Category Archives: Taxes

Trailing Spouse Benefit Proving of Minimal Impact

Results of the first 40 months paying unemployment benefits to military spouses leaving Virginia jobs due to family transfer. Source: VEC

Virginia’s unemployment insurance (UI) trust fund continues to show improved balances despite dropping tax rates, reflecting a strengthening economy.   The most recent semi-annual report, released at a legislative meeting yesterday, projects half as many initial claims during 2018 as there were five years ago: 134,000 this year versus the earlier 276,000.

It the trend holds that would be a 45-year low, the Daily Press reported, quoting Virginia Employment Commissioner Ellen Marie Hess.

The trust fund balance probably peaked at $1.35 billion June 30, with slight declines expected in coming months.  With the lower unemployment and higher workforce participation rates, the system is working as designed.   More than 68 percent of the almost 215,000 Virginia employers paying into the fund pay at the lowest possible tax rate, which works out to $88 per employee.

The tax rates go up with a history of layoffs or other successful claims and are higher on new employers or employers based outside of Virginia.  In general Virginia has some of the lowest taxes in the region, in part because it also has less generous payments.

The various charts track many other signs of economic improvement:  More employers registered with the system, fewer of them paying elevated taxes due to past layoffs, lower general unemployment rates, and a labor force participation rate (66.2 percent) higher than the national average.

The report also tracks the impact of a controversial recent change in the system, allowing unemployment benefit payments to the spouses of military personnel who get reassigned outside Virginia.  Prior to 2015 that was considered a voluntary termination, not a layoff, and thus not eligible for benefits.

Over the first 40 months 766 people have claimed benefits costing about $2.3 million.

Business groups, including the Virginia Chamber of Commerce, opposed giving this benefit to so-called “trailing spouses” because of fear it would be a major drain on the fund.  The employer ultimately responsible for the move, the Department of Defense, pays zero into the state UI fund, but taxes are collected from whatever employer had the departing spouse on the payroll.

So far, the number of claimants has been so small there has been no measurable effect on the fund balance or tax rates. The military spouse benefit was passed with a sunset clause and has two more years to run before the General Assembly must end or extend it.  It was advocated as another way to demonstrate Virginia’s commitment to the military, for economic as much as patriotic reasons.

Having the benefit may give Virginia some positive points should there ever be another round of base closures, but if there is and Virginia is on the losing end, the number of claims under this provision would spike.

Specific Updates: Lobbyists, Lottery, Tuition

A few updates, clearing the decks before I disappear next week (I’m not quite as dedicated as Bacon, although I will take the laptop to Duck.)  My son who blogs on University of Virginia sports is going to give me some tips.  (StLouisHoo or something like that…)

Specifics on Who is Not Specific

The Virginia Public Access Project (VPAP) has once again demonstrated the power of a good chart (see above), this one tracking the number of 2018 disclosure forms filed by lobbyists which list bill numbers, and frankly it is a lower percentage than even I realized.   Absent any corrective action by the existing oversight committee or legislators, who are probably not motivated to require more disclosure, the number of disclosure forms listing bills by number will drop further.  No consequence, no change.

If the situation changed, you can see on VPAP the potential for a real tracking system where you could see which companies or associations weighed in on which bills.

Specifics on Who Plays the Lottery

Source: Virginia Lottery

A request for additional information on lottery spending or lottery frequency by income category, following my earlier report, drew a response from the Virginia Lottery that the information is not available.  Perhaps it is a question they do not want to ask or a survey crosstab they do not want to see.

My query did produce some additional data on who plays which games.  It was interesting that those with the lowest level of education, the 12 percent of respondents who didn’t finish high school, are least likely to play and of course least likely to have much discretionary income.  (They are underrepresented in the sample, however.)  People with a high school diploma but no college are the heaviest players of daily games and scratch games, which as noted earlier produce the most revenue.

Additional data was sent on the purchase of lottery tickets by automatic debits or charges, called a subscription in their terminology.  That approach to playing is most popular in the more economically healthy and urban regions of the commonwealth.

Source: Virginia Lottery

They did push back a bit on my assertion that the purchase of U.S. Treasury investments to cover deferred future payouts is another way the house wins, and correctly pointed out the state lottery doesn’t gain any benefit from that.  Yes, in that case I was using the term “the house” to mean government in general, including the federal government, which most certainly benefits from this steady market for these securities.

Specifics on Higher Education Inflation

You read it first on Bacon’s Rebellion a few weeks ago, but the large increase in the tuition and fees bills for this coming term at the state’s public colleges and community colleges is now fully detailed in the official release from the State Council of Higher Education.  The Richmond Times-Dispatch coverage is here.

Working? A Republican Anti-Poverty Plan Works?

Source: IRS.gov

“The federal EITC, together with the Child Tax Credit, lifted nearly 200,000 Virginians out of poverty each year from 2011 to 2013, including nearly 100,000 children.”

Lifted out of poverty.  Let that sink in a minute.  The writer of that sentence is admitting that the federal Earned Income Tax Credit lifts people out of poverty.  And it wasn’t even part of President Lyndon Johnsons’ Great Society but was enacted in the era of GOP Presidents Richard Nixon and Gerald Ford.

I lifted the sentence out of a report on the website of the Commonwealth Institute for Fiscal Analysis, which was called to my attention by a piece  distributed this morning by Virginia Mercury.  The people at the Commonwealth Institute also recognize that Virginia is poised for a long-needed discussion on tax policy, thanks to the opportunity provided by the major changes at the federal level.   It would be a perfect time to discuss again a refundable state version of the EITC, which the state has resisted because of the cost.

The federal EITC is refundable, meaning if the taxpayer has not paid in as much in taxes as the credit, the unused balance of the credit is paid out in cash just like a refund.  Virginia’s EITC is just a credit, and if the credit is larger than the tax owed the tax bill goes to zero but there is no cash-back refund.

The 2018 General Assembly defeated the most recent effort to convert the credit, House Bill 716.  The fiscal impact statement put on an incredibly high quarter-billion dollar price tag, which I suspect is wrong.  If it is not inflated, Virginia should be ashamed it is taking that much tax away from low-income families.

The Commonwealth Institute report noted that just over 80 percent of eligible Virginia taxpayers are claiming the federal credit, meaning almost 20 percent are ignoring it.  Even without converting it, it probably makes sense to get more people to file.  The size of the credit is tied to income and family size, and it’s possible many of the people taking a pass wouldn’t have much of a credit anyway.

When it suits some advocates for low-income programs, they ignore the real value of existing efforts that do provide cash or services to that population.  Note that the child tax credit is also mentioned as important, and other programs not listed keep people above abject poverty abound, supplemented by private efforts. Do the poor have it easy in this country?  Hardly.  But the entire picture needs to be seen.

As Virginia stumbles quietly toward a tax debate over whether and how to conform to the new IRS rules, a state refundable EITC deserves to be one of the big ideas.

Protestants, Progressives and Paternalism

If you’re a freedom lover, high scores are good. If you like telling people how to live their lives, low scores are good. Virginia ranks 39th. Source: Mercatus Center.

To put Steve Haner’s recent post about the Virginia lottery in broader perspective, I have displayed the “freedom from paternalism” ranking of the 50 states published this year by George Mason University’s Mercatus Center. Virginia ranks 39th in freedom from paternalism. The flip side of that finding is that the Old Dominion ranks as the 12th most paternalistic state in the country.

By “paternalistic,” Mercatus researchers Russell S. Sobel and Joshua C. Hall, professors at the Citadel and West Virginia University respectively, mean state policies that the political class has decided are for your own damn good.

If you don’t like a busybody government, then New York is the state from hell, with a ranking in a class all by itself. Vermont, Washington, and California are other hard-core busybody states. If you’re a freedom junky, head to Wyoming, the least meddlesome state in the country. Arizona, Nevada and Kansas also are among the least intrusive.

The Mercatus ranking breaks down paternalism into three buckets of policies — selective taxes, “saint subsidies,” and miscellaneous bans and regulations. Virginia scores pretty darned meddlesome across the board. On the less paternalistic side, Virginia has no soda tax and a low cigarette tax but it has a killer tax on distilled spirits.

The ranking encompasses such policies as plastic bag bans, happy hour restrictions, mandatory motorcycle helmets, fireworks restrictions, blood tests, social gambling and Internet gambling. To the point of Steve’s post about the state lottery, Mercatus does not include the presence of state lotteries, horse race betting, or casino gambling.

Why is Virginia so paternalistic? It is often observed that Virginia is either the southernmost Northern state or the northernmost Southern state. I’d hypothesize that we have incorporated the most meddlesome traits of both North and South — Bible Belt blue laws inherited from our Protestant past and the Northern progressives’ instinct for economic regulation on environmental, consumer and other grounds. One way or the other, if you’re a libertarian, you live in enemy occupied territory.

The Tax on the Mathematically Challenged

Pick 3 Game Frequency

Untold thousands of Virginians just poured their money into the recent multi-state Mega Millions drawing won by someone in California.  Governor Jerry Brown sends his thanks for his cut.  But based on a recent news release our own governor is also very pleased with the performance of the Virginia Lottery as it approaches its 30th anniversary.

As with any other game of chance, the house has many ways to win.

Years of debate in the General Assembly led to a November 1987 lottery referendum, which passed with about 57 percent in favor.  The games started less than a year later.  According to information on the Virginia Lottery website, and plugging in the unaudited totals from fiscal year 2018, over 30 years the lottery has:

  • Received from players $37 billion in cash (sales).
  • Returned about $21 billion of that back to players in prizes. The net after taxes is not reported, so that might really be about $16 or 17 billion.
  • Transferred about $12.5 billion to the state earmarked for education (but there is no proof local schools are better funded than they would otherwise be.)
  • Spent about $2 billion on its own overhead and advertising and  another $2 billion on compensation to retailers. (State and local taxes gets a cut of that, too.)

Neighboring lotteries were rare initially, but now all surrounding states have joined in taxing people who don’t understand probability. Maryland has taken the additional plunge into casino gambling.  Strip away the masquerade and Virginia is right behind with the new “historical horse racing” which will allow 3,000 slot machines.

This has become a big business, more than twice the size of Virginia’s liquor sales through the ABC.  The bare-bones cash flow summary on the Virginia Lottery website is supplemented by details in the annual reports and survey information provided to Bacon’s Rebellion upon request.

With all the attention given to the large national lotto games, the bulk of Virginia’s revenue comes from the scratch-off games and the daily Pick 3, 4 or 5 games intended to mimic the illegal numbers racket.  Last year’s annual report stated the scratch-off revenue represented 56 percent of sales and the simple numbers games 30 percent.

Regular market surveys are based on a rolling 100 interviews per week or 1,300 per quarter, a very strong methodology, and you can see a recent report here.  If indeed 70 percent of adult Virginians have played in the past year, that’s about 4.6 million individuals.  That puts the annual average revenue per player at $465, but of course most of players spend far less.

Which means quite a few Virginians are spending far more.  Who are they?  How much do they spend? The data shared does not include that, but there are some hints. Continue reading

Tax Act Impact on Virginia: 5,782 Jobs

The Tax Cuts and Jobs Act of 2018 will create 218,000 full-time equivalent jobs across the United States this year, asserts the center-right Tax Foundation, which specializes in analyzing the impact of tax policy on the U.S. economy.

Using its Taxes and Growth econometric model, the Tax Foundation provided a job-creation estimate for each of the 50 states and Washington, D.C. In Virginia, predicts the model, the economic stimulus of corporate and personal income tax reform will create 5,782 jobs.

That number compares to 20,100 total jobs created between Dec. 2017 and May 2018, according to U.S. Bureau of Labor Statistics data. Annualized, Virginia was on track for creating 48,200 jobs in 2018, suggesting that the tax cuts are accounting for about 12% of the state’s job growth.

The tax cuts’ impact on Virginia falls in the middling range compared to other states. The 5,872 jobs created in Virginia amounts to 678 jobs per 1 million population, according to Bacon’s Rebellion calculations. On a jobs-per-population basis, the impact ranges from 1,640 in Washington, D.C. to a mere 110 in Oklahoma, both of which appear to be anomalies. Excluding those two, the impact ranges from 564 jobs per million population in Mississippi to 824 in North Dakota.

 

Tax Conformity Addendum: Has Virginia Already Conformed?

During a discussion today about the issue of whether and how Virginia should amend its taxes in response to recent federal changes, the question came up:  just what is the situation today? I was reminded that the conformity bill that originally passed in the 2018 General Assembly was subsequently amended at the request of the Governor with very little fanfare. Has Virginia actually conformed?

Here is the language now in the Code of Virginia.

The original introduced bill set a conformity date of December 1, 2017, well before Congress acted. The bill that then passed the House and Senate set the date at December 31, after the new federal law was signed, but included language that limited conformity only to the new federal provisions that had an impact on 2017 taxes (see paragraph 6c.) The Governor’s Amendment advanced that conformity date to February 9, 2018 – but did not change the language that prevented conformity from just about every provision that applies to tax year 2018. So as I read the bill, Virginia still has not conformed to the “Tax and Job Cuts Act”.

The official summary for the bill on the legislative website, which was written after the Governor’s Amendment, seems to agree: “The bill conforms only to certain provisions of Public Law 115-97, known as the Tax Cuts and Jobs Act, that affect taxable years prior to 2018.” (Emphasis added).  That leaves Virginia’s posture toward all of the new rules and definitions for 2018 and beyond still to be determined.

As you can see by reading the current law,  Virginia has already lost its purity as a conformity state with all the exceptions in the Code.  I still expect a strong inclination on the part of many of Virginia’s elected leaders to keep all the new revenue produced for the state, thus offsetting some of the federal tax cuts, and to consider selective de-conformity as a method to add to that revenue.

Signs Virginia Will Keep Tax Reform Windfall

Source: Tax Foundation

The following is from remarks prepared for a meeting of the Thomas Jefferson Institute in Richmond today.  

As of right now all the signs indicate that the Virginia General Assembly and the Northam Administration are going to allow the federal tax reform to generate additional tax revenue for the Commonwealth. Some of what the Congress gave back will flow not to Virginia taxpayers, but to the state treasury.

What are those signs? None of them are totally clear but the circumstantial case is strong.

There are no plans for any special session later in 2018 to amend Virginia’s tax code in response to the federal changes. I have confirmed that with the chairmen of both the House and Senate committees, but of course that could change.

In a recent talk at Christopher Newport University, Senator Frank Wagner, R-Virginia Beach, was gushing to the crowd over all of the extra revenue expected in Virginia – some of which is already baked into the state budget just adopted.

Secretary of Finance Aubrey Layne a couple of months ago, talking to the Senate Finance committee, left me with a strong impression that the administration would be slow to amend Virginia’s tax code and forego any windfall. His next big chance to address the General Assembly in public comes in August when the money committees hold the joint meeting on the closeout of fiscal year 2018.

By then the state may have received the consultant report it has commissioned detailing the state revenue impact of the various federal provisions. A very important sign will be whether that data is widely disseminated or held close as governor’s working papers.

Another sign: The Commonwealth Institute for Fiscal Analysis, possibly reflecting the attitude of key General Assembly Democrats, has come out in favor of full conformity because it believes the net result will be hundreds of millions of dollars in new revenue for the state from higher income taxpayers and from corporations. Unless Virginia changes its tax rates or makes other adjustments that will be correct, except not everybody paying more will be rich.

The strongest indication is the state’s own fiscal stress. The new budget total is about 12.5 percent higher than its 2016 counterpart but the increase in the general fund was only five percent, somewhat anemic for a time of economic growth. Virginia is very dependent – too heavily dependent – on the personal and corporate income taxes to make its base budget. It won’t want to part with income tax dollars.

Virginia was under pressure before expanding Medicaid and the risk that adds that the federal government won’t continue its 90 percent match on the expansion far into the future. Virginia’s reserves remain too low even in the new budget.

Finally, nobody is pushing the alternative, at least not publicly. It’s dead quiet. The average taxpayer won’t feel the impact until early 2019. Nobody is demanding the General Assembly adjust Virginia’s tax rates, standard deductions or filing thresholds to lower taxes on individuals. Nobody is warning that much of the business tax benefits will be wiped away if Virginia moves conformity forward but leaves the corporate tax rate at 6 percent.

The contrast with 1986 is striking.  As the GOP director of communications and research and the main liaison with GOP legislators, I helped organize efforts pushing Governor Gerald Baliles to give back any windfall. It was just a year after the transportation taxes had gone up in a special session. Of course, we were the minority in those days and had lots of freedom to stir the pot.

Baliles responded by cutting taxes the way he wanted to, which shifted the tax burden up on higher incomes. But it was a tax cut with some sound policy behind it.

Continue reading

Dillon’s Rule, the RPV and the Marylandization of Virginia

by Don Rippert

Doppler shift from red to blue. As recently as 1977 both of Maryland’s US Senators were Republican.   From 1993 through 2003 Maryland’s eight US House seats were evenly split between Republicans and Democrats.   Today, Maryland’s 10 person Congressional delegation consists of 9 Democrats and a lone Republican.  This shift caused Maryland to be routinely rated as one of America’s most liberal states but also one of the worst states for conservatives.

Yes, Virginia there is a trend here too. Maryland last saw a Republican US Senator in 1989, Virginia made it to 2009.  In the state legislature nothing more than pure luck kept Republicans in control of the house.  Republicans still hold the state senate but all of those seats come up in 2019.  Maryland went from light blue to royal blue about 15 years ago and Virginia is tracking 20 years behind Maryland.  Simple math says that Virginia will be fully liberal / Democratic by 2023.  Arguably, the RPV’s recent bungling could accelerate this timeline.

In the RPV hope really does spring eternal.  Unfortunately, hope is not a strategy.  Hope gives Virginia’s Republicans a choice of EW Jackson (unelectable), Corey Stewart (unelectable) and Nick Freitas (a longshot, but maybe electable) in the recently held US Senate primary.  The rightwing radicals who vote in primaries insist on the futile opposition to abortion as a litmus test and voila … “unelectable” wins the Republican nomination.  When Stewart loses, those same lunatic fringe members will declare that Stewart just wasn’t conservative enough.  Fast forward to 2019, repeat the same RPV process and the Dems are in perfect position to dominate the statehouse right in time for the next round of census-driven gerrymandering.  Stick a fork in the RPV.

Judge Dillon’s revenge on Virginia’s conservatives.  Contrary to popular opinion there are some very conservative areas in Maryland.  They are too few to affect the state overall but they’re still very conservative.  Secession has been discussed frequently in Maryland’s Eastern Shore and recently in Western Maryland, the most conservative areas of the state.  Nobody thinks either plan has a snowball’s chance in hell of success but it’s “fun talk” anyway.  However, conservative Marylanders have something conservative Virginians don’t – local autonomy.  Even income taxes vary by county in Maryland.  So, a liberal county like Montgomery has a high county income tax (3.2%) and many government services while conservative Worcester County has a low income tax (1.25%) and fewer government services.  Conservative counties can stay somewhat conservative – even in the so-called Free State.  Once the libs get full control of Virginia everybody in the state will pour ever more money down the rabbit hole in Richmond.  Guns will become a dirty four letter word.  School curricula will be standardized along liberal lines and designated safe spaces will be mandatory for all government buildings (including schools).  When that happens I’ll be laughing at the addle brained Virginia conservatives who so loved our idiotic implementation of Dillon’s Rule here in the Old Dominion.  They’ll have it far worse than the conservatives in Maryland.

What the 2018 Tax Cuts Mean for Virginia

How will the tax cuts from the 2018 Tax Cuts and Jobs Act impact Virginia households? The results vary considerably by income bracket, according to a tax calculator published by the Tax Foundation. Higher income households, making over $200,000 per year, will get the biggest income tax breaks as measured in absolute dollars and by percentage of income.

But, despite the hand-wringing over the elimination of the tax deduction for state and local taxes, there is only modest variance among high-income households between high-tax Northern Virginia and other parts of the state.

To illustrate the impact by income category, I selected Congressional District 7, which stands at the geographic center of the state and encompasses a range of higher-income suburban households and lower-income rural households. As seen in the table above, there is very little in the tax package for people making less than $25,000 per year. Of course, given the highly progressive structure of the tax code, people making less than $25,000 per year pay almost no taxes to begin with.

The tax act is fairly generous to working-class and middle-income Virginians but most generous to those making over $200,000 per year. If your No. 1 concern is sticking it to the rich, this bill doesn’t do it. In fact, the Tax Foundation data makes the tax act look like a giveaway to the rich — more or less as its Democratic Party critics described it.

Unfortunately, this static analysis obscures as much as it reveals. By eliminating many deductions employed by the wealthy, tax reform should flush considerable income out of tax shelters into the taxable open. One can predict several things: (1) that taxable income will rise, which (2) will induce hysteria among the social justice warriors obsessed about income inequality without appreciating the difference between gross income and net (taxable) income, and (3) will result in higher tax payments than would be predicted by static analysis. If your No. 1 concern is ensuring that the rich shoulder an increasing share of the income tax burden, then such an outcome is entirely possible under the tax plan — although we won’t know for sure until the data comes in.

Another thing that static analysis overlooks is the impact of the tax cuts on the economy. At a minimum, lower taxes will create more disposable income, some proportion of which will be plowed back into the economy in the form of increased consumer spending. If the money isn’t spent, it will be used either to pay down debt (a good thing) or invested (also a good thing). It seems pretty clear that Democrats’ fears of an economy cataclysm resulting from the tax cuts are not being borne out. In the short run, the cuts clearly are boosting the economy. They’re also boosting deficits, however, which does aggravate the long-term problem of endemic deficit spending and make a Boomergeddon scenario all the more likely.

There is some geographic variability in tax cuts for top-earning households ($200,000 and up), as can be seen in the chart to the left, but it is modest. Fears fanned by critics that high-income earners in high-tax districts might be losers do not appear to be panning out in Virginia. Northern Virginia districts 8, 10, and 11 don’t get tax breaks as big as their high-income earners in other districts, but they do get tax breaks. Big ones. If anyone has a problem, it’s Maryland’s 4th and 5th districts east of the District of Columbia. There, top income earners get tax breaks averaging only $9,000 per household. Is that a big enough difference to induce some to move across the Potomac? We’ll see.