Guest Column

Steve Haner


 

All This for 0.4 Percent?

The proposed House budget spends almost as much money as the "pro-tax" Warner plan but resorts to a jumbled mix of new "fees", closed "loopholes" and accounting gimmicks.


 

The premise behind the Virginia Chamber of Commerce’s oft-discussed endorsement of a tax increase was simple: We didn’t believe the General Assembly could produce a credible budget without additional revenue. We didn’t think the legislature could make the cuts in non-essential programs sufficient to pay for the good stuff and satisfy the credit rating agencies.

 

The events of the past month have proven us right

 

The anti-tax, tight-fisted House of Delegates has adopted a proposed state budget for 2004-06 that closely mirrors Gov. Mark R. Warner’s $59 billion proposal. The House cut $109 million from the governor’s $27 billion General Fund proposal (see chart below); total revenue amounts to 99.6 percent of the governor’s total projected revenue. I guess that four-tenths of one percent makes all the difference. 

 

The State Budget
(Revenues in $millions)
 

General

Fund

Non-

General

Fund

Total Growth
2002-04 Budget 24,412 30,573 54,985  
House (2004-06) 26,926 33,515 60,442 9.9%
Governor (2004-06) 27,036 33,640 60,676 10.3%
Senate (2004-06) 28,018 35,931 63,949 16.3%

 

Supporters of the no-tax position have shifted their rhetoric and now defend their budget as avoiding general tax increases. But to avoid the sales tax increase proposed by the governor and adopted by the Senate -- an increase of one cent per dollar offset by a lower tax on food -- the House proposes to do the following:

  • Eliminate the sales tax exemption for commercial and industrial inputs on some of Virginia’s basic industries, in effect raising the final cost of electricity, natural gas, telecommunications and various modes of transportation (air, rail, ship, truck and – yes – spacecraft!). Right now nobody knows how much money House Bill 1488 will raise, but the House assumes $260 million a year.

The dollar impact is probably equivalent to the additional sales taxes the business community would have paid under the one-cent general increase (since businesses pay about 35 percent of all sales and use taxes.) The difference is that the impact falls heavily on a few companies and their customers.

That is the story of the entire House approach: make a few people and companies pay a whole lot more to avoid making everybody pay a little more, hoping that most voters won’t notice.

The House also would:

  • Continue the “accelerated” sales tax, demanding that retailers pay the sales tax for July in June. This no longer gains the state any money, but the governor wanted to end the practice, reducing revenue in the first fiscal year by $181 million. By keeping this accounting gimmick in place, the House had $181 million more to spend.

  • Continue de-conformity with federal tax law. The major business tax provision the House plan would not conform to is the increased deduction small businesses receive for capital expenses under IRS Section 179. This will require Virginia small businesses to “add back” about $17 million in state income taxes over two years.

  • Continue diversion of the auto insurance premium tax, pledged to transportation in 2000 but moved back to the general fund in 2001. (Perhaps after three straight years we can longer call it a "raid" on transportation.) The governor proposed to finally keep this promise. The House move reduces the transportation program he proposed by $270 million.

  • A collection of additional fee increases and budget actions, including a two percent tax on rental cars, an increase of three percent in the markup at ABC stores and higher fees for various ABC event and vendor licenses. (The amendment to that particular section conveniently strikes the word “taxes” and inserts “fees.” See how easy it is to mollify the GOP right wing? Pay no attention to that tax increase behind the curtain.)

Are these really better choices than a straight-up sales tax increase as advocated by the Virginia Chamber? Will they have a greater or a lesser impact on the economy? On individuals? The point can be argued. If they survive into the final budget, the real decision on their wisdom will come from Moody’s Investor Services and the other bond rating agencies that will pass judgment on Virginia’s threatened AAA credit rating.

 

Let’s hope that “consistency” is not one of Wall Street’s criteria.

 

The same House of Delegates that voted to remove the sales tax exemptions on 12 commercial and industrial categories continues to expand or maintain the list of exemptions in other areas. On Wednesday, for example, the House passed Senate Bill 571, continuing the exemption for film and video production (such as when movies or TV episodes are shot in Virginia), and Senate Bill 533, continuing the exemption for materials purchased for certain kinds of printed advertising. 

 

Del. Phil Hamilton, R-Newport News, author of House Bill 1488, offered floor substitutes to both bills which would have eliminated all the sales tax exemptions in those code sections (mainly broadcasting, cable TV and advertising). But the House, perhaps having learned the wisdom of “fool me twice, shame on me,” balked and then passed the bills un-amended.

 

Republicans repudiated the telephone eavesdroppers, but some are not above reading somebody else’s mail out loud on the House floor. Hamilton took great pleasure in quoting aloud one of my e-mail messages (which did not include him as an addressee). Since he liked the line so much, I reprint it here:

 

“The House continues to pass new exemptions – a bill got out of House Finance an hour or so ago extending the exemption for film and video production.  Michael Eisner and Jane Fonda get a sales tax exemption, but the investor-owned utilities that power this great Commonwealth and dozens of companies providing permanent jobs no longer will.  That will be fun to contrast come election time."

 

That was a mistake on my part, which I regret.

 

It should have said: “hundreds of companies providing permanent jobs.” 

 

-- March 1, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stephen D. Haner is vice president for public policy with the Virginia Chamber of Commerce. You can can e-mail him here: s.haner@vachamber.com