State tax revenues have fallen to a new, lower trajectory. Source for all graphs: "Report of the State Budget Crisis Task Force." (Click graphs for more legible image.)
by James A. Bacon
While the federal government is hurtling towards a Boomergeddon melt-down, the prospects of state and local governments don’t look much better. According to the “Report of the State Budget Crisis Task Force,” states’ major revenue sources are eroding and increasingly volatile. Despite its AAA bond rating, Virginia is no exception to the trend.
As consumer spending shifts from products to services, the sales tax captures a smaller percentage of income.
On average, sales taxes account for roughly one third of state revenue. That percentage is smaller for Virginia — 20.3% for state tax revenue in 2009 and 6.9% for local — but it is significant nonetheless. Due to the shift in consumer spending from taxable products to usually non-taxable services, sales tax breadth (tax base as a percentage of personal income) has shrunk in Virginia from 40.5% in 1970-2010 to 26.9% in 2010.
Meanwhile, an increasing share of retail sales transactions are taking place online, where they are not taxable. “Estimates place Virginia’s revenue loss during the current fiscal year from untaxed Internet sales at $207 million, roughly one-quarter of all of the state’s estimated retail sales and use taxes due on Internet sales,” states the study.
Fluctuations in capital gains account for much of the volatility in income tax revenues.
At the same time, states’ reliance upon income taxes has increased, even as revenue from the tax has become more volatile. As states increase the progressivity of their income taxes (taxing highest income earners disproportionately), they become more vulnerable to economic swings that affect variable income sources such as bonuses and capital gains. In the current slow-growth environment, which the study expects to persist, that variability works to the states’ disadvantage. Virginia depends on the individual income tax for two-thirds of general fund revenue.
Finally, the motor fuels tax, Virginia’s main revenue source for transportation, has not changed from its 17.5-cents-per-gallon level for 24 years. “The buying power of Virginia’s gas tax revenue has declined 45 percent in this period; it would take a 14.5 cent increase to restore the real value of gas tax revenue – $580.3 million annually in current dollars.”
A sudden rebound in economic growth and incomes would revitalize the state’s income tax revenue, but the long-term shift in consumption toward services will continue to crimp growth in sales tax revenue, and absent an increase in the motor fuels tax, that revenue source will continue to erode with inflation and the trend to more fuel-efficient vehicles. If Virginia is unwilling to reform its tax structure — see our posts on Commonwealth Institute and Thomas Jefferson Institute for Public Policy studies making the same point — state government will continue to be revenue constricted.
And that’s just the opening salvo. In future posts, I will discuss other threats to fiscal sustainability such as increasing Medicaid costs, cutbacks in federal aid and under-funded pensions.
Special thanks to criminal defense lawyer, Nicole Naum for supporting Bacon’s Rebellion.
