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Remarks
by House Speaker
Bill
Howell
to
the Virginia Chamber of Commerce Board
The
Homestead, Hot Springs, VA
October
31, 2003
Good morning, and thank you Randy [Lail] for that
kind introduction.
As
a former director of the State Chamber Board, I’m
delighted to be in the good company of so many
successful Virginia
business leaders. I’ve
been looking forward to being with you, and for this
opportunity.
As one who has worked hard for years as a legislator to
maximize the benefits of free enterprise and limit
government’s burden on businesses, I appreciate
what you and the entire Virginia Chamber are
doing to help maintain and improve Virginia’s
business climate. I’m
especially grateful for the Chamber’s leadership
within the business community
– encouraging it to speak with greater clarity on
those legislative issues that are truly vital to Virginia’s economic prosperity.
Of course, we may agree or honestly disagree, even
passionately, on individual issues.
But as I’ve indicated to Randy, Hugh [Keogh],
Steve [Haner] and others, this organization
will continue to be heard and respected as a voice
for Virginia’s progress.
Governing in the 21st Century
Since
becoming Speaker, I’ve made it a priority to reach
out and engage people across
Virginia.
To listen to the concerns of business
leaders, citizens and taxpayers. And to articulate the broad principles
motivating the majority party in the House, and our
strong commitment to moving Virginia
forward. That’s
what brings me here today.
Governing in the 21st Century requires new ideas, innovations, and focusing
clearly on the core responsibilities of state
government – which are public education, public safety and security, and helping
those who cannot help themselves. And the way
you pay for these and other services – like
transportation – is through a vibrant, growing
economy. Make no mistake about it: Respecting and
championing freedom, opportunity, and free
enterprise are at the core of the economic
prosperity we’ve accomplished, and the family
incomes and government revenues they provide.
Government
does have an important role in helping to develop a
state’s economic foundation.
Elected leaders can help, or hinder, the
fostering of a positive, pro-growth economic
environment in Virginia.
The critical test is whether government is
genuinely working to liberate individuals and businesses by
creating incentives for work, savings,
investments and success, which lead to a better
quality of life for us all.
As
a Republican leader, I’m very interested in
governing, and in advancing practical policies that
address the real-world concerns of Virginians.
This
summer and fall, a number of my House caucus
colleagues and I have been discussing a variety of
possible legislative initiatives, in such important
public policy areas as:
·
Health Care:
Health care costs for employees, employers,
and the Commonwealth have been rising rapidly –
making it difficult to plan for a better future.
Thinking long-term,
we announced in September three common-sense
alternatives to make the purchase of private
long-term care insurance more accessible and more
affordable.
·
Tort Reform:
We’re looking for common-sense improvements
that will help businesses focus on creating jobs,
rather than fighting frivolous lawsuits – which
are driving up insurance costs for workers and
businesses.
·
Economic Development:
Finding ways to reinforce economic growth is
always a priority for Republicans.
In these challenging times, especially for
folks in Southside and Southwest
Virginia, we’re looking at reforms
to promote the health of Virginia’s
manufacturing base, and streamline government
regulations and compliance burdens.
Education improvements. Government
reforms. Privatization
and public-private partnerships.
All
of these are just a few of the real issues and
priorities that Virginians care most about, and
which House Republicans are focusing on.
We
want to find better ways to make state government
more efficient for taxpayers, and
more effective for all of the citizens it
serves – now and always.
As
I look ahead to Virginia’s
future, I’ve become convinced of two things:
First,
important decisions will be made in the 2004 Session
of the General Assembly that will shape the economic
future of our Commonwealth;
Second,
in the ongoing discussion of tax and fiscal policy,
reform efforts should focus on these primary issues:
Ø
How to get the state’s
economy growing again; and
Ø
How to make sure local
governments share in the growth revenues in coming
years so they
can meet pressing education and other needs without
local real estate tax increases.
Successfully
addressing these primary issues will mean greater
financial security for Virginia’s
working families, and much desired fiscal stability
for state and local governments.
In various ways and settings, you’ve been advocates
for pro-growth fiscal and regulatory policies.
I hope – and ask – that each of you help me and others champion
these two important issues.
For this message needs to be heard in the
current debate over fiscal reform in our
Commonwealth.
States
Can’t Tax Their Way Back to Prosperity
Tax
reform ought not be considered in a vacuum, and it
isn’t. Ongoing
discussions come in the wake of the economic slump
in 2001 and 2002, and the tepid recovery in the
first half of 2003.
The
unanticipated economic downturn meant that state and
local government revenues fell far short of their
projected levels. As
we all know, the result has been a challenging but
necessary, and ongoing, adjustment to fiscal
reality.
Fortunately,
we’re seeing signs that the economy is recovering.
For
example, the most recent government statistics show
that employment is starting to grow slightly and Virginia’s
unemployment rate has dropped to 3.8%.
Further,
revenues for the state’s general operating fund
for the months of July, August and September 2003
grew by 8.4% over the same quarter last year –
dwarfing the state’s official estimate of 4.6% for
the current fiscal year.
Of
course, one quarter does not make a year.
But, here again, the latest economic signs at
both the state and national level are encouraging.
So,
where does Virginia
go from here?
Common
sense dictates that we should be guided by sound
economic principles, and a review of the historical
performance of the
Virginia
economy.
All
Virginians, our families and businesses deserve
nothing less from elected leaders, given our
responsibility to be fiscally sound stewards of
state government and taxpayer’s hard-earned
dollars.
Professor
Mark Crain of
George
Mason
University, an expert on economic policy and author of
the recent book, Volatile States, got a head
start by taking stock of
Virginia’s present circumstances.
Here are a
few especially relevant points from Professor
Crain’s cogent analysis.
·
Since
1970, the typical Virginia
resident has experienced an annual growth rate in
inflation-adjusted personal income of 2.85%.
This is the fourth-fastest income growth
among the 50 states.
· In 1970, Virginians ranked 30th among the 50
states in terms of personal income per capita. By 2002,
Virginians had moved up into 11th
place. No
other southern state came close to Virginia
by this common gauge of living standards.
In practical terms, this stellar performance
meant that within one generation, Virginians’
standard of living almost doubled.
· Also, he states that
policy-makers should avoid the temptation to tax
our way out of Virginia’s
fiscal problems at the real risk of disrupting
long-term growth and stability.
Rather, a healthy economy will solve the
fiscal crisis as the tax base expands and the
nation comes out of the hesitant recovery.
Professor
Crain concludes:
· Virginia’s
penchant for a low, flat and stable tax structure
provides a constructive environment for business
investments, job creation, and rising living
standards. This
conclusion is backed by the historical evidence
and informed by sound economic principles.
Now,
in contrast to Professor Crain’s findings, much of
the discussion of tax reform to date has generally
fallen into one of two categories:
–
First, there are some who
believe that we need a major tax increase here in
Virginia, and who envision significant revenue
increases coming out of any tax reform effort.
–
And then, there are those who
believe we have an “antiquated, agrarian tax
system” here in Virginia, and who want to
completely revamp it, perhaps in a revenue-neutral
way.
I
respect both points of view.
But many
of us in the General Assembly – and others in the
business community and beyond – believe
both of these points of view are failing to
recognize some central facts.
Those who want to increase taxes to pay for new programs
– or to correct the current structural
imbalance in the state budget – or both, are
overlooking a basic economic reality.
We
cannot tax our way back to prosperity and fiscal
strength.
In fact, increasing the tax burden on working families and
businesses is exactly the wrong policy for
promoting economic growth.
Likewise,
those who say Virginia’s state tax code is
antiquated and who want to completely
re-engineer it also are overlooking several
things.
Just
a few years ago, for example, this same tax code was
producing unparalleled revenues.
Many, from
the bond rating agencies to our own state economic
development agency, were touting Virginia’s
balanced economy and the corresponding tax revenues
it produced.
The tax code that worked so well just a few years ago did
not suddenly become dysfunctional.
What
happened was our economy stopped growing.
And
that is what policymakers need to focus on
correcting.
Of course, that’s not to say that we do not need to fix
some things. Where
we can, we should. And,
I think we will.
But
I believe the most serious and continuing structural
imbalance Virginia faces is that of the state and
local relationship.
Now,
I’d like to hone in on some of these points in
more depth.
Heeding
Lessons Learned from the 1990-91 Recession
In
the early 1990s, during the last recession, the
discussion of raising taxes sounded much like
today’s tax debate.
In fact, we are hearing many of the very same
arguments again.
But
the governor at that time – Governor Wilder –
closed the door on tax increases because he said
higher taxes would make it harder for our state
economy to get growing again.
He
was right. And
many of us on the Republican side supported him
across party lines.
In
resisting tax-hike pressures a decade ago, Virginia
was among a minority of states.
It was not easy at the time.
But it was the right policy.
And it paid handsome dividends for the
remainder of the 1990s.
The
American Legislative Exchange Council (ALEC)
released a white paper about this time last year.
Their analysis examined how the overall level
of taxes at the beginning of the last decade
affected the rate of economic growth and job
creation – and, by extension, state budget health
– in the 50 states over the subsequent 10-year
period of 1990-2000.
The
study looked at fiscal and economic circumstances in
states, and categorized which states raised taxes in
the early 1990s, and which did not.
ALEC
documents that states – like Virginia – that
avoided tax hikes during the last recession
experienced stronger economic growth during the
remainder of the ‘90s than states that raised
taxes.
In
sum, the ALEC white paper finds that “the fiscal
lessons of the 1990s confirm nearly two decades of
academic research:
·
State tax policies can have a
profound impact on the relative economic
performance of the states.
·
States
with low and falling tax burdens outperform states
with high and rising tax burdens.
·
Most importantly, however,
states that attempt to balance their budgets with
higher tax rates are likely to lose jobs and lose
businesses – and thus create even larger,
long-term structural deficits.”
In
addition to the benefits highlighted in the ALEC
study, Virginia’s experience in the 1990s also
proved that a growing economy will produce abundant
public revenues.
In
fact, our state budget nearly doubled in the last
decade – without a tax increase – because we
held the line against tax increases during the
economic downturn that opened the 1990s.
Whatever
you think of the doubling of the state budget in the
1990s, higher taxes did not make it possible.
Higher
taxes likely would have made it impossible.
The
same is true as we look ahead.
Honestly,
I don’t know how much the economy will really grow
in this decade and beyond.
And,
I don’t know how much of a spending increase we
really will need in Virginia over the next 10 years.
That’s something that the Governor and
General Assembly will work out in the budget process
each year – with the input
of the people of Virginia, through their decisions
at election time, and through their participation in
the public policy debate.
But
what I do know is this: We’re going to have a balanced budget in
Virginia.
And
we’ll have more resources to spend on the core
services state government provides if we heed the
lessons of the 1990s by holding the line against
higher taxes than we will have if we reject the
lessons of the 1990s and try to tax our way to some
sort of budgetary nirvana that some are hoping to
somehow attain.
In
the coming weeks, I suspect we’ll hear that a
major tax increase is the only way to cure the
state’s “structural imbalance.” No doubt, soon we’ll see easels with big
charts, colorful graphs, and complicated tables –
all designed to convince the people of Virginia that
unless they feed state government
more, state government will starve; that unless they
raise taxes, vital needs will go unmet.
The
fact that Virginia’s budget doubled during the
1990s is reason enough to seriously doubt the
argument of those who now say we cannot meet our
state’s needs without raising taxes and spending
still more.
Raising
taxes would obviously make it easy to balance
Virginia’s budget – in the short term.
But,
the price of that short-term benefit will be
long-term detriment to our state’s economy and
revenue growth.
Higher
taxes would mean more hardship for working families,
who already face financial pressures and an
uncertain job situation.
And
increasing the tax burden on businesses would
discourage plans for new investments and hiring.
It’s
a lack of prudence and foresight to think that we
will “solve” the current structural imbalance in
our state budget by imposing higher taxes.
Simply
put, higher taxes will shrink the tax base and
compound the state’s fiscal woes.
It
is for these principled and experience-based reasons
that most Republicans in the House and Senate –
and many more Virginians across our state – reject
calls for tax increases.
We
think it is the wrong medicine at the wrong time.
So,
I urge Governor Warner to abandon any plans to
increase the overall tax burden when he submits his
tax reform recommendations after the November 4
General Assembly elections.
Modernizing
Virginia’s Tax System
I
said a moment ago there were two main points of view
about tax reform. I’ve
offered my thoughts on what a mistake it would be to
use tax reform as a vehicle for increasing the
overall tax burden.
Now,
I’d like to say a word or two about the other
notion: that
discontent and impatience with the immediate fiscal
picture is leading some to argue that the Virginia
tax code is ill suited
– from top to bottom – for today’s
economy.
As
we consider the possibility of completely revamping
Virginia’s “old, antiquated and
agrarian” tax code, I can’t help but
recall the admonition: “If you think the problem
is bad now, just
wait ‘til they fix it.”
I
have no doubt that our state tax code – like any
human-made system – can be improved.
Let
us not forget, however, that the legislature has
acted and has made beneficial changes to the tax
code.
You’ll
recall that the General Assembly formed a tax reform
commission in 2001 and worked diligently throughout
2002.
In
the 2003 Session, the legislature went forward with
a package of proposals to improve Virginia’s tax
policy and encourage economic growth and job
creation.
A
number of these positive initiatives are now law:
·
We restored most of
Virginia’s conformity with federal income tax
law – a high priority of the Virginia Chamber of
Commerce and other business groups.
·
We adopted a moratorium on new
sales tax exemptions for charitable organizations.
·
We eliminated the requirement
that income tax payers pay the tax before going to
court to contest an assessment.
This is just one of several other positive
changes we made to the administrative appeals
process for income taxpayers.
·
And we made the personal
property tax fairer by clarifying the procedures
and standards of proof for taxpayers.
Many taxpayers simply paid the tax, rather
than fight city hall because the old burden of
proof was so difficult to overcome.
The
General Assembly earlier this year also
overwhelmingly passed legislation to phase out the
death tax, which falls hardest on Virginia’s small
businesses and family farms.
Unfortunately, this pro-job and pro-growth
legislative initiative was vetoed.
Still,
I remain confidant that other improvements can and
will be made.
But
this idea that Virginia’s tax code is some old
song from days gone by – that it should go the way
of the phonograph or the 8-track tape – is simply
not supported by the facts.
The
Virginia tax code has been amended and updated in a
host of ways under governors and legislatures of
both parties.
Hundreds
of amendments – large and small – have been made
to the tax code in the last two decades alone.
Within
just the last two years, commentators from outside
and inside our state have recognized Virginia’s
balanced economy and the corresponding state tax
revenues it generates.
Financial rating service agencies consistently note the
relative “strength and stability” of
Virginia’s “broad, diverse economy,” which
generates revenues for families, businesses and
state coffers. And, as GMU
Professor Crain has pointed out in his book, at the
state level, our mix of individual and corporate
income taxes, sales taxes, and other levies –
while not perfect – does a pretty good job of
spreading the tax burden fairly across the economy,
and producing revenues for government as the economy
expands.
In
other words, the fiscal principles that fostered an
environment for enormous progress in the past are
now regarded by some as obstacles to progress –
impatiently to be brushed away and scrapped –
rather than as conditions for the preservation and
development of what Virginia has achieved over
several decades.
Improving the State & Local Government Relationship
The
size and extent of reforms to Virginia’s tax code
can – and will continue – to be debated.
But
while many today are preoccupied with a wholesale
reinvention of our state tax code, the legislative
and executive branches ought to be working together
to enact long-term reforms that will remedy the most
pressing structural imbalance facing Virginia today
– which is the imbalance between state and local
resources and responsibilities.
Specifically,
I believe that the Governor and General Assembly
should consider two long-term strategies for
relieving fiscal pressures on local governments:
Ø A state-funded program to
address mounting local school construction and
renovation needs, or
Ø A sharing of state income tax
revenue with localities.
The
problem essentially is that a combination of
constitutional features distinctive to Virginia –
plus state policy decisions – have placed local
governments in an untenable position.
Simply
put, localities have too many responsibilities and
too few resources. Numerous
commissions and studies have amply documented this
conclusion.
This
imbalance ought to be – and is – of tremendous
concern to many of us. Why? Because
it is at the local level that the primary burden
falls for the education of our children.
Because
of their dependence on property taxes, local
governments did not experience sharp revenue growth
in the 1990s – even though state revenues almost
doubled.
Unless
we make reforms now, local governments will not
participate in the impending economic recovery.
Local governments will continue to face
mounting fiscal stress – especially from new
school construction, renovation and repair needs.
And that will result in continued pressure
for higher local real estate taxes.
As
a student of history, I believe in learning from
history. With
the advantage of hindsight, the Virginia General
Assembly should establish long-term policies that
restrain recurring state spending and systematically
invest in needed infrastructure – especially new
school construction, renovation and repair of aging
school facilities, and technology related
infrastructure.
Investing in infrastructure – such as schools – lays a
foundation for future progress and prosperity.
Last
year, the General Assembly proposed, and the voters
overwhelmingly approved, a major bond issue for
higher education. It
was long overdue. And
I supported and worked for its passage – as did
many of you in the business community, among others.
A
state policy of investing in K-12 education
infrastructure could be modeled on the legislation
we approved two years ago for Virginia’s
outstanding system of public colleges and
universities. That
program combined bond-financed capital expenditures
with a long-term commitment to sustained capital
investment as the economy starts to generate revenue
increases again. And,
it allocated 2% of projected general fund revenues
to higher education capital construction and
renovation.
Because
of concerns about the Commonwealth’s bond rating
and the immediate need to remedy the state budget
imbalance, the time is not right to approve a bond
issue for K-12 education.
When
circumstances permit in the next year or two,
however, we should restore Literary Fund resources
– currently going to help weather the current
downturn – and use them to leverage significant
bond-financed investments in our public schools
through the Virginia Public School Authority.
There
also is merit in the idea that those resources
should be combined with cash investments – using a
dedicated portion of revenue growth – to create a
fund to assist local school construction and
renovation. And
that fund could include incentives for local
investment, regional collaboration, and leveraging
of private resources through public-private
partnerships.
Some
may say this kind of policy does not address
immediate needs.
But experience has shown that unless we plan ahead and put
prudent, long-term policies in place, spending
pressures will gobble up available resources as soon
as they appear.
A
long-term K-12 capital investment policy for the
Commonwealth would address several pressing
priorities:
Ø
It would put state dollars
where they are needed most – in education, which
is the top priority that everyone agrees on.
Ø
It would ease the taxing
pressure that localities face.
Ø
And, as the economy starts to
heat up again, it would help ensure that recurring
and discretionary state spending in the base
operating budget is restrained – thereby
lessening the temporary budget imbalance that
inevitably occurs when bust follows boom.
Another
alternative option that should be considered is a
state income tax revenue-sharing program.
For example, when income tax growth revenues
rebound, begin growing steadily, and reach a certain
level, then a portion of that revenue growth could
be shared with local governments.
There have been numerous proposals along this
line, but none has passed.
I
simply do not see the degree of focus on this issue
coming from the Governor or from the Tax Reform
Commission that I believe is appropriate and
required.
Moving Virginia Forward
Of
course, I cannot foretell the final outcome of this
important and ongoing debate.
But, I
can and do pledge here today that I will do
everything in my power, as Speaker, to ensure that
the public discourse is conducted with
civility and mutual respect.
Tax
reform should not mean increasing the overall tax
burden or trying to reinvent our entire state tax
code.
Sensible
tax reform should include reductions in taxes that
are restraining economic growth, and
adoption of long-term policies – such as a
state-supported school construction investment
strategy – that will remedy the structural
imbalance between state and local government
resources and responsibilities.
I
respectfully urge Governor Warner to give these
viewpoints – shared by many in the House, the
General Assembly, and people across our Commonwealth
– the serious attention they merit.
In
the 2004, the General Assembly will strengthen
Virginia’s long-term fiscal management and fiscal
health if we commit to:
Ø
pro-growth
tax policies;
Ø
restraints
on discretionary state spending; and
Ø
sustained,
long-term investment in needed educational
infrastructure that is essential for the creation
of a climate conducive to new business investment,
development of a top-flight workforce, and
provision of career opportunities for our citizens
throughout their lifetime.
The
time is now to show the rating agencies, investors,
local governments, you in the business community,
and taxpayers that we are serious about long-term
capital investment in our schools, that we are
serious about relieving the fiscal pressures on our
local governments, and that we seriously understand this economic truth:
to grow Virginia’s tax base, we must grow
our economy.
I’m an
optimist at heart. So
that’s why I see today’s challenges exceeded by
the enormous potential of Virginia’s future.
Thank you for your attention and interest. Together, we will move Virginia in the right
direction.
--
November 3, 2003
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