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:
-
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.
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
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