Category Archives: Taxes

Virginia Gothic

by Bill Tracy

Following up on Steve Haner’s discussion of Virginia’s handling of the new federal tax laws, I decided to do a “hypothetical” sample calculation.  “Hypothetical” is in quotes, because this example is somewhat similar to my own household, where we are grandparents in retirement.

In this simplified example, the annual income is assumed to be $150,000 withdrawn from retirement savings. Itemized deductions total $28,500 including $7500 state income tax, $7500 property tax, and $13,500 mortgage interest and charitable donations.  Thus the SALT (state and local taxes) exceed the new $10,000 federal limit.

Our hypothetical taxpayers are filing a Married-Joint tax return, and they are Age 65 or older.  Due to being over Age 65, this couple benefits from a larger 2018 Federal Standard Deduction of $26,600 vs. the normal deduction of $24,000 for younger couples.   In our example, the couple’s itemized deductions total $28,500 in 2017, but which is reduced to $23,500 in 2018 with the new SALT deduction limits.  Thus the $26,600 Standard Deduction looks better, but only on the surface.  As you will see below, the plot thickens in 2018 for many Virginians.

Using 2017 as a Base Case, let’s look at the tax payment options available to the couple in 2018:

Option-1 above is currently the best for our couple in 2018, but they are not very happy. Upon completion of their Federal FORM 1040 they are temporarily pleased see $801 tax savings, courtesy President Trump. However, upon filing their Virginia FORM 760, the couple owes Virginia an extra $863, courtesy whomever wants to take the credit for that. So the overall loss is $62 versus the 2017 Base Case.

Option-2 uses itemized deductions, and presents our retired couple with an interesting and rebellious alternative. If they are mad at Virginia, they could elect to itemize deductions, and pay more tax to the Feds, and less to the state. In my actual personal tax projection, right now I think Option-2 probably saves me a few bucks.

Option-3 is the most preferable option for our retired couple, but it requires the General Assembly to change the Virginia tax laws. Virginia tax law currently stipulates that a taxpayer who takes the Federal Standard deduction, cannot itemize taxes for Virginia purposes. It is this Virginia law that prevents our retired couple from taking the modest tax reduction that the new Federal tax law tries to achieve.

(Calculations based on a shareware 2018 Federal Tax estimator, and using 2017 Virginia tax calculator with adjustments for itemized/standard deductions.)

Bill Tracy, a retired engineer, lives in Northern Virginia.

Taxes, Innovation and Virginia’s Lost Mojo

In 1940

In 1940, technological innovation in the United States was concentrated overwhelmingly in the Great Lakes states, the Northeast, and California. The powerful economic force known as agglomeration — in which geographic proximity boosts the productivity of inventors and researchers — acted to perpetuate those states’ lead. Yet over the following six decades, the propensity for innovation, as measured by patents per 10,000 state residents, diffused to Texas, the South Atlantic states (including Virginia), and the Rocky Mountain states. What drove that change?

One likely factor was tax rates — primarily for corporate income taxes, but for personal income taxes as well. And that should be a wake-up call to Virginia. The Old Dominion’s 6% top marginal tax rate for corporations gives the state a crummy 31st rank in the Tax Foundation’s business tax climate index, and its 5.75% top tax bracket contributes to the state’s 9th highest rank for state-and-local income taxes paid per year.

A new study by Ufuk Akcigit, a University of Chicago economics professor, and three colleagues has found that corporate and personal income tax rates have a profound effect over long periods of time on technological innovation. States their paper, “Taxation and Innovation in the 20th Century“:

Taxes affect the amount of innovation, the quality of innovation, and the location of inventive activity.

The effect of taxes on innovation is a consuming question in modern-day economics. Heavily dependent upon anecdotal evidence and incomplete data, the debate has been impossible to resolve decisively. However, Akcigit and his co-authors have set a new evidentiary standard by compiling three new datasets. First they constructed a database of inventors based on historical patent data since 1920, which allows them to track innovations over time, industry, and location. Secondly, they built a database of corporations’ R&D labs and research employment. Thirdly, they created a dataset of state-level corporate and personal income tax rates.

The authors find that personal and corporate income tax rates have “significant effects” at the state level on patents, citations (a measure of the significance of a given patent), the prevalence of inventors in a state, and the share of patents produced by firms compared to those produced by lone inventors.

Corporate inventors are the most “elastic” — economics speak for “sensitive” — to tax rates. Corporations tend to be unsentimental about where they invest. They have less loyalty to a given geographic area. They look to maximize their return on investment wherever they can find it. By contrast, individuals may have strong personal and sentimental attachments to a location. However, when inventors do choose to move, Akcigit has found, they are “significantly less likely” to move to states with higher taxes.

Though a significant factor in shaping the geographic distribution of innovation, taxes are not all-powerful. The authors readily acknowledge the influence of agglomeration effects. Within a given scientific or technological field, inventors like to stay close to the action — in other words, to locate near others in the same field. Often, agglomeration effects are stronger than tax rates.

Bacon’s bottom line: Let me offer a couple of refinements, and then a warning to Virginia.

The authors examine published corporate income tax rates. They do not take into account the impact of corporate tax giveaways — an essential strategy for some states (such as New York) to retain corporate activity and for other states (such as anyone trying to attract Amazon’s HQ2) to bribe corporate investors. Also, they don’t examine how the tax money is spent. In theory, highly skilled and educated inventors prefer to live and work in locations with superior amenities made possible with higher taxes. Finally, they neglect to examine university-generated R&D. It goes without saying that university R&D is tied to the geographic location of the institution (although research teams can be induced to move).

I would argue that powerful forces work to perpetuate the geographic status quo:

  • Agglomeration effects, in which inventors in industry clusters feed off one another. Silicon Valley is a classic example of how agglomeration effects outweigh the negative impact of high taxes and even higher real estate prices.
  • Government and cultural amenities, in which wealthy regions of the country spend more money on schools, higher-ed, and other amenities valued by the educated class, and where philanthropists have endowed local universities, medical centers, and arts & cultural institutions over the ages.
  • Tax-favored institutions, in which leading universities, disproportionately located in the Northeast, the Midwest and California, have accumulated massive tax-exempt endowments that allow them to underwrite the recruitment of world-class research faculty. Insofar as universities serve as anchors for innovation ecosystems, this tax advantage is crucial.

It is remarkable, given the extraordinary advantages of the incumbent innovation leaders, that research and innovation has migrated to other states at all. What allows these other states to compete? Lower corporate and individual taxes is one of the few public policy tools a poorer state can muster.

Once upon a time, Virginia was known as a low-tax, fast-growth state. That is no longer true. At best, we can claim to be a moderate-tax, moderate-growth state. We have neither the advantage of accumulated wealth in the form of world-class research universities, medical centers, foundations, museums, and cultural institutions nor the advantage of lower taxes that attract corporate investment. (Yeah, yeah, the University of Virginia is great, and so is the Virginia Museum, but overall Virginia is strictly second-tier.) Measured by economic performance, Virginia is in the muddled middle. Economic growth is plodding. For the first time in decades, more native-born Americans have been leaving the state than entering it. 

Is our tax policy to blame? Do our tax structures and budgetary priorities increasingly resemble those of the Midwestern and Northeastern states — without the inheritance of vast industrial-era wealth and philanthropy to underpin our economy? I suspect strongly that that’s the case.

To answer the question, it would help to have innovation data more recent than 2000. Economically speaking, Virginia was on a roll then. Today, the state is suffering economic malaise. I would not be surprised to find that our relative innovation standing has declined. Our governor and legislature propose lots of small-small remedies to jump-start the economy, but it’s hard to see how they will amount to much. Virginia’s relative decline warrants far more serious thought than it has received so far.

Virginia Should Double Its Standard Deduction

In 1987, as part of its response to the conformity issues created by President Reagan’s tax cut, the Virginia General Assembly increased the standard deduction available to Virginia taxpayers to $3,000 for an individual and $5,000 for a couple. At some point since the joint filing amount went up to $6,000 to eliminate any marriage penalty.

Faced with a similar problem in 2019, that’s what the Virginia General Assembly should do as a start:  Increase the state standard deduction.  Double the amount of income a Virginia couple can shield from tax under that method, with no itemized deductions necessary.

Virginia also allows personal exemptions to provide a bit more tax-free income.  The personal exemption is now $930 each.  A couple with one child gets $6,000 in standard deductions and $2,790 in personal exemptions for a total of $8,790 pre-tax income.  Compare that to where surrounding states are on that score and to the new federal standard deduction of $24,000.  Even if Virginia doubles the standard deduction, its only a step in the right direction, as you can see below.

Taxable Income Threshold
Couple Plus One Child
Virginia Current $8,790
Virginia Proposed $14,790
Maryland $13,600
District of Columbia $24,000
North Carolina $17,500
South Carolina $24,000
West Virginia $6,000
Tennessee No Income Tax
Federal Taxes $24,000

I’ve been drawn to this idea from the start but when I saw that surrounding states (except West Virginia) were already there, this suddenly struck me as imperative.

It would be only a good first step toward preventing the personal income tax increases which will result when Virginia conforms to the new federal tax rules and definitions.  The idea is further explored in a briefing paper published today by the Thomas Jefferson Institute for Public Policy.  It is neither creative nor comprehensive tax reform, but creative and comprehensive make people nervous and will take time so let’s start with something simple and familiar we can do quickly.

It is better than doing nothing, which is what the Virginia Society of Certified Public Accountants is recommending.  It wants to adopt conformity and let the revenue accumulate, hoping later next year some consensus on reform will emerge.  Hope is no substitute for cash.  This is a very attractive idea that might get consensus now and could be adopted in the same bill that accepts conformity.

It is also a better approach than breaking conformity and allowing Virginia taxpayers to itemize on their state taxes while taking the standard deduction at the federal level.  The whole idea behind federal tax reform – and many surrounding states clearly agree – is to move people away from deductions driving their economic behavior.

Finally, this is a better idea than giving low income workers grants through the Earned Income Tax Credit system.  The grants come once a year and you must apply.  They reduce to nothing on a sliding scale.   This is a clear-cut tax reduction of $345 ($6,000 x 5.75%) for almost every family taking the standard deduction.  With withholding tables adjusted, the money shows up in every paycheck.

Many in the political class remains focused on spending the windfall money.  This takes away about $440 million of that possible spending, according to the Department of Taxation’s modeling.  This is an accidental tax increase, a windfall not approved by the General Assembly or (despite some of the rhetoric) caused by the Governor.  Any tax increase has economic consequences as people lose spendable income, so if you can reduce that impact there is economic benefit.

People with a pile of itemized deductions, which would usually be people who also have high incomes, taxes, interest payments and charitable giving, didn’t take the standard deduction before and will not do so going forward. This idea does nothing for them.  This also does nothing to address the corporate income tax increases which are coming.

Has NoVa Finally Woken Up?

VA-10.  State Senator Jennifer Wexton (D) hopes to unseat Congresswoman Barbara Comstock (R) in Virginia’s 10th Congressional District.  A typically gerrymandered Virginia district, the 10th stretches from inside the Capital Beltway to well west of Winchester.  As a resident of the 10th I watch the elections in that district closely.  This one is shaping up to be a doozy.  Far left Jennifer Wexton is running on an anti-Trump platform while trying to avoid taking a position on any issue relevant to the constituents she hopes to represent.  Meanwhile, Barbara Comstock is running as an embarrassed Republican who tries to avoid gazing east at the current occupant of the Oval Office.  Think Nelson Rockafeller in drag.  All in all I think Barbara Comstock has done a better job of explaining herself and focusing on issues that are relevant to her district.  One issue in particular stands out for me – the allegation that Wexton has sold out Northern Virginia during her time in the General Assembly.

Don’t get Wexton’ed.  Recent negative ads run by the National Republican Congressional Committee (presumably) on behalf of Barbara Comstock hit a point that hasn’t been hit before.  The ads call out Jennifer Wexton for her role in the General Assembly’s massive rip off of Northern Virginia.  The 30 second ads are punchy and direct.  One ad has a graphic that shows money raining out of NoVa into Richmond.  It cites high tolls and NoVa – only taxes.  Needless to say, Jennifer Wexton is the highlighted villain.  Another ad shows traffic jams and tolls in NoVa then cuts to a single car effortlessly driving down an otherwise empty road claiming, “The rest of the state rides for free.”  As far as I’m concerned, the ads are completely on target and finally call out the gutless NoVa politicians we have elected for selling out their constituents.

I wish I could drive I295.  For many people from Northern Virginia there certainly seems to be a vast sucking sound coming from the General Assembly in Richmond.  There also seems to be a two class system when it comes to a lot of things including transportation.  Take Richmond for example … the city, not the state government.  The OMB defines the greater Richmond area as comprising thirteen counties, including the principal cities of Richmond, Petersburg, Hopewell, and Colonial Heights. As of 2016, it had a population of 1,263,617.  Somehow, this qualifies the area for a 4 lane “beltway” called I295.  Meanwhile, the greater Washington area has a population of 6.1m as of 2016.  It also has a 4 lane beltway in NoVa.  An area with 4.7 times the population of Richmond somehow ends up with the same sized highway encircling it as Richmond gets?  And Jennifer Wexton thinks that’s all fine and dandy?  Comstock’s right – let’s not get Wexton’ed.

Thanks, Barbara.  Jennifer Wexton is hardly alone in selling out her constituents.  All 140 seats in the Virginia General Assembly are up for election in 2019 including every state politician claiming to represent Northern Virginia.  It’s high time that all of NoVa’s politicians are taken to task for selling out their constituents.  Hopefully these ads and others like them will continue to haunt the comfy re-election dreams of our political class in Northern Virginia.  If our politicians want to argue about their role in grifting NoVa the approach is easy … clearly and quantitatively document the amount of money taken by state and local government in NoVa and compare it to the amount of money spent by state and local government in NoVa.  Then … defend the difference.  I happen to know that a number of General Assembly members from NoVa read this blog (at least occasionally).  Any of you who read this – are you up for the challenge of demonstrating the fairness of your actions vis-a-vis inflows and outflows of money from NoVa?  I won’t hold my breath.

— Don Rippert

Lock in Tax Cuts, Stimulate Virginia Small Business

Gary Desilets

by Gary Desilets

Ahead of the November midterms, Republicans are preparing to make President Trump’s tax relief permanent.

House Republicans have introduced legislation to lock in tax cuts beyond 2025, when they are currently set to expire. The legislation also would maintain the standard deduction, which increased to $12,000 per individual and $24,000 for a married couple, and keep the special deduction for pass-through small business owners. (Pass-through business owners are taxed at their individual marginal rates, thereby “passing” business income on to personal income.)

In the words of House Ways and Means Committee Chairman Kevin Brady (R-TX): “This legislation is our commitment to the American worker to ensure our tax code remains the most competitive in the world.”

He’s spot-on. Small businesses need permanent tax relief, which will make it much, much easier for them to grow the U.S. economy.

Our economy depends on small business. America is home to more than 30 million small businesses, which employ nearly 60 million workers—half of the U.S. workforce. In fact, small business accounts for 99.9 percent of all American businesses.

This story can also be told in Virginia, which is home to just under 724,000 small businesses. Many of them our exporters who connect Virginia to other states and foreign economies. In our state, 1.5 million employees—47 percent of the Virginia workforce—depend on small business for their current employment and financial stability.

We need to support these job creators with pro-business policies, which President Trump and Republicans in Congress have prioritized for months. Tax cuts, for example, allow employers to keep more of their hard-earned money, making it easier to invest that money in hiring, pay raises, and other ventures.
That’s exactly what the federal tax bill accomplished. By decreasing rates and increasing deductions, elected officials finally extended an olive branch to the business community, giving job creators the shot in the arm they need to finance expansion.

As a small business owner, I’ve seen it firsthand. I own Deckscapes of Virginia, a deck builder in Catharpin. Because of my tax savings, I was able to hire additional workers and expand our business operations. Moreover, we opened individual retirement accounts (IRAs) for all of our employees, helping them prepare for life after work. That’s how tax cuts work: More money in my pocket eventually means more money in the pockets of my employees.

I’m not alone. Countless businesses across Virginia have used their tax savings for the greater good. Take Newport News-based Bay Electric, which not only hired 12 electricians and two project managers, but also invested more than $500,000 in new trucks and additional equipment. Or consider Fredericksburg-based Payne Trucking, which dished out $750 bonuses to boost Payne employees’ financial well-being.

Let’s build on this positive momentum. There’s no reason not to make federal tax cuts permanent, on behalf of employers and employees.

That’s exactly what Republicans should do. Forget politics for a second. Do the right thing for the U.S. economy.

Gary Desilets is the owner of Deckscapes of Virginia in Catharpin.

Virginia State/Local Taxes Per Capita: $4,457

State and local tax collections per capita, FY 2015. Source: The Tax Foundation. Click to enlarge map for better legibility.

State and local tax collections per capita in Virginia amounted to $4,457 in fiscal 2015, ranking the Old Dominion as the 23rd highest taxed state in the country, according to the Tax Foundation. We are the most heavily taxed state in the Southeast.

If you believe state/local government should spend and tax more, this data gives you ammo. We have plenty of room to raise taxes. If you think state/local government spends and taxes too much… this data gives you ammo. We have plenty of room to cut taxes.

VA CPAs Say Conform, Hold Tax Funds for Later

The Virginia Society of Certified Public Accountants (VSCPA) Monday called on the 2019 Virginia General Assembly to conform Virginia tax with recent federal changes, to track and sequester the hundreds of millions of dollars in higher taxes thus generated and to hold those funds for a future tax reform effort.

Nobody knows these issues better than the people who prepare tax returns, and the CPAs cite continued uncertainty over the full impact of the federal changes, especially with several issues still awaiting guidance from the U.S. Internal Revenue Service.  The society’s position is detailed in a white paper.  It offers no firm advice on what policy changes should eventually be adopted.

“VSCPA leadership and the VSCPA Tax Advisory Committee considered and discussed numerous policy options in an effort to make a recommendation, considering extensive input from VSCPA members and tax professionals, and determined that there was no member consensus on any single policy prescription,” Vice President Emily Walker wrote in an accompanying news release.

The VSCPA has enhanced its clout on this issue by hiring former Senate Finance Committee Chairman Walter Stosch as an outside lobbyist.  Stosch’s message to conform in full and then hold the money for later decisions is likely to carry greatest weight with his former colleagues in the Senate.

On the same day the CPA’s position was announced the first piece of proposed conformity legislation was filed, a House bill seeking to allow one major deviation from conformity.  It would allow Virginians to take the standard deduction on their federal returns but still itemize deductions on their state returns.  The deductions they can take will be under the new federal rules, however.

In previous Republican-generated statements pledging to allow Virginians to keep state itemized deductions while taking the federal standard deduction, the question of which deductions – new or old — has not been addressed.  The new federal law places limits on state and local tax deductions, eliminates the moving expense deduction, and make many other changes.

Delegate Richard Bell (R-Staunton) is not on either the House Finance or Appropriations Committees and it is likely other bills will emerge, probably many of them, before the session starts in January.  To apply retroactively to tax year 2018 any bill will have to pass with 80 percent super-majorities in both chambers, requiring a bipartisan consensus.  A bill changing policy for tax year 2019 needs just the usual majorities plus the Governor’s signature.

Secretary of Finance Aubrey Layne was back discussing the issue before the House Appropriations Committee Monday, at the end of his regular presentation on the state’s finances.  A CPA himself, he probably helped influence that society position paper.  The Northam Administration is resisting efforts to make immediate tax policy changes in response to conformity but has not ruled out a tax reform effort next year.

That approach has its own challenges.  By the administration’s own estimates, conformity with no policy changes produces almost $600 million in additional revenue for tax year 2018 from individuals and businesses.  To hold the funds in reserve for a future tax policy debate would require great discipline on the part of the elected leaders.  And if done in special session next year that debate would take place during the run-up to what is likely to be a bitter primary and election season for both House and Senate.

Layne has access to the revenue model produced for the state by Chainbridge Solutions LLC and added a data tidbit yesterday:  While some people will see a tax increase if Virginia adopts full conformity, others will see a tax increase if the state does not.  The individual tax hike from non-conformity is more than $181 million.  That’s far less than the other way around but demonstrates the complexity of all this.

Speaking of complexity, an effort to explain this in easier-to-understand language led to the production of another white paper, this one mainly written by me and distributed Monday.  You can find it on the Thomas Jefferson Institute website here.

Dump the Nonsense in Coming Conformity Debate

Mr. Chairman, I seek permission to revise and extend my remarks – in this case a guest column in today’s Washington Post on the topic of income tax conformity.

For about a month now the inbox has been filling up with nonsense (and some wisdom) from across the political spectrum over the causes, impact and possible corrective actions to the side effects federal tax reform had on Virginia’s taxes because Virginia is a conformity state.  There is an annual bill dealing with income tax conformity at the General Assembly, but based on what has been coming out, few who voted for it have paid any attention to it.

“Governor Northam recently announced a new tax plan that will result in a large tax increase on middle class families. That means more money out of your pocket,” was the message in a recent Republican fundraising appeal.  The only hint of accuracy in that is that Virginia Governor Ralph Northam has proposed Virginia continue its long and bipartisan policy of conformity with the tax laws passed by Congress, in this case a tax bill written by their fellow Republicans.

If the position of the Republicans in the House of Delegates is to abandon Virginia’s long (and wise) policy of tax conformity, they should just say so.  They  are painting themselves into that corner.  You’ll notice no similar noises have come from the state Senate.

More than 30 years ago I was writing the political rhetoric following the Reagan-era tax reform, which had a similar impact on state taxes because of conformity.  Our immediate call as Republicans was to prevent a windfall tax increase at the state level, to “give it back to those who paid it.”  We even went so far as to accuse Governor Gerald Baliles of playing Robin Hood, taking from the rich to help the poor.  I should have looked up Robin Hood’s Q score.  People love Robin Hood.

As my education on the issue continued it became obvious our stated goal was impossible, given the complexity of the tax code.  The bill that eventually passed produced tax reductions, but was not intended to cancel out every individual tax hike.  It was not possible then and is even less possible now.

This is complicated stuff,  just like my other favorite topic of electricity regulation.  But taxes really get people riled up, adding the emotional content.  Fairness?  Fairness in this realm is entirely subjective. If you are going to pick a hill to die on, pick one you can actually find.  

The eagle-eyed among you will see a new title for me mentioned in the Post’s intro.

I have accepted an invitation to affiliate with the Thomas Jefferson Institute for Public Policy as a senior fellow.  Those of you who know it and founder Michael Thompson know it is a pro-business, pro-growth policy shop that does not engage in lobbying or partisan politics. It does have a point of view.  It has long been an advocate for a deep examination of the state and local tax structure, seeking to make it more aligned with the modern economy and more competitive compared to other states.  This is another chance to do that.

We hope to add some depth and detail to the debate, balancing opposing but equally important viewpoints, because a good outcome is crucial to the Commonwealth’s economic future.  The institute has access to an economic model that might prove useful in the debate, a counterweight to the data the state obtained from Chainbridge Software LLC.

I have asked that any financial support received for this effort, which may pay for that modeling, be as transparent as possible.  Any policy goals of the donors or others affiliated with the Jefferson institute will not overcome my own opinions on these issues, formed over forty years of writing and lobbying on taxes and budgets.  I also intend to continue exploring a wide range of additional topics here on Bacon’s Rebellion.  

Northam To Ask Again To Spend Carbon Fees

The gap between the amount of generation Dominion projects it will need by 2033, and what the SCC and an outside consultant project. It deals with thousand of megawatts of capacity. Source: SCC staff comments on Integrated Resource Plan case.

Virginia Secretary of Natural Resources Matthew Strickler told a legislative commission today the Governor will again ask the General Assembly to keep and spend the proceeds of a new electricity carbon tax, rather than find a way to return it to ratepayers.

Strickler pointed to Senate Bill 696 and its companion House Bill 1273, defeated by General Assembly Republicans on party-line votes, as models for what might come back in the 2019 session.  He estimated that once Virginia joins the Regional Greenhouse Gas Initiative (RGGI), and Virginia utilities are having to buy carbon credits at auction for their fossil fuel generation, it will generate $200 million per year.  The fiscal note on the failed bill estimates between $175 million and $208 million.

(Here’s an earlier discussion of RGGI on Bacon’s Rebellion, and here is the Richmond Times-Dispatch coverage of the meeting.)

The draft regulation pending at the Department of Environmental Quality would have the money paid to RGGI in the auctions eventually return to the utilities, after RGGI dips into the pot for its cut.  When former Governor Terrence McAuliffe started the regulatory process in 2016 he said the money would come back as credits to ratepayers and in effect create a shell game with little final cost.

The bottom line of the briefing before the Manufacturing Development Commission was all talk of money is just speculation until DEQ and the Air Pollution Control Board release the final regulation, and no details on that were reported.  The draft sparked 7,500 written comments and the Air Board can amend it before it takes a final vote.  Strickler predicted release of that in early December.

With all the other electricity rate increases barreling toward Virginians because of recent state legislation – building new solar and wind, a major effort to place residential lines underground, a massive roll out of smart metering and other grid improvements – it is easy to dismiss the cost of RGGI fees as a rounding error.  But $200 million more piled on annually will make a difference if the money is spent on other things the state wants, or somehow is retained by the utilities – which is very possible.  Some of that will be paid by customers of Appalachian Power or other smaller generators.

The State Corporation Commission staff told the commission that any cost estimate will depend on the actual CO2 emission targets set for Virginia by RGGI.  The starting point from which you measure the planned 3 percent annual reductions will matter.  Greg Abbott of the SCC staff said it is possible the utility could have an easy time meeting early goals and make a profit on the effort.  Just what happens to those dollars once RGGI sends them back to Virginia is not spelled out in the law and may depend on how the utilities treat the money in their own accounting.

The issue is also tied up in the SCC’s review of the Dominion Energy Virginia integrated resource plan.  Several of Dominion’s proposed capital plans assume a need to comply with RGGI and assign a cost.  But the SCC and others are challenging a key assumption behind those projections – the growth in demand for electricity from Dominion customers.  Slower growth makes meeting the RGGI goals easier and cheaper.

A chart from the SCC testimony in that case illustrates how its projections vary is at the top of this post.  An outside consultant to the SCC, Robert McBride of DrillingInfo Inc., believes Dominion will need less generation in 2033 than it currently has.

For its part, Dominion today provided absolutely no details at all on the cost or policy implications of RGGI, not even what it has included in the IRP.  It turned up with a short slide set to show how low its rates already are in comparison to other states, and tell how it helps low income customers.

Senator Frank Wagner, R-Virginia Beach, chair of this Commission and obviously still a RGGI skeptic, indicated he may call everybody back before his Joint Commission on Administrative Rules, which has statutory authority to challenge pending regulations.  Wagner questioned the need for RGGI membership, pointing to his own 2018 bill which authorized up to 5,000 MW of new renewable generation.

If that gets built, he asked Strickler, doesn’t that more than meet any carbon reduction goals RGGI might set?  So why join RGGI and layer on the carbon tax costs?   Strickler zeroed in on “if” and pointed out that the legislation did not actually order construction of those assets.  Joining RGGI sets a goal that creates more pressure to build them, he argued.

Steps Virginia Must Take to Tax Internet Sales

Virginia cannot meet new Supreme Court standards for interstate sales tax collection without changing its laws. Source: Tax Foundation

Conformity to recent federal income tax changes is not the only challenge (or opportunity, depending on your point of view) facing the 2019 Virginia General Assembly.  It may also be asked to amend Virginia’s sales and use tax rules, so the tax can be demanded from out-of-state sellers.

A recent review from the Tax Foundation provides concrete advice on the steps Virginia should take to bring its rules in line with recent direction from the U.S. Supreme Court, which reviewed and blessed South Dakota’s approach in the Wayfair decision.  It also points to several states ready to roll or almost in compliance, including North Carolina.  Each state is discussed in the report.

The Wayfair ruling reversed two previous decisions that states could not force businesses with no physical presence inside their border to collect and remit the tax.  The tax advantage for online sales has been fought by traditional retailers for decades.

The first and most difficult recommendation is Virginia should adopt the uniform sales tax definitions and rules of the interstate Streamlined Sales and Use Tax Agreement (SSUTA), a step South Dakota has already taken that played a key role in the majority’s opinion.

Joining SSUTA is something the Virginia legislature has refused to do as recently as 2016.  As part of that, Virginia would need to develop a simple on-line method for retailers in other states to report and remit the taxes they owe to Richmond.

A good description of the challenge is provided in the fiscal impact statement for the failed 2016 bill, which lists several provisions in Virginia that differ from the SSUTA and would have to change.  It also reports that the major hurdle in the past, Virginia local government insistence on applying tax at the point of sale instead of the point of delivery, has been addressed and perhaps removed by SSUTA.  Inside Virginia point of sale could remain the rule.

One option mentioned by the Tax Foundation not previously proposed in Virginia:  Allow remote sellers to register with SSUTA directly and recognize payments to Virginia through that mechanism as compliant with state law.

Secretary of Finance Aubrey Layne has estimated a possible $250 million windfall for the state, which would be split between the state and localities.   One state legislator is already pushing to earmark all the revenue to school construction.

After years of politicians promising to keep the internet “tax free,” moving to expand the tax on remote sales may be resisted by some people. But the internet hasn’t been tax free for some time, with large retailers including Amazon collecting tax and internet service itself subject to a sales tax now in this state – one of the few instances where Virginia taxes a pure service.

Virginia has not adopted SSUTA but has played an advisory role in its development.

Small retailers complain with good reason that it will be impossible to comply with the thousands of sales tax collectors and rule variations around the U.S.  But as the Tax Foundation points out, that is not much of a problem in Virginia.

Despite having 174 tax jurisdictions, “the state provides central collection and local sales taxes must adhere to the state sales tax base.”  Central collection means the Virginia Department of Taxation has authority over sales taxes and conducts any audits, not individual cities and counties.

The Tax Foundation, citing the court rule, also recommended a threshold level of activity before the tax is triggered. In South Dakota’s case that is $100,000 in sales or 200 annual transactions.  That leaves truly small retailers out of the tax collector’s net.

Many of these issues gore somebody’s ox, so a serious effort to adopt the SSUTA definitions should begin well before the Assembly convenes in January.  Without adoption of SSUTA Virginia will likely remain unable to force internet sellers outside its border to impose and remit this tax.  Frankly if it refuses to compromise some of its rules and improve its level of uniformity, sellers shouldn’t have to comply.