect critical investments in education, health care, transportation, public safety, and other core revenues.

Gillespie’s plan is vague about exactly which “special interest tax preferences” he would cut — and he’s vague about the “revenue triggers.” Virginia’s tax code is larded  with tax breaks, but the big ones are political popular and eliminating the small ones yield only modest savings. In effect, Gillespie is punting some of the tough political choices until later. As for the tax revenue triggers, presumably, they would limit the tax phase-out in any given year if revenues fail to meet expectations. Undoubtedly, there would be considerable discussion over how sensitive to revenue shortfalls those triggers should be. Continue reading

Unplanned Obsolescence: Fairfax County’s Office Parks

Aging, outdated, not within walking distance of anything.... 75% of Fairfax County's commercial/industrial real estate is obsolete.

Aging, ugly, outdated, not within walking distance of anything….75% of Fairfax County’s office space is obsolete.

There is some scary data hidden in Fairfax County’s budget numbers. Back in 1990, commercial/ industrial property comprised 26.7% of the county’s total real estate property tax base. Revenues from high office valuations gave the county leeway to keep the tax rate low — great for homeowners. But the commercial/ industrial share has declined since then to 19.12%, which puts Virginia’s largest political jurisdiction in a bind as county officials prepare the Fiscal 2018 budget.

That commercial/industrial crucial ratio has been known to jump around, depending upon market conditions. The 26.7% number, the highest rate recorded, came only seven years after the lowest rate recorded, 16.12% in 1983, according to a County Executive Budget Presentation published in February. So, things can change. But there is reason to think that the ratio will stay low for several years more.

The office vacancy rate in Fairfax County runs around 20 million square feet out of 116.4 million square feet. Meanwhile the Metro Silver Line is spurring new construction as employers seek Class A office space with mass transit access. Almost 2 million square feet are under construction in Virginia’s largest office center, Tysons, and nine major applications with 9 million square feet are under review.

While the new construction is good news for the Fairfax tax base, here’s what’s not: The executive presentation quotes the Fairfax County Economic Development Authority as saying that 73% of the county’s office space is obsolete.

I’m not sure how the EDA defines “obsolete,” but it sounds ominous. I’m guessing that it means the buildings are aging physically, need re-wiring for state-of-the-art telecommunications, and/or have antiquated layouts incompatible with collaborative work styles. Furthermore, I’d hazard a guess, the office parks reflect a ’70s- and ’80s-era autocentric design, which means they lack the walkable ambience that Millennial employees are looking for these days.

It’s one thing to invest millions in modernizing an office building in a desirable location; it’s another investing millions to update a building in an office park where no one wants to work anymore. I would hypothesize that a large percentage of the county’s commercial/industrial office buildings will continue to get older and more out-of-date. Rents will decline, property values will decline, and the county tax base will continue to erode.

Let this be a warning to other suburban counties across Virginia. Unless they can figure out how to reinvent their old office parks as walkable, mixed-use districts where people these days prefer to work,  they, too, will find themselves heirs to obsolete office parks that leech value and undermine their tax base. The difference is that Fairfax County could see a revival if President Trump succeeds in ramping up defense spending. Henrico, Chesterfield, Virginia Beach and other jurisdictions will have no such luck.

(Hat tip: Andrew Roesell.)

Making School Vouchers Palatable to Democrats

School vouchers have brought about demonstrable improvements to students' educational achievement -- in some cases, but not all. How can we combined free choice with accountability?

School vouchers have brought about demonstrable improvements to students’ educational achievement — at some schools, but not all. How can we combined free choice with accountability?

The Richmond-based Commonwealth Institute (CI) has staked out a reasonable position on two school choice bills before the General Assembly this session. Rather than opposing school vouchers and health savings accounts out of hand, CI acknowledges that children, especially poor children, can benefit from alternatives to public school. But the center-left think tank insists upon holding private schools accepting taxpayer dollars as accountable as public schools.

Not all private schools are created equal. Some excel, far surpassing public schools in performance, while others can be described only as failures. “If the goal of school choice is to provide options for a high-quality education,” writes Chris Duncombe in CI’s Half Sheet blog, “then it makes sense to hold private schools receiving taxpayer dollars to the same standards as public schools.”

Two bills before the General Assembly — HB 1605 and SB 1243 — would create voucher-like educational savings accounts that would provide taxpayer dollars for families pursuing private education or home schooling. One way to hold hold private schools accountable to taxpayers is to adopt a policy practiced in some other states: If a private school falls short of accreditation standards, bar them from accepting vouchers the following year.

As a practical matter, if I understand the system correctly, that means private schools with voucher students will have to administer the Standards of Learning (SOL) exams. For a school to receive accreditation, a specified percentage of its students must rate proficient in the exams. That might well mean “teaching to the test,” which some private schools find objectionable. But unless someone suggests another means to hold schools accountable and weed out the inevitable fly-by-nights, meeting state accreditation standards may be the least bad option.

For Duncombe, a second issue is equity. The school vouchers would vary widely from locality to locality, dependent upon state Standards of Quality funds appropriated. “That means a family in Lee County would receive over three times as much as a family in Falls Church,” he says. “This variation is not based on the financial need of the family or the cost of pursuing private education in the area.”

(I’m not sure I see the objection here. A family in Lee County is already receiving three times as much state aid as a family in Falls Church. So, how would funding school vouchers on the same basis be any more inequitable?)

Duncombe’s third criterion is income eligibility: “A millionaire could get tax dollars to send their kid to private school, while a family who lacks the means to supplement the voucher with their own income would be left out.” His proposed solution would be to limit the benefit to households whose incomes are below 133% of free-and-reduced-price lunch eligibility — about $60,000 for a family of four.

These proposals are not unreasonable. Duncombe is not taking a position of “Vouchers, hell, over my dead body.” He’s trying to address the criticisms of school vouchers in a substantive way — in effect, taking away the arguments who those who are inclined to accept school choice over their dead bodies. If these compromises are what’s necessary to win legislative approval, expand the sphere of choice, and empower parents, then I can live with them. With luck, the General Assembly and Governor Terry McAuliffe will decide they can live with them, too.

Tax Preference or Tax Prejudice?

The Whitman exhibition of collector coins in Baltimore

Exhibit One: The Whitman exhibition of collector coins in Baltimore

by Steve Haner

Three times per year a massive coin show is held in Baltimore, packing a large convention space for several days and filling hotel rooms and restaurants all around the area. The photo above is from 2015. The dealers and the buyers include the key Virginia players in this industry.  A 2013 analysis by the Baltimore Tourism Bureau estimated that attendees spend $3 million inside and outside the arena at just one show, and they do it three times a year.  The expo may be an even bigger show now.

A similar show is held in a faded motel on Richmond’s Boulevard, near the Diamond.  I took this photo in October.  The comparison to the Baltimore show is obvious, but there is no other show anywhere in Virginia that compares to Baltimore’s either.  Maybe, just maybe, every show conducted in Virginia combined generates the $3-4 million in local spending that goes on at one Baltimore show.  No one has bothered to do a formal impact analysis.

Exhibit Two: Richmond numismatic show

What does Baltimore have that Richmond does not? It is the other way around.  Richmond and Virginia have something Maryland got rid of – a sales and use tax on collector coins. In fact, Maryland is one of 27 states that have no sales tax on those items, and then of course five states have no sales tax at all, for a total of 32 tax-free states.  Ohio just rejoined the list of tax-free states on January 1. It dumped the exemption a few years back because of one bad-apple dealer, but the local industry visibly shrank and the exemption is now back.

The national Industry Council for Tangible Assets, representing the bullion and coin dealers, surveyed its members and compared the responses from the states which do and do not tax bullion and coins.  You can see the results summarized here: Exhibit Three. Dealers in the tax-free states have more than four times the annual revenue.  Dealers in both kinds of states do mainly shows in tax-free states.  Dealers in the tax-free states, being bigger, sell more taxable items as well and remit almost as much tax as the dealers in taxing states.

Argue all you want about how Virginia ranks overall as a good place to do business – Virginia is a lousy place to do this business. Like everything else, the Internet is taking over. A Virginia buyer on a Virginia retailer’s website will get the tax added on at check-out, and often the transaction ends right there. The buyer clicks off and goes elsewhere.

Oh, in case you haven’t figured it out yet, I’m back with another bill on this issue for a client. In 2015 the Virginia General Assembly did approve legislation to remove the tax on large purchases of gold, silver or platinum bullion. Coins were removed from that bill and remained taxable. But it is the coins that are of interest to the bulk of the dealers and collectors, and only by removing the tax on the coins will the industry be able to build up the native shows, attract one of the national shows, and grow actual retail operations in storefronts. Would you like that, Virginia? Compared to the grants and tax advantages you provide other industries, the impact of this is just pocket change.

Tax policy has always fascinated me, and this issue is a classic example of how tax policy has consequences in a free market. Some may dismiss this effort as another tax preference or even, dare I say it, a loophole. But turn that around and in light of the 32 tax-free states and the tax-free U.S. Mint supply, it seems to me that the existing situation in Virginia represents a form of tax prejudice.

Stephen D. Haner is the principal of Black Walnut Strategies.

Special Tax Districts for City Schools?

Special tax districts to build public schools?

Photo credit: WAVY TV

Chesapeake Councilwoman Debbie Ritter has a crazy idea — why not let Chesapeake create special districts that allow property owners to tax themselves to fund school improvements in their district? Virginia localities can set up special tax districts to pay for utilities, transportation improvements, and even sand dredging, why not schools?

Here is her logic, as laid out by the Virginian-Pilot:

Ritter said she is requesting the change so the city has a way to pay for schools in the currently undeveloped Dominion Boulevard area off U.S. 17. The city is set to vote this month on the Dominion Boulevard Corridor Study, which maps out future land use on about 10,000 acres around Dominion Boulevard South, from the new Veterans Bridge south to the Great Dismal Swamp National Wildlife Refuge. The tentative plan notes that new elementary and middle schools may be needed.

Ritter said she would “never consider imposing an additional tax on an already developed area of the city.”

“If you live in an area now, you will not be asked to be a part of the special taxing district,” Ritter said. What the city needs is a way to fund new infrastructure around the corridor “without imposing that on current residents and businesses.”

Interesting issue. As an abstract principle, I support the idea of letting people tax themselves for public projects they want — it beats dipping into public coffers and asking other taxpayers to share the cost. As a bonus under Ritter’s plan, the people of the Dismal Swamp area of Chesapeake might get their school built far more quickly than if they had to wait for the city to scrounge up the funds or issue city-wide bonds, which city-wide voters might reject.

But there is a potential downside. I can also envision a scenario in which affluent neighborhoods vote to tax themselves for new or renovated schools, then vote down city- or county-wide funding initiatives. Poor neighborhoods would be the losers.

— JAB

Taking a Hard Look at Historic Tax Credits

tobacco_rowby James A. Bacon

A General Assembly subcommittee is giving well-deserved scrutiny to Virginia’s tax credits for rehabilitating historic properties.

That program, which has provided more than $1 billion in tax credits since its inception in 1997, is widely credited with revitalizing older neighborhoods across Virginia, particularly in the City of Richmond with its wealth of historic properties. However, as the state grapples with a $1.5 billion revenue gap in the current two-year budget, it is encouraging to see lawmakers employ economic thinking for a change.

“It is really hard for us to make a good business decision here when we don’t know what kind of return we are getting on our money,” said Del. Jimmie Massie, R-Henrico, according to the Richmond Times-Dispatch. “If we are getting a 10 to 15 percent return, that is one thing. If we are getting 5 percent, that’s another.”

Virginia allows developers to claim credits of 25 percent of eligible expenses on renovations of certified historic structures, explains the T-D. With a federal historic tax credit of 20 percent, developers can claim total credits of 45 percent. They can use the credits against their own tax liabilities or syndicate the credits for investors.

According to a 2014 study by the Center for Urban and Regional Analysis at Virginia Commonwealth University, 2,375 projects tapping tax credits generated almost $4 billion in economic activity in the state between 1997 and 2013. A survey of developers indicated that 85% would not have made their investment without the credits.

The Richmond regions has benefited disproportionately from the credit. About 1,185 projects generated about $2 billion in expenditures. However, the program also has defenders from other cities, such as Staunton, which has seen a downtown renaissance in recent years.

Bacon’s bottom line: No question, the tax credit has been a boon to urban-core economies. I’m a big fan of restoring and rehabilitating historic buildings. (I restored two ante-bellum houses in Church Hill.) I greatly prefer historic architectural styles to modern motifs.

But saying that developers would not have undertaken historic renovations without the tax credit is not saying that they would have done nothing. Presumably, those developers would not have stayed idle. What the VCU study could not measure is what projects they would have undertaken in the absence of the credits. Thus, while stating that every $1 in tax credits generated $4 in construction activity sounds impressive, it is a meaningless metric of net economic impact.

I see historic tax credits as analogous to conservation tax credits. A decade ago, conservation tax credits were being handed out indiscriminately, sometimes going to properties of dubious conservation value. The General Assembly cracked down, imposing a $100 million cap. Likewise, historic tax credits may have gone to development projects of dubious value. I recall hearing that developers game the system by preserving a small historic structure, or part of a structure like a wall, and incorporating it into a larger project while pocketing credits for the full amount. (Sorry, I don’t have time this morning to document such instances for this blog post.)

The tax credits represent a drain on the state treasury. It’s about time the General Assembly started asking tough questions of the program. I am particularly concerned how much “gaming” the system goes on. Tightening up the requirements might be in order. Further, lawmakers might well consider a yearly cap, as the state does with conservation easements. As much as I personally love historic renovations, preserving the integrity of the public fisc is the greater good.

Ranking States by “Bang for the Buck”

Source: WalletHub

by James A. Bacon

Most people would acknowledge that there is a trade-off between taxes on the one hand and the quality of government services on the other. It takes money to fund good schools, colleges, infrastructure, criminal justice systems and other basic services. At the risk of over-simplifying, the red state model for state-and-local governance errs to the side of lower taxes, while the blue state model errs to the side of more generously funded government services.

Then there is the body of thought that low taxes and quality government services are both desirable, and that the goal should be to generate the best services per tax dollar expended.

Now comes WalletHub, the financial services website and compulsve list compilers, with a ranking that addresses this very point. Which states deliver the most bang for buck? By WalletHub’s estimate, Virginia does a good job — 4th best in the country.

That’s reassuring. I suspect that Virginia’s high ranking reflects its “purple” state coloring of Virginia’s electorate and the strong two-party competition that prevents either party from indulging the worst instincts of its political base. (I can think of no other reason why Virginia would fare so well — it certainly can’t be our system of governance, which caters to the political class in so many ways.)

Of course, the survey ranking is only as valuable as the methodology that stands behind it. WalletHub compiled 20 metrics to gauge the quality of government services in education, health, public safety, economy and infrastructure & pollution. Then it compared each state’s Average “Government Service” Score to its “Total Taxes per Capita (Population Aged 18 & Older)” Ranking in order to provide a clear ROI hierarchy for taxpayers across the 50 states.

According to this ranking, red states have better ROIs overall with an average ranking of 23.4 versus blue states with 27.4.

Unclear, however, is how WalletHub defines a state to be “red” or “blue.” One could argue that Virginia is a blue state because the governor, Terry McAuliffe, is a Democrat. But both bodies of the General Assembly are controlled by Republicans. Similarly, Ohio is judged to be a “blue” state, even though its governor, John Kasich, is a Republican. Perhaps WalletHub should establish a “purple” state category. I would be interested to see how purple states fared by this reckoning.

We can argue over the methodology all day long. The larger, more important point, I believe, is the question that WalletHub is asking: Which states have optimized the tradeoff between taxes and services — who is getting the most bang for the buck? If we can answer that question, we can move on to even more compelling questions: Which policies, strategies and institutions account for the superior results?

Virginia Property Taxes — Not as Bad as Jersey but Worse than D.C.

property_taxes8property_taxes4
No one much pretends that Virginia is a “low tax” state anymore. Indeed, the Old Dominion has ensconced itself solidly in the ranks of the middle-tax states. If there is anything good to be said about the state’s tax structure, it’s that revenue sources are diversified across a broad array of taxes — income, sales, property and many smaller sources — so that state revenues aren’t excessively vulnerable to, say, a real estate crash, a consumer recession, or a decline in capital gains-generated income tax revenue.

One downside is that Virginia taxes personal property — primarily real estate and automobiles — more heavily than the typical state. I have combined data from the latest WalletHub offering to show that, using WalletHub’s methodology, Virginia has the 14th highest property tax burden among the 50 states (and Washington, D.C.) The real estate tax rate is modest (16th lowest) but it combines with relatively high median housing prices (11th highest) to create the 23rd highest average tax on the median-value house.

The car tax (2nd highest in the country) is a killer. Throw that into the mix, and Virginia has the 14th highest overall property tax burden in the country. If you adjust the taxes as a percentage of average household income, the numbers look a little better. Still, there’s no escaping the conclusion that Virginia’s “low tax” days are long gone — even at the local level.

The main limit to this analysis is that it obscures the tremendous divide between NoVa and RoVa. NoVa is in a league of its own when it comes to housing values and property tax rates. If you split the state into two, I’d guess, NoVa probably would look more like New York and RoVa more like North Carolina.

— JAB

Your Tax Breaks at Work

terraces_at_manchester

Terraces at Manchester

by James A. Bacon

The Terraces at Manchester, a 148-unit luxury apartment across the river from downtown Richmond, opened in August. Its amenities include views of downtown and the river, an outdoor pool, a club room, a sky lounge, a rooftop dog park and, of course, an active urban lifestyle. Its cheapest apartment, with a small bedroom, a small bathroom and a living-kitchen area, rents for $1,200 per month.

Thank to an “affordable housing” ordinance enacted in 2014, the developer was able to pocket $2 million in real estate tax breaks over 10 years by renting 15% of the units to individuals making $41,000 a year or less. The company isn’t required to offer reduced rents in exchange for the breaks.

poolNow City Council has activists’ remorse. Councilwoman Ellen F. Robertson, author of the measure, wants to close the “loophole” she designed in the first place. “Once we realized there was a loophole, we decided to revise the legislation to make it more restrictive,” she was quoted as saying by the Richmond Times-Dispatch. “It was unfortunate that we did have a developer that didn’t operate in the true spirit of the law.”

Yeah, right, it was the developer’s fault! He read the fine print. Shame on him!

“We fully complied with the ordinance,” said Robin Miller, one of the principals in the project. However, he added, after the project’s use of the tax breaks were reported last month, his staff has reduced rents for some tenants.

Isn’t that special? Tenants making up to $41,000 (more than the median household income for the City of Richmond) who voluntarily signed a lease, presumably because they found the cost-to-value proposition attractive, suddenly get a break in their rent. Well, that certainly promotes the cause of affordable housing for the city’s lower-income residents!

So, what’s Robertson’s fix? Here’s the T-D’s explanation:

Robertson … said her proposed changes tighten eligibility requirements for developers seeking to qualify. Among the changes the City Council will consider: requiring developers to charge rent proportional to a qualifying tenant’s income and lowering the maximum salary that a qualifying low-income tenant can make up to $31,200, which is 60 percent of the area’s median income.

If the program changes are adopted, the most an individual tenant could be charged is $780 monthly.

Charge rents proportional to the tenant’s income? That sounds like a winner. Imagine how tenants will game the rules on that one (with landlords doing a wink, wink, nod, nod). Say an unmarried couple wants to live in a project qualifying for the tax break. The partner with the lowest income rents the apartment in his or her name, qualifying for a rent reduction. Then the other partner moves in, too, and pays all the utilities and groceries. Trust me, this fix is ripe for abuse.

Here’s an idea: Maybe City Council should stop trying to “fix” the housing market and start acquainting themselves with the law of supply and demand. Instead of passing tax breaks and incentives, maybe it should loosen up zoning restrictions against building new housing stock. If the supply of housing increases faster than the demand, prices will fall.

But what happens, I hear the economically illiterate ask, if builders just build luxury apartments that generate the biggest profits?

Here’s what happens. People moving into the luxury apartments and condos presumably lived somewhere else. They put their properties on the market (or free up apartments for someone else to rent). Someone else moves in, and they create vacancies where they formerly lived. Ultimately, vacancies open up in the lower end of the housing market, creating options that poor people didn’t have before. Here’s the really astounding thing — it doesn’t take any tax dollars, and it doesn’t herd poor people into crime-ridden projects.

Unfortunately, a fostering a free market in housing doesn’t help the politicians. After all, any politician worth his or her salt gets re-elected by “doing something” that proves they “care” (regardless of whether what they do actually works). Even scarier for politicians, their low-income constituents might move out of their district — maybe out of the city entirely — to be replaced by affluent constituents living in luxury apartment who, gadzooks, might vote for someone else!

Sadly, in the war between economic logic and political logic, political logic usually prevails. As the T-D article concludes, Robertson’s proposal is on Council’s consent agenda, an indication that it is considered “likely to receive unanimous approval.”

Is Virginia Ready for Car Tax Reform?

Toyota Prius. Want greener cars? Try reforming the car tax.

Toyota Prius. Want greener cars? Try reforming the car tax.

by Bill Tracy

I was encouraged last week when Sen. Chap Petersen, D-Fairfax, joined the “car tax blues” chorus.* According to the Washington Post, Petersen filed bills proposing  to eliminate the car tax through a constitutional amendment and then giving localities the option of levying a local gasoline tax to make up for the lost revenue.

Many localities given the freedom to tax cars to balance their budgets went over-board with a car “super-tax.” That’s what’s happened in Northern Virginia, where the cumulative tax levy can approach 30% of a vehicle’s original cost over the 12-year average life of a vehicle. Of course, thanks to former Governor Jim Gilmore, the state of Virginia pays much of the local car tax for most residents. Unfortunately, the effect of the state subsidy has diminished as the cost of new cars escalates faster than the capped state payments.

Can you imagine up to $12,000 cumulative car taxes** on a $40,000 Ford F-150, America’s most popular vehicle? Even after Gilmore’s tax relief, the total tax bill still could be as high as $10,000 in NoVa. This compares unfavorably to our neighbors in Maryland and D.C. with a flat 6% excise tax ($2,400).

Parenthetically, Virginia’s car tax relief program does NOT reduce or solve the local car tax issue. It simply means that the state of Virginia, as a stop-gap corrective measure, sends a check to the locality on your behalf to help you cover your car tax bill.

Due to high local car taxes, many Virginians have learned to be modest in their new car selections, or they purchase used cars instead.  As a consequence, we are throttling new car sales.  In addition, the tax functions as a de facto green car penalty. For example, a hybrid typically costs about $4,000 more than an equivalent  non-hybrid. That price premium gets fully taxed.

Auto manufacturers believe that the Obama administration’s 54 miles-per-gallon standards for 2025 will force them to sell more electric plug-in cars to meet their regulatory quotas. California, the largest and most important U.S. car market, already mandates a substantial portion of electric car sales. Former GM executive Bob Lutz speculated that automaker were trying to recoup the cost of unprofitable plug-in sales by jacking up prices on other cars, especially trucks, SUVs and crossovers. Whatever the cause, we are seeing a trend towards more expensive conventional vehicles and more expensive green cars. As the average cost of a new car trends to $34,000 and higher, our current car tax system will prove increasingly painful to Virginia residents.

A year or so back, the McAuliffe administration invited me to submit my proposal for reforming the car tax to Transportation Secretary Aubrey Layne. The secretary nixed it on the logic that the localities, not the state, have ownership of the car tax issue.

To summarize my proposal, I said there is nothing wrong with a modest local car tax. At last count, about 18  states have some form of a local car tax.  I have studied the car tax formulas of many other states, and I strongly feel that we could devise an improved formula for Virginia.

As a fiscal “conservative” fearing another temporary, stop-gap solution, I am reluctant to totally kill off our car tax. As a possible alternative, perhaps we could move to a life-time 6% upper limit on the (tax deductible) local car tax in addition to the normal 4% Virginia state tax, for a total 10% total car tax. Perhaps give the buyer the option to pay a lump sum on the local tax.  I believe the lump sum approach is how Georgia weaned its localities from a prior “super-tax” approach.

I also agree with Petersen, and a related proposal by Sen. Frank Wagner, R-Virginia Beach, that allowing localities to charge more for local gasoline taxes at the pump might be a good idea. But, holy cow, let’s not give localities carte blanche on that.

Am I too bold to suggest that reducing the car tax would stimulate enough new car sales that localities might come out ahead? Only if we play our cards right, with good planning.

Bill Tracy is a retired engineer living in Burke, Virginia.  He owns a 2006 Prius and a 2009 Minivan (both white).


* The Virginia Car Tax Blues

(Parody song by Bill Tracy, 2013, to the tune White Christmas.)

 I’m dreamin’ of a white Prius, with every car tax check I write,
Where the hybrids pay more, and big cars pay less, 
To use, Virginia’s bumpy roads.

I’m dreamin’ of a new Prius, but I don’t think it makes sense here.
Low de-pre-ci-a-tion, high val-u-a-tion,
You pay, more car tax every year.

Now thinkin’ of a used Chevy, just like the ones Gramp used to drive.
If you think that’s crazy, you’re right!
But may all your Priuses…be White. 

** Calculations for 5% annual car tax, with and without 30% tax relief below $20,000 value, for a $40,000 vehicle at a low 15% depreciation rate. Cumulative total tax for 12-year ownership. Includes 4.15% state sales tax on cars.  Assumes no further local car tax rate increases.