Bacon's Rebellion

Democracy Thrives in Sunlight

Boomgergeddon in Virginia: Our Eroding Tax Base

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by

James A. Bacon
in ,

by James A. Bacon

While the federal government is hurtling  towards a Boomergeddon melt-down, the prospects of state and local governments don’t look much better. According to the “Report of the State Budget Crisis Task Force,” states’ major revenue sources are eroding and increasingly volatile. Despite its AAA bond rating, Virginia is no exception to the trend.

As consumer spending shifts from products to services, the sales tax captures a smaller percentage of income.

On average, sales taxes account for roughly one third of state revenue. That percentage is smaller for Virginia — 20.3% for state tax revenue in 2009 and 6.9% for local — but it is significant nonetheless. Due to the shift in consumer spending from taxable products to usually non-taxable services, sales tax breadth (tax base as a percentage of personal income) has shrunk in Virginia from 40.5% in 1970-2010 to 26.9% in 2010.

Meanwhile, an increasing share of retail sales transactions are taking place online, where they are not taxable. “Estimates place Virginia’s revenue loss during the current fiscal year from untaxed Internet sales at $207 million, roughly one-quarter of all of the state’s estimated retail sales and use taxes due on Internet sales,” states the study.

Fluctuations in capital gains account for much of the volatility in income tax revenues.

At the same time, states’ reliance upon income taxes has increased, even as revenue from the tax has become more volatile. As states increase the progressivity of their  income taxes (taxing highest income earners disproportionately), they become more vulnerable to economic swings that affect variable income sources such as bonuses and capital gains. In the current slow-growth environment, which the study expects to persist, that variability works to the states’ disadvantage. Virginia depends on the individual income tax for two-thirds of general fund revenue.

Finally, the motor fuels tax, Virginia’s main revenue source for transportation, has not changed from its 17.5-cents-per-gallon level for 24 years. “The buying power of Virginia’s gas tax revenue has declined 45 percent in this period; it would take a 14.5 cent increase to restore the real value of gas tax revenue – $580.3 million annually in current dollars.”

A sudden rebound in economic growth and incomes would revitalize the state’s income tax revenue, but the long-term shift in consumption toward services will continue to crimp growth in sales tax revenue, and absent an increase in the motor fuels tax, that revenue source will continue to erode with inflation and the trend to more fuel-efficient vehicles. If Virginia is unwilling to reform its tax structure — see our posts on Commonwealth Institute and Thomas Jefferson Institute for Public Policy studies making the same point — state government will continue to be revenue constricted.

And that’s just the opening salvo. In future posts, I will discuss  other threats to fiscal sustainability such as increasing Medicaid costs, cutbacks in federal aid and under-funded pensions.

Special thanks to criminal defense lawyer, Nicole Naum for supporting Bacon’s Rebellion.

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  1. Hydra Avatar
    Hydra

    Eroding tax base my foot. You have and eroding economic base. The boomers are retirining and buying less stuff. There are not enough people coming after them to replace their buying habits.

    Look forward to a long period of modest growth, purely as a matter of demographics.

  2. reed fawell Avatar
    reed fawell

    We’ve had as much as 6%+ post recession growth in past recoveries. What a difference such juice would make today, at least in the short to mid-term. Boomers have relatively little to do with it at the moment, I suspect.

  3. larryg Avatar
    larryg

    On average, sales taxes account for roughly one third of state revenue. That percentage is smaller for Virginia — 20.3% for state tax revenue in 2009 and 6.9% for local — but it is significant nonetheless.

    why is this?

    re: “retirees who are not spending”

    did you know:

    ” Nearly half of Americans die with ‘virtually no financial assets’ ”

    http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/08/03/study-nearly-half-of-americans-die-with-virtually-no-financial-assets/

    I think it is a fallacy to say that retirees are not spending. Retirees often buy big ticket stuff they have put off buying while paying for their kids college – and these days having their kids move back in with them.

    Some retirees whose primary funds are stock-market-based don’t have the cash flow they used to have but those who receive Social Security and vested defined benefit pensions may well be what is preserving the economy these days especially in places like NoVa and Va where many Federal retirees live.

    but two questions:

    1. why is Va substantially different on sales tax receipts than other states?

    2. why is the housing crash and lower property tax revenues at the local level not also identified as a significant issue in reduced revenues?

  4. larryg Avatar
    larryg

    Retirees’ pension benefits help keep Washington economy afloat

    1. DJRippert Avatar
      DJRippert

      The “Washington” in your referenced article is Washington State. Sales taxes in Washington State range between 7 and 9.5%. The tax is split between local ans state-wide. If Virginia adopted a much much higher sales tax then perhaps it would begin to claw back some money from early retirees.

      Here is the sales tax in Washington State by locality:

      http://dor.wa.gov/Docs/forms/ExcsTx/LocSalUseTx/LocalSlsUseFlyer_12_Q3_alpha.pdf

  5. DJRippert Avatar
    DJRippert

    Well, researched and well written!

    “At the same time, states’ reliance upon income taxes has increased, even as revenue from the tax has become more volatile. As states increase the progressivity of their income taxes (taxing highest income earners disproportionately), they become more vulnerable to economic swings that affect variable income sources …”.

    You got it! A smaller and smaller percentage of the working population is paying a bigger and bigger share of the costs.

    The french have implemented a “wealth tax” to ensure that the idle rich pay their fair share – whether they work and pay income taxes or not. Frankly, this is an idea worth studying.

    The other point on the growing dependence on state income taxes is a growing competition for the few people who actually pay income taxes and the fewer yet who pay substantially more than they consume in government benefits.

    There is an experiment going on in Maryland where Martin “Tax the Rich” O’Malley has jacked up the top marginal rate on Maryland’s highest earners. Some in the state are citing statistics that indicate many of these high earners are simply leaving Maryland, often for Virginia. However, O’Malley and his ilk are contesting the statistics claiming they are erroneous at best and fabricated at worst.

    It will be interesting to see how the Maryland experiment unfolds.

    1. reed fawell Avatar
      reed fawell

      I am told that some 30,000 high income Md tax returns “have been lost” recently by reason of “tax residency changes.”

  6. larryg Avatar
    larryg

    As anti-tolling opposition grows, VDOT wants input on future of transportation network

    Now, WHO wants to BET that if VDOT asks people how they want to pay for roads that people will BEG them to INCREASE gas taxes?

    ha ha ha

    The typical response from most folks is that they do not want increased taxes nor tolls but they want VDOT to get rid of waste and abuse and find the hidden money that they and Richmond have been “hoarding”.

    When this becomes a opinion shared by many – we’re deep into denial but what the heck – that just seems to be the way just about everything works these days whether it’s about global warming or balancing the budget with cuts only.

    We’ve become a nation and state of 3rd graders who don’t like any of the options presented and so we collectively hum ” wa wa wa”.

  7. larryg Avatar
    larryg

    sorry the previous post was meant for the toll thread.

    re: ” You got it! A smaller and smaller percentage of the working population is paying a bigger and bigger share of the costs.”

    because… they are so close to the poverty level that what little they’d pay in taxes would not be enough to do much good. It’s a “nice” theory but the reality is that if you do tax those at the lower levels – they then would qualify for more/increased entitlements.

    “The other point on the growing dependence on state income taxes is a growing competition for the few people who actually pay income taxes and the fewer yet who pay substantially more than they consume in government benefits.”

    if you are arguing against a progressive tax system – then fine – present your REALISTIC plan to fund with a different tax system. Otherwise, you’ve joined the anti-tax, we don’t like anything group. We, like most every other industrialized country in the world, have a progress tax system. Name a modern country that does not have a progressive tax system and a tax system that is not progressive.

    we could do what some countries do and amp up the consumption tax like Canada does where just about everything does cost substantially more with the tax included and that WOULD have the effect of taxing the lower income.

    “There is an experiment going on in Maryland where Martin “Tax the Rich” O’Malley has jacked up the top marginal rate on Maryland’s highest earners. ”

    yes, an you are always talking about how Maryland is “better” than Virginia so which is it?

    1. DJRippert Avatar
      DJRippert

      Poor LarryG – Like his hero, Obama, he wants easy and tidy answers. Remember when Obama’s easy and tidy answer to the recessions was more government spending? What did he say that unemployment rate would be today of we just did what he wanted? Oh, right – 6.3% or so? well, he spent the money but didn’t drop the unemployment rate. I guess things are a bit more complicated than, “if government spends like a drunken sailor then all will be well”.

      Please tell me where I claimed there should not be a progressive tax system. You can’t show that because I never wrote it.

      The Maryland vs Virginia analysis is very interesting. O’Malley claims Maryland is creating jobs faster than Virginia. McDonnell says, “bunk”. Some people say Marylanders are leaving the state due to the high taxes. O’Malley says, “not true”. In Maryland, you pay income taxes at the state and county level. No doubt per capita income in Maryland is now (and long has been) higher than in Virginia. Jim Bacon says that’s an unfair comparison.

      No easy answers, LarryG.

      Jim Bacon is coming to the conclusion that Virginia is headed for the financial ditch. I think he’s right. Low taxes are great until you destroy the quality of life in the economic engines of the state. Then, you regret reducing the gas tax in real terms by 45% in the last 24 years.

      You know when you regret it?

      When the federal government slows its spending and the well educated people who were drawn to the federal jobs leave the state rather than battle the transportation chaos.

      You know, when the small percentage of people who actually go to work every day, pay their income taxes and contribute more than they take leave the state.

      That’s when you regret these decisions.

  8. larryg Avatar
    larryg

    Poor LarryG – Like his hero, Obama, he wants easy and tidy answers. Remember when Obama’s easy and tidy answer to the recessions was more government spending? What did he say that unemployment rate would be today of we just did what he wanted? Oh, right – 6.3% or so? well, he spent the money but didn’t drop the unemployment rate. I guess things are a bit more complicated than, “if government spends like a drunken sailor then all will be well”.

    his most serious mistake was underestimating just how deep and damaging the recession was – and that it would take a lot more stimulus than what he originally advocated. If you think austerity is the answer – listen to the GOP caterwauling about actually making cuts. DOD doubled their budget from 300 to well over 800 billion yet 50 billion in cuts would be “devastating”. So much for the deficit hypocrites.

    Please tell me where I claimed there should not be a progressive tax system. You can’t show that because I never wrote it.

    you alluded to it when discussing less and less revenues from 1/2 of taxpayers.

    Jim Bacon is coming to the conclusion that Virginia is headed for the financial ditch. I think he’s right. Low taxes are great until you destroy the quality of life in the economic engines of the state. Then, you regret reducing the gas tax in real terms by 45% in the last 24 years.

    You know when you regret it?

    When the federal government slows its spending and the well educated people who were drawn to the federal jobs leave the state rather than battle the transportation chaos.

    that would be GOOD according to the GOP gobblers!, right? They say cut spending but then they go stupid when you say DOD.

    You know, when the small percentage of people who actually go to work every day, pay their income taxes and contribute more than they take leave the state.

    if that were true – one could do a rank list of the most expensive tax states in col 1 and in col 2 the net out-migration.

    you forget jobs which attracts people. The lowest taxes in the world won’t do you any good if jobs are non-existent.

    That’s when you regret these decisions.

    so is Va better run or worse run than Md?

    1. DJRippert Avatar
      DJRippert

      “you forget jobs which attracts people. The lowest taxes in the world won’t do you any good if jobs are non-existent.”.

      Well now, you are starting to make sense.

      And what brings jobs? Jim Bacon and Richard Florida will tell you that attracting the creative class is one way of building an economy that generates jobs. San Francisco, Manhattan and Austin, Tx all seem to point to this being true.

      When federal spending declines (which it will) what will keep the creative class in place? The great quality of life built by a General Assembly that can’t accept inflation and has created a transportation chaos that is destroying Virginia’s two biggest economic centers?

      No, LarryG – that will not keep the creative class in place after the federal spending declines.

      What would have kept the creative class in place would have been to do what North Carolina did – spend the money on transportation required to keep growth areas like Charlotte and RTP in good stead.

      San Francisco and Fredricksburg have the same unemployment rates – 8.3%. Why don’t the low taxes in Fredricksburg attract all those over-taxed people from San Francisco?

      “so is Va better run or worse run than Md?”.

      Since Virginia is a mindless Dillon Rule state and Maryland is not – the question should be whether Virginia or any of the localities in Maryland are better run.

      Answer – many of the localities in Maryland are better run than Virginia.

  9. larryg Avatar
    larryg

    The “Washington” in your referenced article is Washington State. Sales taxes in Washington State range between 7 and 9.5%. The tax is split between local ans state-wide. If Virginia adopted a much much higher sales tax then perhaps it would begin to claw back some money from early retirees.

    you’ve made your assertions about retirees. You’ve provided zero evidence just uninformed blather.

    there are a number of states with local sales taxes than Va although we tend to be in the lower third.

    still not sure why you are demonizing retirees who have worked all their lives and paid into FICA and pensions all their lives.

    you’re all about blame guy …Richmond, Retirees, RoVa, etc

    it’s all someone else’s fault….eh?

    1. DJRippert Avatar
      DJRippert

      Poor LarryG – He spends all day reading blogs but still has poor comprehension. I hold “early retirees” accountable for their costs. People who just quit working because working is hard. As I’ve said in the past – anybody between the ages of 22 and 65 who has willfully decided to stop working should pay a “citizenship tax” to pay for the government services they receive. If they need to sell some possession to pay the tax – so be it. You see, LarryG – that’s not blame, that’s accountability. If you still want to be protected by the police, if you still want the US Marines on your side then you need to pay for those things.

      The fact that early retirees have voluntarily decided to stop working is their choice. The fact that they want to freeload off those of us who continue to work is unacceptable.

      You talk a lot about “user pays” when it comes to hard working commuters going to and from work so they can earn an income and pay all their taxes. However, that “user pays” mentality seems to evaporate when it’s some fifty-something who has decided to just give up on work but still wants all of society’s benefits.

      It’s not the working stiff suffering through traffic jams for the privilege of paying income taxes that is the problem. It is the “early retirees” who sit in their bathrobes looking out the windows at those traffic jams and cursing the people going to and from work that are the problem.

  10. TMT Avatar
    TMT

    I came to the Washington, D.C. area in 1984 and believed the federal government spent too much money. In 2012, I still believe that. I would not be extremely upset to see sequestration or some other substantial cut-back in federal spending. In the long term, it would be good for the entire U.S. and its residents.

    Disclosure, I make a significant portion of my income due to federal government regulation and none due to government spending.

  11. larryg Avatar
    larryg

    I lived in the region before I-95 existed. I graduated from high school at about the same time that I-95 was finished.

    At that time – Stafford and Spotsylvania and Fredericksburg – combined were less than 50,000 people and “commuters” were those folks driving up US 1 to Quantico or drove into the boondocks in King George at a Navy base called a “proving ground” that basically shot various calibers of large bullets such as 16″ shells “down river”.

    You can look back at the US budgets in the 70s, 80s and 90s including DOD and see enough taxing to pay for what we spent.

    We even had this under Reagan when he advocated Star Wars but also advocated a tax structure sufficient to pay for it. Clinton followed that idea by keeping taxes in line with spending.

    Then we got 911 and all reasonable thinking went out of the window and the logic was (and remains) that since we were attacked, We had NO CHOICE, but to go into deficit and the primary response was to CUT TAXES on the theory that the increased revenues would take care of the deficit.

    Since 2000, the DOD budget has more than doubled and that does not count all the homeland security, NASA satellites, and other increased spending under the rubric of “National Defense”.

    The biggest problem with sequestration is that the biggest blatherbutts of cutting spending – KNOW that if you cut DOD right now, it WILL even more seriously harm the economy – because govt employees are EMPLOYED and they DO buy cars and homes and other things that provide jobs to those who make those things,

    But the blatherbuts just refuse to admit why they don’t want to cut DOD.

    Instead they make the ridiculous argument that 50 billion in cuts in a budget that is well over 900 billion will “hollow out” our national defense.

    So much for the folks who blather on incessantly about “cutting spending”.

    and NoVa is a primary beneficiary. We have so much govt “largess” that we are “drowning in congestion” on I-495 and I-95 and you know what the answer is?

    Yup – higher taxes on RoVa , god forbid that the solo commuting govt workers have to pay …. unless of course the govt is going to give them toll money in addition to their lucrative govt jobs!

    1. DJRippert Avatar
      DJRippert

      “You can look back at the US budgets in the 70s, 80s and 90s including DOD and see enough taxing to pay for what we spent.”.

      Really?

      http://www.davemanuel.com/history-of-deficits-and-surpluses-in-the-united-states.php

      In the 53 years since 1959 there have been only 6 years where deficits were not incurred.

      Also, 2005, 2006 and 2007 saw a substantial reduction in the deficit in real terms.

      By 2008 things had started to go the wrong way. Since then, your hero Obama has spent like a drunken sailor and gotten nowhere with the economy.

      Facts, LarryG, facts.

  12. larryg Avatar
    larryg

    Poor LarryG – He spends all day reading blogs but still has poor comprehension. I hold “early retirees” accountable for their costs. People who just quit working because working is hard. As I’ve said in the past – anybody between the ages of 22 and 65 who has willfully decided to stop working should pay a “citizenship tax” to pay for the government services they receive.

    even if they spent their whole life paying into SS and pension?

    where do you get that? and do you consider “work for pay” the same as “work”? pretty arrogant if you ask me.


    You see, LarryG – that’s not blame, that’s accountability. If you still want to be protected by the police, if you still want the US Marines on your side then you need to pay for those things.

    The fact that early retirees have voluntarily decided to stop working is their choice. The fact that they want to freeload off those of us who continue to work is unacceptable.

    you might be interested in understanding that early retirees don’t get as much benefit as later retirees. It’s all factored in.


    You talk a lot about “user pays” when it comes to hard working commuters going to and from work so they can earn an income and pay all their taxes. However, that “user pays” mentality seems to evaporate when it’s some fifty-something who has decided to just give up on work but still wants all of society’s benefits.

    if you use it then you should pay for it guy. I paid every day when I used it and I STILL pay when I use it and I would not have it any other way. I do not want others to pay for me. I pay for myself as I should and as you and commuters should. You characterize irresponsible behavior as “accountability”. ha ha ha yes indeed.

    It’s not the working stiff suffering through traffic jams for the privilege of paying income taxes that is the problem. It is the “early retirees” who sit in their bathrobes looking out the windows at those traffic jams and cursing the people going to and from work that are the problem.

    if I was using the road I would expect to pay for it whether I was retired or not. you seem to have some kind of envy here that is unjustified. I pay every time I buy fuel also but I do not use scarce capacity at rush hour like others do.

    oh put a dirty sock in it DJ.. you’re a bag of hot air here.

  13. larryg Avatar
    larryg

    http://www.davemanuel.com/history-of-deficits-and-surpluses-in-the-united-states.php

    DJ .. why don’t you TRY to USE a CREDIBLE SOURCE guy instead of blatant propaganda?

    are you THAT gullible?

    http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf

    and guy – 2000 – 2008 the deficits CONTINUED and in 2008 tell me other than the stimulus – what exactly did Obama ADD?

    here’s some more facts for you :

    http://www.washingtonpost.com/business/economy/adding-to-the-deficit-bush-vs-obama/2012/01/31/gIQAQ0kFgQ_graphic.html

    take a look guy and then tell me where the continuing deficits from 2008 are coming from….

    you’re living in a dream world guy.. so gullible that you’ll swallow whatever non-credible info you run into. try using CREDIBLE data guy.

  14. larryg Avatar
    larryg

    and another one DJ: http://www.nytimes.com/imagepages/2011/07/24/opinion/sunday/24editorial_graph2.html?ref=sunday

    DJ – you’re all about blame… Obama…the Clown show, Richmond, retirees… blah blah blah

    your idea of “accountability” is to blame others…

  15. larryg Avatar
    larryg

    http://www.davemanuel.com/history-of-deficits-and-surpluses-in-the-united-states.php

    you gotta be kidding guy

    you need to be using CREDIBLE sites

    Here’s what you will find on:

    whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf

    2001 +128,236
    2002 -157,758
    2003 -377,385
    2004 -412,727
    2005 -318,356
    2006 -248,181
    2007 -160,701
    2008 – 458,553
    2009 -1,293,489

    Obama had nothing to do with any of these.

    In fact, just about the only thing he did was the stimulus which was about a billion

    nytimes.com/imagepages/2011/07/24/opinion/sunday/24editorial_graph2.html?ref=sunday

    washingtonpost.com/business/economy/adding-to-the-deficit-bush-vs-obama/2012/01/31/gIQAQ0kFgQ_graphic.html

  16. larryg Avatar
    larryg

    What would have kept the creative class in place would have been to do what North Carolina did – spend the money on transportation required to keep growth areas like Charlotte and RTP in good stead.

    DJ – have you seen this:

    http://www.ncdot.gov/turnpike/

    and this:

    http://www.mdta.maryland.gov/TollRates/ratesIndex.html

    Now I KNOW you STILL want to blame tolls roads on retirees and the Clown Show and Dillon Rule , etc but how do you reconcile the fact that both NC and MD are ALSO doing toll roads to improve their transportation networks?

  17. TMT Avatar
    TMT

    I was down in Raleigh-Durham a little over a week ago to help my daughter move in for this year at NC State. Even on a moving day, I saw/heard info about the “540 tolls.”
    Network management principles have long included premium pricing at peak demand periods to move traffic to non-peak periods. It must more economically efficient than building additional network capacity that is not heavily used other times.

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