Another Cry for Virginia Tax Reform

Graphic credit: Commonwealth Institute

by James A. Bacon

Virginia’s revenue problems run much deeper than the Great Recession, argues the Commonwealth Institute in a new report, “Frozen in Time: Virginia’s Revenue System Can’t Pull Its Weight.” Chronic revenue shortfalls are the fault of the Old Dominion’s antiquated tax structure.

Virginia has grappled with budget shortfalls in 10 of the last 12 years, note authors Sara Okos, Sookyung Oh and Michael Cassidy. Reliance on “deep cuts, one-time budget-balancing tools, and gimmicks” got the state through the recession. But structural problems persist.

Graphic credit: Commonwealth Institute

The report cites costly tax breaks for favored industries that get “baked into the tax code but are not subject to the same regular scrutiny or evaluation as other types of state spending”; an income tax structure that has not been touched since 1987 despite a market shift in income distribution to higher-income households;  and policies that enabled 60% of Virginia corporations to pay no income tax in 2008.

Concludes the report:

Virginia’s general fund revenues have fallen short of the levels needed to fund education, public safety, transportation, health and human services, and other public obligations that contribute to a strong economy for over a decade. And they will continue to do so because a maze of obsolete and narrow policies, set between 25 and nearly 100 years ago – and for the most part not updated since – have Virginia frozen in time. Holding fast to a state tax system that was designed for yesterday’s economy, not the Virginia of today, is starving the needs of our modern state and jeopardizing our ability to create good jobs and ensure a better future for the next generation. It is time for Virginia to engage in a serious conversation about revenue modernization. It is time to talk taxes.

If there is one thing that liberals and conservatives can agree upon, it is that Virginia’s tax code desperately needs an overhaul. It is indeed time to talk taxes. The big question is which reforms to enact.

I would submit the following principles should guide any discussion: (1) We should aspire to create as level a playing field as possible by eliminating special deductions, loopholes and credits; (2) we should seek the broadest possible tax base so as to keep tax rates as low as possible, thus reducing economic distortions and tax-avoidance behavior; (3) we should strive for simplicity and ease of compliance; and (4) we should balance the goal of making the tax system progressive, in which wealthier Virginians pay more than poorer Virginians, with the goal of stimulating economic growth and job creation.

The Commonwealth Institute does not recommend specific policy changes. But in April the Jefferson Institute for Public Policy pitched a proposal for restructuring the tax code that, it argued, would stimulate economic growth. If it’s time to talk taxes, perhaps the Commonwealth Institute and the Thomas Jefferson Institute should sit down and see if they can find common ground.

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  1. larryg Avatar

    Virginia’s tax code for the average individual taxpayer is pretty straight forward since it starts with the Federal AGI.

    other then exemptions for the elderly and disabled.. I don’t see much opportunity for “reform”.

    indeed the essence of the TJ proposal was to kill some local taxes like BPOL and replace them with sales taxes on services.

    While I agree that the BPOL and Machinery taxes are onerous and unfair… I’m not seeing how the TJ revenue-neutral idea goes forward .

    re: ” by eliminating special deductions, loopholes and credits”

    let’s see them.. look on the Va 760… I just don’t see much

  2. DJRippert Avatar

    Many counties in Virginia are sitting on huge unfunded retirement mandates for public sector workers. Prince William County is one. I’ve read that the unfunded pension will cost every man, woman and child in PWC $2,500 to close.

    Eliminate loopholes? I should say so. Of course, the loophole owners are, no doubt, among the biggest of the unlimited contribution contributors.

    Virginia is broken, broken, broken.

    Only a whole sale change in the governance approach will give the Commonwealth a fighting chance. Until then, contributions = loopholes = fiscal decay.

    We need a two term governor.
    We need term limits on the General Assembly.
    We need the practicing attorneys in the GA to recuse themselves from any judicial appointments.
    It must be easier to get on the ballot in Virginia.
    Redistricting should be done by an impartial committee, not by The Imperial Clown Show itself.
    We need a cap on campaign contributions.
    There must be much better visibility into the operations of government.
    We need citizen initiated referenda and recall elections.

    Until we start getting some of these things – you will have loopholes and fiscal decay.

  3. larryg Avatar

    the state itself (and other states) and private pensions are all in unfunded liability hot water.

    I’m suspicious of the “reform the tax code” idea unless I see a clear proposal rather than some vague concept.

    I’m especially suspicious of proposing vague tax reforms at the same time the budget won’t balance – again – unless I see a clear plan.

    the problem is your idea of tax reform is my idea of you trying to stick it to me. It’s damned near impossible to “reform” the tax code because virtually everyone has a vested interest and won’t give it up unless they see others taking pain also.

  4. Isn’t tax reform what Mark Warner did successfully during his term as Governor? I had the chance to hear him speak on the topic. He talked about the need to make some structural changes to address a changing world and to fix the structural deficit. Well, taxes were reformed and experienced a net increase at the state level. (Actually, NoVA just sent a lot more money to Richmond.) So didn’t it work? Why do we need to do it again? LoL
    My understanding of the Virginia tax code is that there are a slew of tax credits that go to this favored business or industry.
    Here’s the list.
    •What’s New for Tax Credits
    •Agricultural Best Management Practices Credit
    •Biodiesel Fuels Credit
    •Barge and Rail Usage Tax Credit
    •Credit for Taxes Paid to Another State
    •Coalfield Employment Enhancement Credit
    •Conservation Tillage Equipment Credit
    •Day-Care Facility Investment Credit
    •Enterprise Zone Act Credit
    •Farm Wineries and Vineyards Tax Credit
    •Fertilizer and Pesticide Application Equipment Credit
    •Foreign Source Retirement Income Credit
    •Historic Rehabilitation Credit
    •Home Accessibility Features for the Disabled Credit
    •International Trade Facility Tax Credit
    •Land Preservation Credit Provisions Prior to 2007
    •Land Preservation Credit Provisions for 2007 and After
    •Livable Home Tax Credit
    •Low Income Housing Credit
    •Low Income Individuals Credit
    •Major Business Facility Job Credit
    •Motion Picture Production Tax Credit
    •Neighborhood Assistance Act Credit
    •Political Contributions Credit
    •Port Volume Increase Tax Credit
    •Qualified Equity and Subordinated Debt Investments Credit
    •Recyclable Materials Processing Equipment and Alternative Recycling Credit
    •Rent Reduction Program Credit
    •Research & Development Tax Credit
    •Riparian Waterway Buffer Credit
    •Telework Expenses Tax Credit
    •Trust Beneficiary Accumulation Distribution Credit
    •Vehicle Emissions Testing Equipment, Clean Fuel Vehicle and Certain Refueling Property Credit, Clean Fuel Vehicle and Advanced Cellulosic Biofuels Job Creation Tax Credit
    •Waste Motor Oil Burning Equipment Credit
    •Worker Retraining Credit
    My problems with tax reforms include: these credits will stay and there will be an attempt to raise taxes generally to fund these; Warner proved tax reform was a ploy to take more money from Fairfax County residents to spend elsewhere; no one in the media will take the time to learn about and explain what is really happening.

  5. larryg Avatar

    these are all business tax credits. Is there a number? I note that the Feds actually have real numbers for things like employer provide health insurance, mortgage deductions, child tax credits, etc.

    I’d be satisfied if we had some quantifiable value for the total of Va tax credits.

    what percent of the budget are these credits? 1%, 10% or 50%?

    In general I support less taxes on business. Taxes on businesses just get passed on to consumers anyhow in most cases so why tax a business and mess up their revenues flow?

    Small businesses, especially operate from hand to mouth and meeting payroll can be tough with some small business owners having to get loans… having to get mortgages on their own homes – just to make payroll.

    I’m not convinced that Warner screwed over NoVa. Let’s see some numbers.

    When people in NoVa claim that the Virginia sales tax belongs to them and not the state, I start to wonder about the rest of their logic.

    All states collect sales taxes to help run the state. Since when does the state sales tax “belong” to the locality?

    the more convoluted the logic when it comes to taxes, the more I am convinced that people simply resent paying taxes to start with but they want the tax-funded stuff that benefits them and oppose taxes that benefit others.

  6. larryg Avatar

    “tax reform” should be sold on it’s own and it’s “benefits” promoted without respect to how they would be used – FIRST.

    Make the argument for tax reform first then once you get it passed, you can use the proceeds to reduce the budget.

    Presenting a reduced-budget that claims tax reform as the reason presumes success on tax reform which is not at all a sure thing to start with but even less so when the actual reforms are not actually identified.

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