Rebel With a Cause

Paul Goldman


 

White Men Can't Jump...
But they can cook -- books, that is. Goldman dissects Gov. Warner's tax plan, showing how all the fun stuff is front-end loaded, while the bad stuff comes after he's gone.


 

This Jewish boy must make a most Catholic confession: I have sinned today, father, for I have said most Virginians are not undertaxed by state government.

 

The current general fund budget mess was not caused by state income and sales taxes being too low, despite the "Virginia is a super low tax state" mantra we hear from so many in politics, academia, government, well-connected insiders, the NOVA and Tidewater business communities and the editorial boards of just about every major newspaper in Virginia.

If you don't want to see the Democrats win the governorship in 2005, 2009 or 2013, I will understand if you recoil at my sins and stop reading this column right now. Personally, I would like to see the Democrats win in 2005. But, apparently, no one wants to do the grunt work or analytical effort necessary to make it happen. 


If you read the press release from the governor's office announcing his "Commonwealth of Opportunity Tax Reform Plan", the first reason given in support of the proposal is this: "65% of Virginians pay less". This 65 percent number made me curious. Read the press release further, and you will find that 65 percent of Virginia taxpayers will "pay less in their overall tax burden."

 

If you read the press release from the governor's office announcing his "Commonwealth of Opportunity Tax Reform Plan", the first reason given in support of the proposal is this: "65% of Virginians pay less". This 65 percent number made me curious. Read the press release further, and you will find that 65 percent of Virginia taxpayers will "pay less in their overall tax burden."

"Overall burden," I said to myself. Interesting. The reporters I have spoken to were not shown a detailed analysis behind this figure. But it seems clear to me that Warner is basing this number on his promise, as stated in the press release, to "finally phase out the car tax by FY 2008." Counting the benefits from the final phase-out of the car tax -- a phase-out that's already on the books -- seems to be the only way to make the numbers work.

 

Using current dollars, moving from the current 70 percent phase-out to 100 percent phase-out will cost about $400 million in the first year and hundreds of millions more eventually.

 

Assuming my logic is right, the $400 million in car tax payments goes disproportionately to Warner's political base in NOVA and to certain other high-income areas where families have two late-model cars. In order to raise the money to pay for this new $400 million in payments, Warner is using primarily the sales tax and cigarette tax, the burden of which fall disproportionately on less affluent, largely rural Virginians.

 

This is one reason the Roanoke Times has called the Tax Plan "anti-rural." Indeed, the benefit from the 100 percent phase-out may fully offset the proposed higher income tax bracket for many high-income Virginians owning two late-model cars.

 

The whole car tax maneuver should be of interest to any Democrat, as should another plank in the governor's Tax Plan that gives a handful of the states wealthiest families $100,000 to $1 million-and-up windfalls by repealing much of estate tax. Several months ago, the governor was calling such windfalls unfair, unconscionable and unaffordable given our budget situation. Perhaps I am too sensitive to this issue, having led the fight, right here on Bacon's Rebellion to show the governor and senate Democrats that they needed to join me in blocking this give-away to the super rich.

 

The governor did join the fight, and he has cited his veto of the GOP Windfall plan as one of his major achievements at the 2003 General Assembly. So I guess we all can understand why the press release touting his Tax Plan says only that it "eliminates estate taxes for working farms and family-owned businesses" while neglecting to mention that he was actually eliminating the estate levy for 99 percent of the wealthiest families in Virginia.

 

Given the criticism the Warner Administration has directed at "Deficit" Jim Gilmore, the former governor no doubt will find it ironic that his car tax plan is apparently the linchpin to Warner's claim to allowing his successors to make his 65 percent claim.

 

These considerations prompted me to try and figure out how the administration is intending to game-play his Tax Plan push. What follows are based on my own logical deductions. I perceive three basic parts to the administration's strategy. The first is a "dot.com bust-era accounting play", a political version of the now SEC-banned maneuver akin to booking your costs as "revenues." The second part addresses a maneuver that appears to be unprecedented in Virginia history, but absolutely legal under the current state law regulating the new budget he will be submitting by December 20th if not sooner.

 

Finally, the third part is right out of Godfather 1, which inspired me to write the opening scene of Goshfather 1. For space considerations, we have put that in another story. Read it here.

 

White Men Can't Jump, but they Can Jump Start a Tax Plan

Tax plan strategies always start with the math, since the guy who gets to define the numbers usually wins the debate. Some say Finance Secretary John Bennett cooked up the following. Others say it has all the earmarks of former Democratic Majority Leader Dickie Cranwell.

Whomever gets the credit, he's no amateur, as he took a page right out of the telecom and dot.com bust era, when companies cooked the books to lure investors by padding top-line revenues to make things look better.

What alerted me was the claim in the press release saying the plan would "generate approximately $500 million a year in new revenue." Now, I might have let it go at that, but for a curious factor: A member of the press told me that Secretary of Finance John Bennett had not put out data documenting this claim.

If I had ever advised doing this to candidate Warner or candidate Wilder, they would have fired me.

So I asked myself: What was going on here?

Then, while jogging at the University of Richmond track, a thought hit me: Did the press release mean that the plan would net $500 million the first year, each year, or an average over a period of years? 

The more I thought about it, it seemed clear the plan netted more than $500 million in the 2004 FY budget, starting on July 1, 2004 and ending June 30, 2005. This is the key one for Warner, his last full budget year as governor, the one that generally leaves a lasting impression.

The sales tax increase will raise $800 million to $900 million in FY 2004, depending on various assumptions. The cigarette tax increase will basically offset the estate tax elimination in the beginning, but not after a while as revenue losses mount. The phase-out of the senior deduction starts later. I don't know what the data shows on the up and down moves in income tax brackets. Some have told me it is a net-revenue loser, others a net-revenue gainer.

But most important, the increased car tax phase-out doesn't really start until January 1, 2005, halfway through that budget year, since the taxes come due on
a calendar basis while the state budget is on a fiscal year basis. Given how the car tax reimbursement program works, the full cost of this phase out step will not be paid out of his 2004 FY budget.

Bottom line: John Bennett, Dickie Cranwell, whomever, has done his job and given Warner a lot more than $500 million to spend on his political priorities in that key budget year. Indeed, if you do the math, the huge cost of the final 100 percent phase-out does not hit until Warner is out of office -- that is to say,
until his successors have to deal with the budget.

 

Indeed, when we get another economic turndown -- and they always come -- the 100 percent phase out costs will grow much faster than the revenue from his extra sales tax revenue, as we know from the experiences the last few years.

Thus, by the time you get to Year Six under the Warner Tax plan, it is possible that most of the new revenue it raises will be consumed by the car tax phase-out, the estate tax windfall and the fact the real costs of these things have been historically underestimated when the promises were made. Indeed, the mushrooming structural deficit could easily get worse, not better, under this Tax plan if things don't go according to Hoyle.

 

Bottom line: Warner gets to play with all the new sales tax revenue, with most of the costs coming due in the outlying years -- after he's gone. Thus, the dot.com beauty of it all: the "new" revenue available at the start is purchased at a future cost: the cost of the full car tax phase-out, the escalating cost of the Estate Tax elimination, and of course the assumption that future General Assemblies actually will raise those taxes on seniors.

 

The governor's staff has said the boss' tax plan was aimed at making the tax code less archaic, and they have lectured us like children all these many months on that point, making us feel like dunces.

But what does the governor's tax plan do? Using his own definition, it makes our tax code more archaic, not less, raising another $800 million to $900 billion a year or so by increasing the sales tax 20 percent on that same narrow set of retail goods he said was 100 years out of sync with the times. Moreover, the Tax Plan, by the laws of the marketplace, create an even bigger disadvantage for Main Street merchants trying to compete with AOL and other online sellers. The plan will drive more Virginians to buy goods online -- not on Main Street where they can avoid sales taxes.

In the press release, the Governor's staff says the plan makes the "tax system more fair." This has been a mantra for months in their lectures to us unfair thinkers.

But how is the tax system more "fair" when you give the biggest tax breaks to the wealthiest Virginians by eliminating something the governor said made the system more "unfair" a few months ago? Indeed, how is the state tax system more fair when the Tax Plan further weds us to the Rube Goldberg scheme of raising
regressive state taxes so that we can then use this money to pay off a local tax bill by a scheme the governor has said was unfair for several years now?

Finally, this tax plan was supposed to deal with our mushrooming structural deficit. But given that the Tax Plan commits the state to 100 percent phase out of the car tax -- an open-ended commitment we already know is subject to continual increases as taxpayers game the system -- it can make the structural problems even worse down line because we are now obligated to this ahead of full funding of education and other priorities.

If You Spend it They Will Come
                 
Kevin Costner found his field of dreams in an Iowa corn field. Gov. Warner has found his in unprecedented action, the submission of a budget proposal based on his Tax Plan.

No one has ever tried this before. The law, 2.2-1508, defining the content of the Governor's budget submission, is broadly drawn. It suggests that the Warner 2004-2006 budget proposal should be based on the governor's "economic assumptions" leading him to make certain "revenue projections" relative to how much money the state will take in.

This may suggest his budget proposal should be funded only by existing revenue streams. But it doesn't say so explicitly. Thus, there is nothing to stop him from basing his budget on his assumption that the General Assembly will pass the tax he proposes, since the law also says the Governor shall prepare his budget to reflect his "proposed goals, objectives, and policies."

The political beauty of doing it this way is clear:

 

By including his Tax Plan in the document, he can put into the budget the new spending that would be possible on account of the new revenue.

Thus, the Governor gets to take credit among voters for the many hundreds of millions of dollars he is giving to education, social services, job creation, wherever he likes, plus offer the Windfall tax cuts to those very powerful families, many of whom will be funding what Warner says will be a multimillion-dollar "educational" campaign aimed at getting the General Assembly to see the light.

All the hype over the new taxes has the media and the pundits looking the wrong direction for Warner's big play.

Right now, it is a tax plan. But once he has a budget and can talk in specific terms about how much money he wants to spend on popular programs, the press curve figures to change and thus the public will perceive the whole issue differently. Or so goes the strategy.

As a political chess player, I've got to say this part of the strategy brings a smile to my face. But Speaker Howell and his allies may not be nearly so smiley, feeling it violates the spirit of the law.


Still, expect the Governor to campaign in all corners of Virginia touting the spending in his proposed blueprint.

This will be a first-ever such campaign in Virginia,  backed up by an unprecedented $2 million expenditure to "educate" voters, not pressure legislators. Having run a few statewide campaigns, I can tell you that $2 million dollars, if spent over the course of the next few months and targeted at certain Republican lawmakers, is going to create a situation unlike any in state history.

 

That wraps up our conventional analysis and sets us up for The Goshfather 1, an inside look at the coming

budget showdown.

 

-- December 1, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Paul Goldman, the Rebel With a Cause, was chief political strategist for the past two winning Democratic governors in Virginia and was credited with leading a "revolution in American politics" by The New York Times for his role in breaking America's 300-year-old color barrier in national politics.

 

You can reach him at GoldmanUSA@aol.com.