Bacon's Rebellion

Other States Considering Tax Cuts

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by

James A. Bacon
in

The headline of a recent article in USA Today tells it all: “Outlook good for tax cuts by states: Revenue growth creates surpluses.”

A chart accompanying the article shows the projected increases in state and local revenue in 2005: 7.25 percent nationally (based on the first nine months of the year). The story then proceeds to describe tax cut proposals in Utah, South Carolina, West Virginia, North Dakota, Michigan and New Hampshire.

Absent from the list: Virginia.

Tax revenues for the first three months of Virginia’s fiscal year are running 14 percent ahead of the same period last year. (See my blog post of Nov. 7.) There’s a good chance the month-over-month revenue gains will moderate, although that’s what the Warner administration said would happen last year, and the revenue just kept flowing. But let’s assume that the revenue gusher does moderate by 20 percent to 30 percent. That still puts Virginia’s revenue performance way ahead of that of other states.

But no one here is talking tax cuts. The only people talking about taxes — most vocally, the editorial writers of the Washington Post, Virginian-Pilot, Roanoke Times and Daily Press — still want to increase them.

How much is enough? The list of “unmet needs” is endless. But taxpayer paychecks are all too finite.

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15 responses to “Other States Considering Tax Cuts”

  1. Chris Avatar
    Chris

    No chance for a tax cut with the current chair of Senate Finance.

  2. The Jaded JD Avatar
    The Jaded JD

    76% of the unexpectedly available revenue comes from unstable revenue sources: corporate taxes, deed recordation, and lump-sum tax payments due to underwithholding. Each of those three sources is volatile and unsustainable. While it might be possible to issue a one-time “dividend” to taxpayers, unexpectedly higher receipts from these three revenue streams won’t support a long-term reduction in, for example, state income tax rates, sales tax rates, or a favorable downward recalibration of state income tax brackets. If we’re looking at a cyclical uptick in state revenue, as all the signs suggest since these three revenue streams are the ones exceeding forecasted receipts, rather than a structural uptick in state revenue, it seems more appropriate to me to sock away that income for the cyclical downtick rather than dividend the cash out.

  3. Adam Smith Avatar
    Adam Smith

    Congrats Jaded JD. You have espoused the truly conservative and prudent line. You win the “Invisible Hand Award” for your fiscal good sense and research.

    And as for you, Mr. Bacon, you receive from the “Invisible Hand” the “Invisible Finger” for your reckless and profligate suggestion.

  4. Jim Bacon Avatar
    Jim Bacon

    Jaded JD, Yes, some of Virginia’s revenue comes from volatile sources. I acknowledged that in my post. What concerns me is this: You say, “It seems more appropriate to me to sock away that income for the cyclical downtick rather than dividend the cash out.” It will be interesting to see the extent to which the Governor and General Assembly “sock away that income for the cyclical downtick” and the extent to which they add to baseline spending.

    You can’t have it both ways: You can’t cite the volatility of revenue streams as a reason not to give surplus funds back to taxpayers without also citing the volatility of revenue streams as a reason not to increase progammatic spending. Are you willing to state that Virginia should hold the line on spending in ’06? I would ask the same question of Adam Smith.

  5. The Jaded JD Avatar
    The Jaded JD

    I think we agree. I don’t want these funds going towards either structural tax reduction or structural spending increases. Either one-time spending projects, one-time tax rebates, or some combination of the two, would be appropriate.

  6. The Richmond Democrat Avatar
    The Richmond Democrat

    Great comments Jaded JD. I can’t believ you’re shutting down your site!

  7. ShortPumpShorty Avatar
    ShortPumpShorty

    Jim, I would ebcourage you to visit the Senate Finance Committee web site and review the presentations made at the retreat a week ago. In fact, I would most respectfully challenge you and everyone else who calls for tax refunds or rate cuts to analyze the reports. I would honestly a potentially contrary assesments of them.

    To me they make a compelling case for “unmet needs” and engender a respect for that term, not sarcastic derision.

    Check out, for instance, the Capital Outlay report, probably the least sexy thing the state does. I am curious in Short Pump.

  8. Ray Hyde Avatar
    Ray Hyde

    I’m with Shorty: anyone who thinks this state hasn’t got a lot of work to do only needs to look around.

    We already went through the situation where the tax rate was too low to support the needs when revenue generating activites were low. Since the rate is set at a percentage of activity, it’s hard to see where taxpayers are getting hurt: their income is up and the taxes are up.

    Considering all that we need to do that seems to be a better situation than lowering the rate and then not having enough, closing DMV’s etc, the next time around.

    It is too bad there isn’t some way to set the excess money aside, beyond the miniscule amount allowed in the rainy day fund. If we paid a few percent extra for a hundred years, we could have an endowment that would eliminate or lower taxes forever.

    Instead, since there is no incentive to give it back or save it, we look for one time programs to unload it. Unfortunately, there isn’t enough time to think carefully about what we are doing, so someones pet political plum picks everyones pocket.

  9. ShortPumpShorty Avatar
    ShortPumpShorty

    Thank you, Ray. Also, thanks for overlooking my typos.

    Another aspect to the larger picture is the perverse incentive governmental programs have with fuding. Our tendency is that those activities that produce results we level fund. For those that fail, we increase their budgets. I’ll be very interested in seeing how the Governor’s outgoing budget measures productivity. As I recall, a more transparent budget with performance measurements was one of his commitments.

    In the interim, all state expenditures, down to each individual vouchers is now available at the Auditor of Public Account’s web site. There are also demographic data. (Perhaps you read it here first on “Bacon’s.”) Check it out.

    Looking to the specifics of the next state budget, I hope our lawmakers:
    (1) resist any new programs unless they can definitively establish savings in the near or medium term
    (2)eschew absolutely any new debt [including transportation!]
    (3) pay down existing debt
    (4) pay only cash for capital projects including defered maintenance.

    Who’s on board with Shorty’s plan?

  10. Jim Bacon Avatar
    Jim Bacon

    Shorty, I think you have a great plan. The chances of it getting enacted are about nil. Brace yourself for a major wave of increased state spending — if not “new porgrams,” then more generous funding for existing programs.

    Regarding the Senate Finance Committee reports you allude to, I could not find them on the Web. Could you provide a URL to get me started?

  11. ShortPump Shorty Avatar
    ShortPump Shorty

    The url’s get a little long. First go to (no “www”) sfc.state.va.us. Click onto the emboldened “Committee” at the end of the second “new” section. From there scroll down to the enmboldened “2005 Retreat.” On that page the reports show up as pdfs. The link for that page is http://leg3.state.va.us/quickplace/sfc2005/main.nsf/h_CDA1E3D8D3D247FB85256DE50071D2A4/99906DDA443949D5852570B900772B20/?OpenDocument

  12. Chris Avatar
    Chris

    “If we’re looking at a cyclical uptick in state revenue, as all the signs suggest since these three revenue streams are the ones exceeding forecasted receipts, rather than a structural uptick in state revenue,”

    But surging corporate tax revenues almost always means that personal taxes and sales taxes will be surging soon as well. In the 1990s, corporate taxes surged just before other taxes surged, and corporate taxes were the first to decline in the early part of this decade. So we could cut sales or personal incomes taxes now if we wanted to.

    But why not reduce corporate tax rates? Would give us an even more competitive business climate.

    I would not be opposed to putting the money in a rainy day fund either.

  13. Steve Haner Avatar
    Steve Haner

    Surging corporate taxes produce growth in the non-withholding portion of the income tax, the quarterly payments, but not so much in the withholding on salaries and wages, which are the bulk of the money. And the history on the corporate income tax is very checkered — it is the first to go south in hard times.

    The surging recordiation taxes, of course, predict huge jumps in local real estate taxes based on the higher values.

    The state is reaping the benefit of the federal tax changes, which is fine. This may be heretical on my part, but I don’t think Virginias corporate income tax rate should be reduced. There might be some tweaks that make Virginia a more competitive location, but largely- at the state level — we are there.

    The battle over tax reform frankly should shift to the local level, where the real estate tax is surging, Governor-elect Kaine may be pushing for a 20 percent homeowner exemption, and where 95 percent of the complaints I hear from the business community about taxes begin. Study the sheets that Short Pump Shorty is recommending and you’ll find that 50 percent of state spending is sent directly to local governments.

  14. Ray Hyde Avatar
    Ray Hyde

    “….50 percent of state spending is sent directly to local governments.”

    We need to ask if the government is in the business of governing, or if it is in the business of income redistribution.

    When local governments complain that housing does not pay it’s fair share of taxes, they conveniently forget about all the money that goes to the state, (from people who live in houses), and then comes back.

    I have a problem with Shorty’s antipathy to debt. Debt is one way we can bill our successors fro projects we undertake primarily for them. Forsaking debt makes any capital expenditure nearly impossible. Any business calculates carefully what the correct amount of debt is: too much and you can’t make the payments, to little and you can’t grow as fast a you might. Same goes for government.

  15. Ray Hyde Avatar
    Ray Hyde

    Ooh, that didn’t come out right. Not that government needs to grow, but the work that it accomplishes probably does need to grow.

    I have a question some historian out there might help me with. It concerns unmet needs.

    If we look around Virginia and see all that has been accomplished; highways, universities, governance of all kind; it occurs to me that much of this was done many years ago, with much less technology, inferior materials to work with, fewer people who earned less money, and with less commerce to support the state coffers.

    Considering the problems we seem to have today, how did it all get done?

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