Restructuring Virginia’s tax code by taxing services and using the proceeds to roll back business and income taxes would stimulate $340 million in additional investment, create 77,000 jobs and increase real disposable income by $2.78 billion under one of nine scenarios studied by the Thomas Jefferson Institute for Public Policy in a new study, “Tax Restructuring in Virginia.”
The Thomas Jefferson Institute explored the scenarios in collaboration with Chmura Economics & Analytics, a Richmond-based consulting firm, and the Boston-based Beacon Hill Institute to see if reconfiguring the tax code along revenue-neutral lines could yield superior economic performance. “What we found is truly fascinating,” said President Michael Thompson. “So much good could be accomplished by restructuring the current taxes without the overall tax burden being any different than it is today.”
One of the nine scenarios assumed that the state sales tax would be extended to all services, which are currently exempt, except health care. The revenue raised would be applied to eliminating the Business Professional and Occupational License (BPOL), the Machinery & Tool (M&T) tax and the Merchant Capital (MC) tax; to cut the state income tax on the first $5,000 in income; and to trim the top income tax rate from 5.75% to 5.3%.
Such a restructuring would stimulate economic growth by shifting the tax burden from consumption to business investment and income, explained Paul Bachman, director of research at Beacon Hill. The benefits would not be immediate, he said, but would phase in over roughly five or six years.
From an economic perspective, a lower, broader tax base is preferable, said Thompson: Lower taxes produce fewer distortions in the economy, encourage investment and incentivize people to work harder. The Virginia Municipal League and Virginia Association of Counties have told him that as long as the tax restructuring was revenue-neutral for local government, they had no problem with the concept.
BPOL, M&T and MC generate revenues for local governments, while the sales tax goes to state government. Thompson said that an arrangement could be worked out, similar to the roll-back of the telecommunications tax, for the state to offset local governments’ lost revenue.
A potential objection to the restructuring could come from those who see it as hurting lower-income Virginians. It could be argued that businesses and higher-income individuals would see the greatest benefit, while lower-income households would share in the pain of paying the tax on services, like getting a haircut. Thompson contended that his Scenario #7 would benefit less affluent Virginians by eliminating the tax on the first $5,000 in income. Also, he said, the 77,000 jobs created would go predominantly to lower-income workers.
Thompson said he has presented his findings to Governor Bob McDonnell’s policy team and has gotten buy-in from business groups like the Virginia Chamber of Commerce. Said he:
It is time for Virginia to look at its out-dated and antiquated tax code and bring it into the 21st Century. The BPOL tax, for instance, was started almost 200 years ago in order to pay Virginia’s share of the War of 1812. We know the facts in this new study and in our tax model will dramatically improve Virginia’s economy while giving every tax payer a substantial reduction in their state income taxes. We encourage our leaders to pursue a sensible tax restructuring that can help everyone in our state.
Bacon’s bottom line: This proposal has a lot of potential. The plan will generate push-back, though, from people arguing that it would increase the tax burden on the poor. Ideally, changes to the tax code would be not only revenue-neutral but would not add any hardship to the poor. If Thompson can address that concern, the plan looks like a winner.