Koelemay's Kosmos

Doug Koelemay

Comfortably Numb

Until the pain emanating from under-funded state programs exceeds the pain of change, tax reform is doomed.

Those who have been beating the bushes for some details on state tax reform in Virginia flushed out only a covey of principles this week as Gov. Mark R. Warner met with the General Assembly’s newest tax reform committee. References at the Executive Mansion to cooperation, fairness, simplicity and modernization made things sound positive and possible, but glossed over the basic two-step that underpins fundamental change of any kind, particularly in an election year. Only when the pain of the present structure finally grows bigger than the pain and dislocation of change will comprehensive tax reform become even remotely possible. Only when that consensus emerges can experts get down to the brass tacks of what a new structure actually should look like.

Fortunately, the endless study habits of the Commonwealth have us all well prepped. Virginia has engaged in years of discussion on the principles of tax policy. Three years ago, for example, the Senate Finance Committee investigated equity (neutral across industries, proportional across income), reliability (sufficient, stable, permit rational plans), accountability (simple, open) and efficiency (low compliance and collection costs). No one argued with a straight face after that that the tax structure in Virginia today is fair -- familiar, yes, but not fair. Nor does any policy-maker claim it is simple or modern. Gov. Warner identified improvements in fairness, efficiency and economic opportunity as goals in his discussion this week.

Two years ago the Commission on Virginia’s State and Local Tax Structure for the 21st Century, a General Assembly initiative that included the Secretary of Finance and Tax Commissioner from the Gilmore administration, took the next step and suggested sweeping changes. The commission, for example, recommended dedicating six percent of the state’s annual individual income tax receipts to localities to reduce dependence on the local property tax, cutting exemptions to sales and use taxes, extending sales taxes to certain categories of services and equalizing city and county taxing authority. Gov. Warner reflected some of those ideas, too, in his remarks.

With clearly identified problems and well articulated reform proposals already out there, Virginians should have some confidence that tax reform is on the way. Wrong. Instead, they are left to wonder why there has not been any real progress beyond single-shot initiatives, such as extending the corporate income tax to foreign sources (succeeded) and repealing the estate tax (failed). The explanation is simple.

There has been no progress on tax reform because there is no consensus on the nature of the problem. Local governments understand how unfunded state mandates increase their local tax responsibilities, but citizens who think local property taxes are too high don’t think of unfunded state mandates at all. Consumers who are supposed to pay use taxes on remote purchases don’t think about how underpayments limit funds for education or transportation. Coalfield tax credit recipients don’t care that they are soaking up incentives that might better be used for technology business startups. And Virginia’s largest statewide business group apparently still sees “low taxes” as Virginia ’s most competitive message in the knowledge economy.

There also is no agreement on the severity of the problem. Pain, a sense and defense mechanism that signals damage is occurring and triggers remedial action, occurs at different thresholds for different people. Some policy-makers apparently feel perfectly comfortable walking on hot coals. Others can conclude that since the educational system is not collapsing everywhere, there are positive signs. Even $6 billion worth of revenue problems and budget cuts in the last two years didn’t hurt enough to prompt action on any of the comprehensive reform recommendations.

Reality to the contrary – deadly, overcrowded highways, price controls on Medicaid reimbursements, frozen enrollments at universities, crumbling public school buildings, state employee layoffs, unmet homeland security needs – tax reform has idled on a siding for years because the calls for change never have exceeded the cries of caution. What is the “revenue neutral” mantra attached to tax restructuring, if not an assertion that the pain isn’t very great? And statements, such as “Virginia has plenty of tax revenue and just needs to establish priorities,” can never produce a consensus on pain. They suggest, instead, only inconvenience of a temporary nature that requires only a discrete adjustment here and there.

The decisive discussion in the months ahead, therefore, will not be about tax reform measures, but about the level of pain in keeping the current structure. The executive branch and its newly formed informal working group that includes J. Alfred Broaddus, Jr., President of the Federal Reserve Bank of Richmond, and Dr. Stephen Fuller, professor of public policy at George Mason University, will thrust, parry and match sound-bites with the newly formed and conservative 10-member General Assembly joint subcommittee on recommendations. But the real work will be communications about the current tax structure. Does it hurt? How much? Where does it hurt the most? How much worse can it get how fast?

Somewhere between the extremes of “ Virginia is doomed forever!” and “What, me worry?” are the answers that political leaders and Virginians will adopt. The most responsible can hope that the facts and a 21^st century vision will dominate, but they know it’s a toss-up right now whether the majority of policy-makers see or feel enough pain to stop signing “no tax” pledges, much less overcome their own inertia. Unless leaders do see pain or feel it, Virginia will never get to step two – a reform package with equity, reliability, accountability and efficiency, and one that amplifies the cheers of those who may pay less over the cries from those who may pay more.

There remains, of course, the continuing danger that the policy doctors will choose again to apply political pain-killers to the affected areas without performing the corrective surgery. Illusions, like opiates, are a viable short-term response to problems. Damage to higher education, K-12, transportation and health care would continue, of course, but as Pink Floyd suggests, Virginia could become comfortably numb.

-- July 14, 2003