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Does Vlad Have the Right Idea?

Posted on January 25, 2012 by Peter Galuszka| 10 Comments

By Peter Galuszka

As conservatives argue about cutting deficits and keeping low taxes for the rich both in Virginia and nationally, a bigger question is coming up: does Vladimir I. Lenin actually have the answer?

Sounds strange, I know, but not if you read Britain’s center-right weekly business newsweekly, The Economist. In a leader titled, “The Rise of State Capitalism,” they note that the success of state-private economies in China and Singapore, countries such as Brazil and South Africa are flirting with the idea of turning back some of their privatization work and going more with state-owned companies.

As the magazine states: “With the West in a funk and emerging markets flourishing, the Chinese no longer see state-directed firms as a way station on the way to liberal capitalism; rather, they see it as a sustainable model.”

Also underscoring the success of state-influenced economies is a recent and startling Brookings Institution report that rates 200 global urban areas for their economic performance. Shanghai leads the list, followed by cities in Saudi Arabia, Turkey, India and more in China. None is an example of traditional, U.S.-style market capitalism.

Indeed, you have to go pretty far down the list, to spot 19, to find the first U.S. city, which is Houston and that’s all petroleum money. Washington is No. 134. We don’t even get to the Old Dominion until No. 159 and Virginia Beach. Richmond is a stunningly bad No. 191, beating out only comatose Sacramento among U.S. cities.

The study should be a wakeup call to Baconauts and Boomergeddons everywhere that maybe they are barking up the wrong tree. Or maybe, even worse, they are completely clueless. At Mr. Jefferson’s Capitol, legislators are playing shell games with budgets to make Mickey D. McDonnell seem like a modern, Republican governor worthy of a vice presidential run. And, we’re screwing around with public private partnerships such as the massive U.S. 460-area highway to give private biz a cut and let them toll the crap out of the rest of us for years — all in the name of Margaret Thatcher and Ronald Reagan who left the scene more than 20 years ago.

While budget hawks complain about the big bad government and public spending on such things as social services and infrastructure, their beloved model is fading into the dust bin of history. I’m no China expert, but I, like everyone, was taken aback by the modern, efficient cities of Shanghai and
Beijing when I visited in October. Unlike the U.S., transportation was clean, efficient and hassle free.

Of course, The Economist must stay true to its OxBridge roots and come out warning that state capitalism with a big spoon of Asian Mandarin sauce might not be the best strategy for the West. But the trends are jolting and deserve a look.

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Posted in Budget, Demographics, Economic development, Economy, Finance, Infrastructure, Labor & workforce, Planning, Taxes, The Economy, Uncategorized

A Modest Proposal to Reform Tax Expenditures

Posted on January 19, 2012 by James A. Bacon| 2 Comments

Del. David Englin, D-Alexandria, has submitted a bill that would require any new legislation establishing or increasing tax loopholes (credits, exemptions, deductions, etc.) to expire within five years.

Tax expenditures, as I have long argued, are out of control at both the federal and state level. Englin’s bill represents a modest step to reining in this monster. The delegate clearly understands the issues at stake, and I wish only that he had gone further.

Tax expenditures, he writes in today’s Times-Dispatch, deprive the state of $12.5 billion in annual revenue (2008 figures). Eliminating the loopholes would free up resources to reduce tax rates (my preference) or boost spending in critical areas. A majority of the tax expenditures run on auto-pilot with little or no legislative oversight.

Englin has personally resolved not to vote for a tax preference unless it includes a sunset date and “a requirement that the Department of Taxation report the intent of the policy and how much revenue it cost” — information legislators need in order to weigh costs and benefits. He should make that second requirement the subject of a second bill, and he should apply it to all tax preferences, not just new ones.

– JAB

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Posted in 2012, Taxes

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The Dangers of Creeping College Privatization

Posted on December 26, 2011 by Peter Galuszka| 14 Comments

By Peter Galuszka

Virginia residents have long enjoyed a special advantage with higher education. Tuition at some of the country’s best-rated public universities — the University of Virginia, the College of William and Mary and Virginia Tech — is relatively modest. The schools offer a great deal for parents and students compared with nationally ranked private colleges.

But this advantage is unraveling. The process began seven years ago, when the General Assembly agreed to a deal whereby it would pay not as much for top public universities. In exchange, the schools would get more autonomy, including more freedom to set their own tuitions, capital spending programs and curricula.

The result? A creeping privatization that threatens to undermine the very
advantages that make Virginia’s top public schools what they are.

To be sure, state education bureaucrats and legislators call it not “privatizing” but “restructuring.” This euphemism means the schools will
gradually demand tuition closer to what is charged at the top national, private institutions but won’t have to go through the hassle that true privatization would entail — such as the selling of public property and making good on repaying decades of public investment.

There is some logic to this approach: If Virginia’s elite public colleges
start approaching market rates for tuition, the thinking goes, state money could be freed up to spend on lesser institutions. More financial-aid money would become available. The state could use those resources to reach for its goal of 100,000 more students earning degrees. Since 2005, when the concept was formalized in General Assembly legislation, Virginia Commonwealth University added itself to the list of schools willing to trade funding for autonomy.

The same year that “restructuring” was approved, John T. Casteen II, then the president of U-Va., announced an ambitious campaign to raise $3 billion through fundraising. Most of that has been collected, although the effort to raise so much private money at a public school raised eyebrows. More recently, Taylor Reveley, president of William and Mary, proposed
bringing his school’s tuition levels to market rates, which, for a nationally rated private institution, would be about $45,000 a year for tuition, room and board. Out-of-state W&M students now pay $44,854 a year, while in-state students pay $22,024.

Reveley notes that Richmond provides only 13 percent of W&M’s funding,
which is way down from the 43 percent of 30 years ago. This trend has been even more pronounced at other elite Virginia public colleges. At the University of Virginia, the state pays less than 8 percent of what the school needs. At Tech, the process has been slower. In 2000, the state provided 58 percent of the school’s needs; today it’s 28 percent.

Reveley argues that if more in-state parents or students paid full freight,
then his school could offer more generous financial-aid packages to middle- and lower-income students. He also believes that as top schools become more self-sustaining, a second tier of Virginia schools could be given more state funding and raise their own academic standings. These would include Old Dominion, George Mason, James Madison, Radford, Longwood and the state’s community college system.

But there is cause to worry about this argument. At present, many complain that lower-income Virginians have been forced to compete with an increasing number of deep-pocketed out-of-staters, whose higher tuition helps to balance the schools’ books. As those schools look to capture more revenue via in-state tuition, they will face strong incentives to accept a greater portion of in-state students with the means to pay all or most of their own way. And even with increased aid, worthy but less affluent students will confront barriers. Some will simply opt for less expensive, less competitive schools; others will emerge from school more deeply in debt.

Such an uneven playing field is contrary to the spirit of a state-funded
higher education: Why should a kid from affluent Fairfax have a better chance at attending U-Va. or W&M than someone with the same grades and test scores from Big Stone Gap?

I’ve noticed this kind of elitism beginning to appear in “Virginia” magazine,
published by the school’s alumni association. Its pages are filled with four-color advertisements hawking multimillion estates mostly in blue-blood
horse country. The message that’s suggested? “If you can’t afford these kinds of properties, then maybe you don’t belong at Mr. Jefferson’s University.”

Privatization is thought of by Virginia conservatives and even some moderates as a panacea for addressing the state’s budget woes while adhering to the state’s dominant anti-tax ideology. Tax hawks, for instance, constantly dodge the need for higher taxes to pay for highways by tossing the problem over to public-private partnerships. But applying the same thinking to public higher education risks undermining the very purpose of such institutions — building the highly educated middle class needed to keep Virginia competitive nationally and globally.

A straight sell-off of state schools isn’t likely. What is possible, says
James Alessio, chief of higher education restructuring at the State Council for Higher Education, is a steady series of tuition hikes in the 5 to 7 percent range. “Within maybe 40 years, you’ll see tuition at the public schools go to $40,000 or $50,000,” he told me.

Once that happens, the stealthy, half-privatization of Virginia’s academic
jewels will be complete, and probably irreversible. One possible solution comes from the University of California at Berkeley, which announced this month that it will cap tuition at 15 percent of what “middle class” families make, defined as $80,000 to $140,000 a year.

Virginia could try something similar. Otherwise, on its current trajectory, the state is fast moving toward a two-tier public college system heavily based on income — the exact opposite of what public higher education is supposed to be.

First published in The Washington Post

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Posted in Budget, Children and families, Economic development, Economy, Education (higher ed), Politics, Taxes

Tagged goozeviews

Merry Christmas, Amazon.com!

Posted on December 24, 2011 by Peter Galuszka| 4 Comments

By Peter Galuszka

Christmas, regretfully, is forced, propagandized consumerism under the guide of market capitalism, albeit in new forms. One is digital sales, of which Amazon is dominant.

Amazon also is about to become a big player in Virginia since it will open distribution centers in Chesterfield and Dinwiddie that will cost $135 million and employ 1,350. Gov. Robert F. McDonnell announced the projects with great flourish. Typically, the Richmond Times-Dispatch played its role as McDonnell’s personal “Pravda” and bannered the news to make us all understand just what a great jobs magnet our photogenic governor is.

To its credit, however, the RTD did break some news. It turns out that Amazon, which is getting $3.5 million from the Governor’s Opportunity Fund and $850,000 from the tobacco fund, will not be required to pay any states sales taxes on the goods its ships to Virginia customers from the two centers.

If you are a traditional, non-digital retailer, you will have to continue charging and paying the usual 5 percent sales tax. You may be competing for the same market with Amazon (2010 sales of $34 billion) but Amazon automatically gets a 5 percent advantage. That, dear shoppers and taxpayers, is Bob McDonnell’s idea of free and unfettered market capitalism.

To be sure, very few states charge a sales tax on goods traded over the Internet. The rationale was, back in the 1990s, was that the Net was waaay too cool to tax. The guys who developed it are waay cool types with a 60s hippie bent, like Bill Gates of Jeff Bezos, and if you make them play by the usual rules, well that’s like, soooo Old Economy. Everyone bought into this nonsense, especially George Allen who lobbied not to tax anything on the Net.

Of course, a lot of these Net heros are really conservatives or libertarians who don’t wear neckties. They are not out for the betterment of mankind, rather the betterment of their bottom lines. Meanwhile, routine mortals, such as journalists like me, have seen our free lance pay plummet because we are forced to accept far less or nothing at all for our content posted on the Web rather than in print. Anyway, that’s my private hell.

This kind of “The Net is Sacred” thinking is McDonnell’s excuse to land needed jobs. No argument about the need. Dinwiddie is mostly rural and can use jobs. Chesterfield has an imbalance of too many subdivisions and not enough industry.

The hypocrisy of the McDonnells is that while they play free market and tight budget and stick it to the schools and retirees and Medicaid recipients, they have no trouble handing out goodies to big firms like Amazon, that have no trouble taking care of themselves. Other states seem to be driving tougher bargains than Virginia. Tennessee got a similarly-sized distribution center from Amazon but also starts getting its sales tax from Amazon in 2014.

Also, it’s not as if big distribution centers are unheard of in Virginia. Back in the early part of the past decade, China was exploding with exports of consumer goods. Hampton Roads was booming. Mid-Atlantic distribution centers were going up from Suffolk and others spots for Wal-Mart, QVC, Target and other big box, mass retailers. I believe they did have to pay the 5 percent sales tax. Of course, the recession cooled that trend and Hampton Roads is stuck with the big box centers while competitors like Baltimore and Savannah eat Virginia’s lunch with other cargo. That’s another story, however.

Among the groups rightly angry with the big Mickey D are members of Richmond’s Retail Merchants Association, who still have to pay that pesky 5 percent sales tax. “The bottom line is that we just want a level playing field,” says Nancy C. Thomas, the group’s CEO and president.

Well, not in Virginia and not with Mickey D.

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Posted in Budget, Economic development, Economy, Finance, Regulation, Taxes

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A 21st Century Revenue System for Virginia

Posted on December 21, 2011 by James A. Bacon| 26 Comments

Click on graph for more legible image.

by James A. Bacon

Virginia faces long-term budget stress due to a slow economy and an outdated tax structure, contends Sara C. Okos, policy director of the Commonwealth Institute, in the latest edition of the Virginia News Letter. “What Virginia needs,” she says, “is a 21st century revenue system for a 21st century economy.”

Okos makes a number of valuable points in this analysis, which renders it worth reading despite its chosen focus on the revenue side of the equation. Needless to say, any budgetary analysis is incomplete if it ignores the dramatic spending increases that preceded the 2007-2008 recession. But one can say only so much in a 14-page publication, so I’ll set that objection aside for the purpose of exploring her revenue-enhancing ideas.

Individual income tax. The state income tax has lost whatever progressive attributes it once had when last updated in 1987. The top tax rate — 5.75 percent — kicks in for taxable income over $17,000. Median income is much higher than it was a quarter-century ago, with the result that more than 60% of Virginia taxpayers pay the top marginal rate. If the top tax bracket had been indexed for inflation, it would be roughly $33,400 today.

Her analysis is indisputable. Her conclusion misses the mark. “Virginia,” she says, “would benefit from altering its individual income tax brackets and rates to reflect the realities of today’s modern economy, demand for public services, and income distribution in the state.” Translation: Make the tax code more progressive. If your goal is making the rich pay their “fair share” (however you define “fair”) then maybe so. If your goal is a stable source of tax revenue, then not. One thing we’ve learned about progressive tax rates in the federal government and state governments like California is that they bring in loads of money when they economy is booming but revenues collapse when the economy slows. Why? Because the income of upper-income Americans is much more volatile.

Sales tax. Two broad economic trends are limiting the take from Virginia’s sales tax, says Okos. First, the sales tax applies only to goods, yet consumer spending is growing more rapidly for services. The majority of states with a sales tax apply the tax, on average, to 40 of 168 potentially-taxable services. Virginia taxes a mere 18, including such blockbuster categories as diaper service, gift-wrapping and tuxedo rental. Secondly, federal law forbids the taxing of Internet sales, which now exceeds more than 4.0% of total retail sales.

Taxing a broader array of services could net the state as much as $900 million annually. Among the advantages, Okos notes: “Bringing services into the sales tax base could reduce the year-to-year volatility of sales tax collections.” Good point! She should think about applying the same principle to her analysis of the income tax. She makes one other interesting point. Taxing services is more “equitable” because the rich spend a larger percentage of their income on services than goods, while the poor spend a higher proportion on goods than services. If your goal is to increase the progressivity of the tax code, this is a better way to do it than increasing the income tax rate. Better it is to tax consumption (the sales tax) than hard work and success (the income tax).

One more note: If we expanded the sales tax to services, I would recommend using the resulting income to reduce some other tax — not to increase spending.

Corporate income tax. Virginia’s corporate income tax stands at 6%. The share of total tax revenue paid by corporations has declined by half since the 1970s. Part of the problem, says Okos, is that a big majority of corporate income tax collections (87 percent in fiscal 2006) are paid by multistate corporations with subsidiaries in different states. These corporations shift income between states to take advantage of jurisdictions in which taxes are lower or where corporations aren’t taxed at all. One possible remedy might be to make Virginia’s corporate tax rate more competitive by lowering it but she doesn’t consider that option. Instead, she says Virginia should mandate the filing of a “combined return,” in which corporations add the income from all their subsidiaries and apportion it to the states where the money was made.

To be perfectly honest, I don’t know enough about the corporate tax law to critique Okos’ recommendation, so I shall keep my mouth zippered on this one.

Tax expenditures. Spending through the tax code in the form of credits, deductions, exemptions and the like costs Virginia roughly $2 billion a year. These loopholes are accumulating and growing. The General Assembly has passed or changed 60 tax expenditures since 1990. Okos suggests, as a first step to plugging these loopholes, that Virginia publish an annual tax expenditure report that is more comprehensive than the partial report issued currently. Writes Okos:

In order to be useful, a tax expenditure report must include several key features. It should contain the intended purpose of each tax break, who benefits and how much they get, and an estimate of total cost. A solid tax expenditure report can shed light on under-performing programs or those that cost far more than was anticipated when the tax break was established. Such a report can also highlight programs that are meeting or exceeding expectations and that yield a high return on investment.

Sound thinking! She also suggests attaching a sunset provision to any new tax-expenditure legislation. I am in 100% agreement with both of her suggestions.

All things considered, there seems ample room to reform Virginia’s tax structure. There are broad areas — broadening the sales tax and limiting tax loopholes — where liberals like Okos and conservatives like me actually agree. The ultimate goals should be a broader, more stable tax base that makes Virginia more economically competitive. Let’s get started!

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Posted in 2011, Budget, Taxes

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Do We Really Want to Subsidize Driving?

Posted on December 20, 2011 by James A. Bacon| 18 Comments

You don't like subsidizing welfare queens or bank bail-outs. Why subsidize the automobile culture?

by James A. Bacon

Once again, circumstances compel me to deliver a lecture on the difference between taxes and user fees. Gov. Bob McDonnell has forced the issue by proposing to boost spending for Virginia roads by diverting more money from the General Fund. In so doing, the governor would tilt the financing mechanism further from a user-pays system and toward an automobile-subsidy system.

Philosophically, this is fundamental. One principle of governance says, “People who use roads should pay the full cost of building and maintaining them.” The other principle says, “People like driving on roads but don’t like paying for them, so I’ll subsidize their transportation preference with taxes imposed upon the general public.”

Republicans claim to loathe social engineering. They rightly distrust those Greens and environmentalists who want to corral the population into high-density housing and force them to ride mass transit. But Republicans are social engineers of a different sort. They support tax and transportation policies that underpin the auto-centric society. Then, when the cost of those policies becomes prohibitively expensive, they turn to public subsidies to maintain an unsustainable status quo.

Once upon a time, Virginia funded most of its road building through the state motor fuels tax, supplemented by federal grants paid for by a federal motor fuels tax. It wasn’t perfect, but it worked reasonably well. Generally speaking, the more miles you drove, the greater the burden you put on the road system, and the more tax you paid. People who walked to work, biked to work or worked at home didn’t pay as much. The salesman who drove 1,000 miles a week paid a lot more than the little old lady who drove 10 miles a week. There was a rough justice in the tax.

But the Old Dominion has largely abandoned that approach. Through inaction, legislators have capped Virginia’s gasoline tax at 17.5 cents per gallon since 1986. Due to inflation, the purchasing power of that tax has declined by more than half — way more than half, actually, if you consider the inflation in construction costs. But the demand for more roads, bridges and highways has not diminished at all. To maintain road funding, lawmakers have boosted other taxes. But they have done so in a sly, underhanded way: by breaking up the taxes into little pieces that are harder for taxpayers to notice, and relying upon revenue sources that automatically increase over time.

Today, barely one third of the dollars spent by the Virginia Department of Transportation comes from the motor fuels tax. Here’s where the money is coming from this year, according to an October VDOT estimate for Fiscal Year 2012:McDonnell would further sever the connection between those who use Virginia’s roads and those who pay for them by doing three things: (1) Phasing in the transfer of an extra 0.25% of the state’s 4.5% sales tax to transportation over eight years, (2) dedicating 75% of any end-of-year General Fund surplus to transportation, and (3) dedicating an additional 1% of all General Fund revenue to transportation in years when revenues increase more than five percent. Bottom line: within eight years, the motor fuels tax will account for perhaps one quarter of VDOT funding.

Why is that so bad? After all, we use General Funds to underwrite the cost of schools, corrections and Medicaid. Why not roads, too?

Here’s why. When government subsidizes the cost of building and maintaining roads, people drive more. When people drive more, they increase the wear and tear on roads and they aggravate traffic congestion, both of which intensify the pressure on government to raise more taxes. Thus tax subsidies beget more tax subsidies.That is fiscally unsustainable.

By comparison, when government pays for public education, people don’t go out and have more children.When government pays for prisons, criminals don’t go out and commit more crime. When government pays for free health care, Medicaid patients don’t go out and get sicker… Well, actually, people probably do make less effort to stay healthy when they know that someone else will pay for their medical treatment. Bad example. That’s a big reason our health care system is so dysfunctional. It, too, needs to change.

In an economically ideal world, Virginia would eliminate every tax listed above except the motor fuels tax and raise that tax by enough to offset the lost revenue. That would mean roughly tripling the gas tax. Virginians wouldn’t be any worse off — by definition, the tax burden would be the same. Actually, I could make the case that Virginians would be better off: (a) because the tax would be totally transparent and they would know what they’re paying, and (b) they could reduce the amount of tax they pay by modifying their behavior — driving less.

Admittedly, there is one big problem with shifting to an all-motor fuels tax. That tax, as I have oft preached and McDonnell noted in justifying his raid-the-General Fund proposal, is living on borrowed time. Gas tax revenues will decline as automobile gas mileage improves and as people buy more alternate-fuel vehicles. But the solution isn’t subsidizing transportation with General Funds, it’s replacing the motor fuels tax with a Vehicle Miles Traveled tax. Any VMT tax would pose administrative challenges, so we need to start studying the options now in order to get the kinks worked out when it’s time to make the switch.

From a moral perspective, subsidies for middle-class drivers are no more defensible than payments to welfare queens or bail-outs for Wall Street bankers. In every case, government robs Peter to pay Paul. And in every case, there are adverse consequences. Just as welfare breeds a pathological culture of poverty and bail-outs encourage bankers to gamble recklessly with other peoples’ money, subsidizing roads leads to more driving, more gasoline consumption, more congestion, more pollution and greater dependence on foreign oil. Genuine conservatives will oppose McDonnell’s transportation-funding proposals.

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Posted in 2011, Taxes, Transportation

Tagged James A. Bacon

Can We Call It a “Decelerated” Sales Tax Now?

Posted on December 16, 2011 by James A. Bacon| 3 Comments

Less of a rip-off than before...

Gov. Bob McDonnell is asking the General Assembly to hurry the phase-out of one of the jinkiest budgetary gimmicks ever foisted upon the people of Virgina, the so-called “accelerated” sales tax. About time! Too bad we can’t finish the job this year.

The 2010 General Assembly required larger retailers — anyone with $1 million or more in taxable sales — to pre-pay a portion of their July 2010 sales tax remittance in June, thus collecting an extra month’s revenue with which to close the budget gap. In the 2011 session, the legislature partially rolled back this abusive and dishonest expediency by raising the sales threshold to $5.4 million, thus exempting some 7,000 merchants and decreasing revenue by $45.7 million.

McDonnell’s proposal would raise the threshold again to $26 million in sales, exempting another 1,400 dealers from the accelerated tax at a cost of roughly $50 million. “I have always opposed the policy of playing budget games with sales tax receipts,” the governor said in a press release. “The accelerated sales tax can feel to retailers like a ‘double tax.’ It penalizes Virginia retailers and merchants and skews states revenues. It is bad policy and it needs to be eliminated as quickly as we can. ”

The accelerated sales tax was the ugly, co-joined twin of the General Assembly’s decision to cut payments into the Virginia Retirement System. Both maneuvers in essence took money that didn’t rightfully belong to the state and eventually would have to be phased out at considerable cost. McDonnell is doing the right thing. It’s the very least we expect from a state that purports to be serious about maintaining its AAA credit rating, and it’s exactly the kind of thing I’m talking about when I say we need to “bullet proof” the state budget.

– JAB

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Hold Hands, Sing Kumbaya and Avoid Taxes

Posted on December 12, 2011 by James A. Bacon| 2 Comments

The least studied, hence least understood, component of 21st-century America’s political economy may well be the rise of the not-for-profit sector of the economy. While real GDP grew by 38% from 1995 to 2010, real total revenues reported by charitable nonprofits registered with the IRS grew by 65%. Nationally, medical services and education, two vast sectors dominated by not-for-profits, accounted for 15.1% of all employment in 2010.

A new study, “Property Tax Exemption for Nonprofits and Revenue Implications for Cities,” explores the impact of the growth of the not-for-profit sector upon municipal finances. Not-for-profit exemption from property taxes can blow a big hole in municipal budgets, especially in metropolitan areas such as Pittsburgh, Philadelphia and Boston where medical services and education exceed 20% of employment (and probably a higher percentage of economic activity). Arguing that the rise of not-for-profits displaces a greater tax burden on homeowners and for-profit businesses, the authors present a variety of arrangements, from municipal-service user fees to Payments In Lieu Of Taxes (PILOTs), to avoid the hollowing out of the tax base.

In Virginia, the challenge is particularly acute in jurisdictions such as Blacksburg that are dominated by a large educational institution, or in the case of Charlottesville, by a large educational institution coupled with a large not-for-profit health care system.

The rise of the not-for-profit economy is significant in other ways not touched upon in the paper. E M Risse refers to not-for-profits as “institutions” in his Estate Matrix, as opposed to “agencies” (government) and “enterprises” (corporations). Institutions include, among others, foundations, labor unions, professional and trade associations, universities, hospitals, museums, political parties, political action committees, conservation advocates, chambers of commerce and other consumption advocates, churches and think tanks.

A growing “institutional” economy means that an ever-larger chunk of the supposedly private sector is exempt both from the wealth-extracting exertions of the federal government and from the Darwinian, for-profit imperative to innovate, boost productivity or die. Not-for-profit status is a great tool to channel the economy’s energy into socially beneficial uses. But the not-for-profit-ication of U.S. society does not augur well for economic dynamism, growth of the tax base and fiscal sustainability.

– JAB

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How to Increase Transportation Revenue without Raising Taxes

Posted on December 8, 2011 by James A. Bacon| 10 Comments

by James A. Bacon

NORFOLK–Declaring that transportation is a “core responsibility” of state government, Gov. Bob McDonnell outlined today a legislative package that would increase funding for roads, highways and transit from the General Fund. Traditionally, Virginia has paid for transportation projects primarily through dedicated revenue streams such as the motor fuels tax, a half percentage point of the sales tax, a tax on automobile registrations and other narrow-bore levies.

McDonnell’s plan would divert an additional one-quarter percentage point from the state sales tax, a bigger share of end-of-year budget surpluses, a full percentage point of the General Fund budget when revenue growth exceeds 5% in a year, and a Tax Increment Financing-like mechanism for capturing a share of state tax revenues made possible by state-funded infrastructure.

“Transportation and economic development and prosperity are inextricably linked,” said McDonnell, presenting his initiative to the Governor’s Transportation Conference in Norfolk. “Whether it’s the infrastructure needed to move people and goods, or certain transportation-related industries poised for major growth and job creation, we must continue to make progress in improving our transportation networks if Virginia is to remain economically competitive.” (Read the press release.)

The governor’s address was interrupted briefly by an outburst from a group identifying itself as Occupy Norfolk. The protesters employed the Occupy movement’s trademarked human microphone technique to greet him with, “Welcome Governor McDonnell.” That elicited a fleeting smile, but the protesters then proceeded to shout over the governor as he tried to address the audience.

The biggest chunk of new revenue would come from phasing in a one-quarter percentage point increase in the share of the state sales tax dedicated to transportation over eight years. If enacted, the plan will boost the share from one half percent (.50%) currently to .055%, or one-twentieth of a percent, sufficient to bolster transportation revenues by $110 million next budget. The governor provided no estimate of how much the other measures would generate, although he noted that over the past two years the state has transferred $100 million in surplus funds to transportation.

Last year, the General Assembly backed McDonnell’s proposal to accelerate borrowing – $4 billion during his administration – to take advantage of low interest rates and low construction costs. Interest will be repaid from sources traditionally dedicated to transportation. A potential sticking point with the new plan is that, by taking money from the General Fund, it may be perceived as funding transportation at the expense of priorities such as K-12 education, higher education, Medicaid and corrections, that rely upon the General Fund.

McDonnell deals with potential objections by limiting the circumstances in which the transfers to transportation would be made. The proposal to steer 75% of budget surpluses to transportation would apply only if the state runs a budget surplus. Taking a one-percent slice from the General Fund would apply only in years when revenues increase by more than 5%. It’s not clear how the Tax Increment Financing proposal would work, but the logic is that it would return to transportation a share of the revenues made possible by a transportation investment in the first place.

Another foreseeable objection is that the plan will focus on the fact that McDonnell’s emphasis is on raising more money for transportation rather than reprioritizing how the money is spent. A recent Sierra Club report accused the governor of borrowing billions of dollars to build “major, unneeded and destructive roadways” instead of funding transit, bike paths, carpooling and transit- and pedestrian-friendly land use.

In justifying the need for more revenue, the governor made two key points. First, the motor fuels tax, the primary source of transportation funds, will decline in the future. An increasing number of cars will shift to alternate fuels, and even those that don’t will get better gas mileage. “Add those two things together and you have a math problem,” the governor said.

Secondly, transportation is vital to economic development. McDonnell cited a study by Chmura Economics & Analytics that found the 2011 transportation package will grow the Virginia economy by over $13 billion and sustain an additional 104,000 jobs. Among specific economic-related initiatives, the governor mentioned additional funding for the Mid-Atlantic Regional Spaceport, with the goal of making it the number one commercial space flight facility in the nation.

The governor also touted the the I-85 Connector Economic Development and Promotion Zone, an initiative that is tied to the construction of a new, limited-access U.S. 460 between Petersburg (the northern terminus of I-85) and Suffolk. A southern route linking Hampton Roads to the national interstate highway network would provide an Interstate-quality alternative to the overloaded U.S. 64 and open up vast new acreage for industrial and warehousing development.

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