Bacon's Rebellion

James A. Bacon

Questions to Ask the Governor

Gov. Warner knows how to please a crowd when talking tax reform, but he still hasn't made the case for a $1.2 billion tax hike. Here are five questions he still needs to answer.

Last week Gov. Mark R. Warner took his “tax reform” dog and pony show to the Greater Richmond Technology Council (GRTC). Working from a PowerPoint presentation, he was at the top of his game – forceful, humorous and in command of the facts. Judging by the audience’s positive response, he can count on strong support from Richmond’s technology community for his plan to raise $1.2 billion in taxes over the next two-year budget.

The governor made a number of cogent points, which I will convey in due course, but I was left unconvinced. I’m not sure what gave me away – perhaps I was fidgeting in my seat when he asked the audience if anyone had any questions – but my wife leaned over, nudged me and whispered, “Don’t you dare try to embarrass him!”

She needn’t have worried. First, although I take issue with his tax plan, I like Gov. Warner personally and have no desire to "dis" him. Secondly, knowing how thoroughly he has studied the numbers, I doubt that I could trip him up even if I wanted to. Thirdly, posing a “gotcha” question never settled anything or convinced anybody.

I do confess, there are queries that I would have liked to put to the governor -- but not in an setting where questions are formulaic, responses take the form of sound bites, and there's no way to follow up evasive or incomplete answers. I would have preferred a more congenial locale. Gov. Warner is the kind of person you can imagine sitting down with over a pint of ale for a friendly exchange of views. So, as you read below the questions that I would have posed if given the chance, envision a tavern-like setting for the interview where the french fries are piping hot, the beer mugs are frosty cold, the conversation is animated, and every so often people look our way and yell, "Hey, could you guys dial down the volume over there?"

What happened to closing the special interest loopholes?

Governor, you made a fascinating observation in your presentation about the reckless behavior during the 1990s dot.com bubble that led to Virginia's current fiscal dilemma. In most states, you said, legislatures "spent money like drunken sailors." In Virginia, the General Assembly passed tax breaks instead -- like drunken CPAs, I'd suppose.

Last year you disseminated a list of tax loopholes created between 1995 and 1992 -- special allowances for agricultural contributions, for donations to public schools, for vehicle-emissions testing equipment, for steam producers, for riparian buffers, and the list goes on -- that you estimated drained an estimated $600 million a year from the treasury. (See the full list here -- it's unbelievable.)

That was a stupendous issue. What happened to it? ... Excuse me, could I trouble you to pass the ketchup? ... You could have campaigned for tax fairness -- closing special interest loop-holes, simplifying the tax code, creating a level playing field for taxpayers, etc. -- while raising $600 million a year! Instead, you propose leaving the loopholes intact in favor of raising the sales tax and creating a higher income-tax bracket! The privileged few get to keep their loopholes, but the rest of us get stuck with higher tax rates! I don't get it.

(For the record, I'd like to ask the same question of the Republican leadership in the General Assembly. Closing tax loopholes and simplifying taxes worked for President Ronald Reagan in the 1980s. What happened to Virginia Republicans since then -- did they get a mass lobotomy?)

If car-tax relief is such a fiscal disaster, how come you want to accelerate the phase out?

You used a great line about the car tax phase-out as the tax break that "keeps on giving." Even though the percentage of car-tax relief has been frozen at 70 percent for the past two years, it costs the state $120 million more.

As Homer Simpson might have said: D'oh! Of course it costs more! Taxes have consequences -- so do tax breaks. If car tax relief lowers the cost of owning a car by $200 to $300 a year, people can afford to buy more expensive cars. When they buy more expensive cars, assessments go up, and the state has to reimburse localities for the lost revenue. There's virtually no upward limit to the state's liability!

You clearly see the flaw in this tax relief. ... Here, let me pour you another beer. ... So, why accelerate the phase out? As I recall, your logic went like this: A partially phased-out car tax leaves a major liability for future budgets so we might as well finish the job and eliminate the liability. But, as you also said, it's the tax break that keeps on giving. If the Commonwealth moves to 100 percent phase-out, taxpayers will have even more incentive to trade up to expensive cars, and the liability to the state will continue surging without let-up!

Meanwhile, to pay for your accelerated car tax phase-out, you want to increase other taxes! Do you really think it's a good idea to reward conspicuous  consumption -- the purchase of BMWs, Jaguars, Humvees and other luxury cars -- and punish initiative by creating a new tax bracket for "the rich," i.e. those making over $100,000 a year? 

(Memo to General Assembly leaders: The same question applies to you, too. What were you smoking when you passed that monstrosity?)

Does Moody's really want us to raise taxes by $1 billion? 

You've justified your tax package on the grounds that Moody's, the bond rating agency, has put Virginia on "credit watch" for a downgrade to its AAA bond rating. I agree: We can't let that happen. A downgrade would make it more expensive for Virginia to borrow money -- and it would signal the breakdown of bipartisan policies which, over the years, have give Virginia such a favorable business climate.

But what, exactly, do the Moody's moguls want from us? Do they want us to use fewer accounting gimmicks? Do they us to replenish our Rainy Day Fund? Or are they telling you that Virginia actually needs to raise taxes? You've been less than crystal clear on this point. ... Pardon my mumbling -- this pizza is really good. Have a slice? ... I'm betting that Moody's is not pushing for tax increases -- just for more honest accounting and a rapid replenishment of the Rainy Day Fund. (See Moody's responses to Paul Goldman's questions in "The Billion Dollar Scare Tactic," February 16, 2004.)

I like the way you sheepishly admitted to the GRTC that, as much as you hated balancing the budget with fiscal gimmicks, you didn't have any choice last time but to use a few -- but this year you were determined to get rid of them. Bravo. People loved that line. At the top of your agenda should be reversing the budgetary sleight of hand that made big retailers pay their July sales tax a month in advance so the state could collect a 13th month of revenue. Scrapping the rule, as you propose, will cost the state a one-time hit of $181 million, but most people will back you on it.

You're also right to put money back in the Rainy Day Fund. But, now that we're on the topic, what are you planning to do with the state surplus this year? According to your own numbers (See the Six Year Financial Plan, page 7), greater-than-forecast economic growth puts us on track for a $372 million surplus. You haven't mentioned any plans for that money. How about putting that into the Rainy Day fund? That would impress Moody's, don't you think?

Fixing the accelerated sales tax and putting a big chunk of money back into the Rainy Day fund should give ample assurance to bond investors. I can't believe that Moody's would insist upon more, especially with the economy and state tax revenues enjoying a healthy recovery.

Has the state really cut spending to the bone?

In your pitch for higher taxes, you've said that Virginia has already cut all it can cut. You've eliminated more than 50 agencies, boards and commissions, slashed 5,000 positions from state government and "produced significant savings through government-wide efficiency plans."

I don't want to denigrate your accomplishments, but I'd like to see a list of those 50 agencies, boards and commissions. I can't find it on the governor's website anywhere. As for cutting 5,000 employees from a workforce of roughly 150,000, that's not exactly causing massive trauma.

I'd like to know more about those "significant savings" from your government-wide efficiency plans. How big are those savings? Do you have any numbers? If you can't measure the savings, how do we know they're real?

Here's my take: Your efficiency reforms probably will save a lot of money -- in the future. You've done a great job, as Bacon's Rebellion has been almost the only media outlet in Virginia to report in any detail, restructuring $1 billion in IT spending, revamping the procurement process, setting up new systems for managing the state's real estate assets, and out-sourcing power production for state properties. Trouble is, those reforms don't achieve big efficiencies out of the starting gate -- it takes time for the savings to ramp up. The biggest economies probably won't be seen until after you're no longer governor. Doesn't seem fair, does it?

But the reforms should start generating tangible savings in the next two-year budget. I'm thinking you could cut costs by at least $100 million a year -- and that's conservative, given the estimates of what your Commission on Government Efficiency and Effectiveness deemed possible.

Here's my question: When you compiled your 2004-2006 budget, did you include those savings or not? You wouldn't be sandbagging us -- hiding $100 million in savings that you can pull out when you want to -- would you? ... Hey, don't get mad, I'm just asking. ... By the way, you're making nervous the way you're gripping that fork!

Good idea: Close the tax break for seniors!

Back when times were flush and the General Assembly was handing out tax breaks like candy, someone had the bright idea of giving every Virginian who turned 65 a $12,000 age deduction based on income. For taxpayers in the top bracket, that was worth $690.

As expensive as that giveaway is now, the cost will expand exponentially as tens of thousands of baby boomers start turning 65 each year. Federal taxes and expenditures are already wildly biased in favor of the elderly: Young people will be saddled with ever-mounting taxes to meet social-security and newly expanded Medicare obligations to the elderly. Thanks to Virginia's tax break for seniors, the same bias will exist at the state level, too.

Governor, your proposal to deal with this out-of-control liability seems like a reasonable one: Grandfather (pun intended) the seniors getting the tax break now, but phase it out for taxpayers yet to turn 65. I don't see how any fiscally responsible person could argue with you.

But here's my question. If the tax break for seniors is a bad idea because it represents an open-ended liability, doesn't that same logic apply to the car tax? If you're willing to eliminate the special tax breaks for seniors, why aren't you willing to convert car tax relief into a tax cut that doesn't hamstring Virginia fiscally?

You recommend closing one other loophole that deserves to be sewn shut: the so-called "Delaware holding company loophole." Twenty-one of the 50 largest corporate employers in Virginia pay no state income tax. Many use accounting tricks to shift profits to states that don't tax corporate income. I'm with you on this one: Level the playing field. The only thing worse than paying taxes is paying more than you should because some other SOB is using accounting tricks to pay less. This measure should save the state roughly $25 million to $30 million a year. 

Do we really need a general tax hike?

Everyone else has a tax plan, so why shouldn't I? Here are the core elements of the Bacon tax plan:

• Don't spend the $372 million surplus you project for the current, fiscal 2004 budget. Save it for fiscal 2005.

• Put the thumb-screws to your cabinet secretaries and make sure they deliver at least $200 million in biennial savings from streamlining government.

• Freeze the car tax roll-back, save $156 million over the next two years (and a lot more in future years). For the long term, convert the car-tax program to a more fiscally responsible way of delivering tax relief.

• Increase the cigarette tax, but not by 22.5 cents per pack. It's rude to stick it to tobacco companies so soon after Philip Morris USA relocated from New York to Richmond. Raise the tax 11 cents per pack instead of 22.5 cents. Philip Morris will be grateful, and you'll still pick up $140 million in new revenue over the next two years.

• Sew up the "Delaware holding company loophole" and bag $56 million over two years.

• Close the "seniors" income tax break, save $36 million over the two years -- and much larger sums in the future.

• That gets you to about $960 million. Pull from the grab-bag of tax loopholes noted above to round out the full $1.2 billion you need to fund your spending priorities.

Think about it, the Bacon Tax Plan leaves your spending priorities untouched. It preserves the AAA bond rating. It doesn't make any shaky assumptions about economic growth. It creates a simpler, fairer tax system all the way around. And it doesn't require wrenching structural reforms -- I didn't even mention the necessity of reforming our dysfunctional human settlement patterns. (See "Taxula Rasa," May 19, 2003.) Best of all, it contains no general tax increases. You'd be a hero!

... Pretty good, huh? ... Sure, I'd be happy to pick up the tab. I know how tough those expense-

account auditors can be....

-- February 16, 2004