Category Archives: Taxes

Governor Hints At Local Business Tax Reform

On Friday, after skirting the topic in a major address to a business conference in Williamsburg, Governor Ralph Northam told a reporter that “he’s planning to ask the General Assembly to tackle business tax reform,” adding it would be “comprehensive.”

The reporter asked about it because of other comments made by Secretary of Finance Aubrey Layne and the President of the Virginia Economic Development Partnership, Stephen Moret.  Since his arrival in Virginia, Moret has from time to time mentioned local business taxes as a hindrance to economic recruitment and business start-ups. He did that again Friday in his own presentation to the Virginia Chamber of Commerce.

For more than a decade local business taxes, especially two of them, have been the focus of the Thomas Jefferson Institute for Public Policy, among others.  The taxes are generally despised by the business community, but local governments are highly attached to them, because they are a revenue source other than residential real estate taxes.

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To Get Useful Answers, Ask Correct Questions

It’s all in how you ask the question.

The Judy Ford Wason Center for Public Policy at Christopher Newport University has done a pre-General Assembly poll testing various issues that may dominate the 2019 session.  The headlines are driven by the favorable and unfavorable rankings (ask me about President Tariff Man this morning as I survey my portfolio) and the apparent openness of Virginians to ending restrictions on gambling.

The poll’s authors took a dive into the complex world of tax policy, as well, seeking to tease out how voters view various moves related to the windfall tax conformity revenue.  It could have been more useful.  To start the discussion, here is the question they used:

Q8: Virginia is expected to receive as much as $600 million in additional tax revenue as a result of the recent federal tax reform. There are several ideas about what to do with this additional money. I’m going to read two of them and I’d like you to tell me if you support it or oppose each one.

  1. Provide an across-the-board tax cut to all Virginians who pay state income taxes.
  2. Provide a fully refundable tax credit to low and moderate-income Virginians regardless of how much they pay in state income taxes.
  3. If only one of these options could be done, which one would you most prefer to see done, an across-the-board tax cut to all Virginians who pay state income taxes or a fully refundable tax credit to low and moderate-income Virginians regardless of how much they pay in state income taxes?

The results were ambivalent, with a healthy portion of voters liking either approach.  There were predictable partisan divides, with Republicans preferring the idea of a broad-based cut for all taxpayers and the Democrats leaning towards a tax credit targeted to the lower and middle income.  But 59 percent of Democrats were positive on Q1 and 49 percent of Republicans were positive on Q2.  Forced to choose by Question 3, the partisan divide appeared again.

The problem is those are not the choices, at least based on the discussions so far.

First, missing from the mix was the idea which may yet prevail, taking no steps to return the money.  A fair additional option to give the poll respondents would have been: “Retain the money to increase the state’s financial reserves and spend it on other pressing state priorities.”  Listing especially popular priorities would have pumped up the positives on that question.

That is the biggest and most important question:  does the General Assembly keep the money or give it back?  They didn’t ask it.

Second, nobody has proposed an across the board tax cut to all those who pay the income tax.  We at the Thomas Jefferson Institute have come closest to that, with a proposal to double the standard deduction that might reach 70 percent of taxpayers, and we may tout the Wason result as supporting our case.  But that is not a tax cut for everybody who pays, so they didn’t poll our idea.

Third, I doubt if more than a handful of people polled know what a “fully refundable” tax credit is (or a partially refundable one, for that matter).  It sure sounds nice; everybody loves a refund – the word by itself may inject a bit of question bias.  Which of course is why it has always been used to describe the Earned Income Tax Credit grant payments.

But imagine the answer to this question, which more accurately describes the proposal around the Earned Income Tax Credit: “Provide an annual cash payment to low- and moderate-income Virginians who do not owe any income tax but are still struggling to meet the needs of their families.”

There still would have been positive responses to that, but how many?  Would it have proven to be as popular a choice as a general tax cut?  More popular?  We will never know.   Will we hear repeatedly in the coming weeks that this or that idea has been “strongly supported in a poll”?  Probably.

To borrow a line used about modeling, all polls are wrong, but some polls are useful.  This poll unfortunately is not very useful because it left off the main choice – keep it or give it back – and didn’t really describe the two choices for giving it back getting the most attention.

I do commend the CNU center for releasing the full text, cross-tabs and demographics of their sample.  Absent those, nobody should believe any poll result featured in the media or in campaign materials.

Amazon Deal Highlights Virginia’s Competitive Advantage Over Maryland

Many Virginians have qualms about the $550 million in job-creation incentives plus more than $1 billion in promised transportation and higher-ed investments it took to recruit a $2.5 billion Amazon facility to Northern Virginia. But things could be worse. Maryland offered an $8.5 billion package — and didn’t land the deal. The Washington Post is asking if the Old Line State, which pitched a Montgomery County location, has lost its economic-development mojo.

For the record, Maryland officials are putting on a positive face. They are delighted that Montgomery County was one of Amazon’s 20 finalists, and they say that the facility’s location in Arlington/Alexandria will send positive economic ripples throughout the Washington region.

But Montgomery County — the Fairfax of Maryland — has studiously refashioned itself over the past few decades as a walkable urban community with access to abundant mass transit, just the kind of urban fabric Amazon was looking for. The county has access to the same high-tech labor pool as Arlington and Alexandria, which snagged the deal. And the state offered $6 to $7 billion more in inducements than Virginia.

Anirban Basu, chairman of the Maryland Economic Development Commission, has been asking himself, “Why would Amazon turn away billions of dollars in subsidies to go across the river?”

Experts quoted by the WaPo pointed point to site-specific factors that favored Virginia. National Landing (the rebranded location in Crystal City and Potomac Yard that Amazon selected) is closer to downtown Washington, D.C., and so close to Reagan National Airport that Virginia has offered to build a walkway to link it to the Amazon office complex. National Landing has direct access to a Metro station, which the Commonwealth has offered to upgrade. And most of the property involved in Virginia’s bid is owned by a single developer, JBG Smith.

And who would believe this? Northern Virginia’s transportation infrastructure compares favorably to that of Maryland.

Northern Virginia’s transit and road networks also outpace the Maryland suburb’s. Virginia recently expanded its part of the Capital Beltway with tolled express lanes, and the second phase of Metro’s Silver Line, which will extend the subway to Dulles International Airport and into Loudoun County, is slated to open in 2020.

Finally, Basu cited Virginia’s “creative stroke of genius” in lining up $1.1 billion in higher-education support to build the computer-science talent pipeline. Virginia’s plan includes $250 million toward Virginia Tech building a $1 billion “Innovation Campus” near the future Amazon hub.

I would add another factor not mentioned in the WaPo article. Amazon has a history of working closely with Virginia officials and its largest utility, Dominion Energy, fostering development of Amazon’s cloud-services business in Northern Virginia. The company knows it can get things done in Virginia, whereas Maryland, where it has had little experience, is more of a cipher.

But Maryland’s competitiveness issue runs deeper. “One of the reasons Maryland created such a large incentive package for Amazon is because we know our business climate is not as competitive,” said Basu, whose Baltimore firm, the Sage Policy Group, conducted the state’s economic impact study of Amazon’s potential benefits but was not involved in the bid.

As the WaPo quotes regional economic analyst Stephen S. Fuller, 25 years ago economic activity in the Washington region was split equally among Northern Virginia, Washington and the Maryland suburbs. By last year, Northern Virginia’s share had grown to 48 percent, while the Maryland suburbs held about steady with 31 percent, and Washington had dropped to 21 percent.

Think about that. For all of Northern Virginia’s horrendous problems with traffic congestion, autocentric land uses, skilled labor shortages, lack of a top-tier research university, local-government unfunded pension liabilities, and some of the highest taxes in Virginia, it has been kicking Terrapin butt for two-and-a-half decades as measured by job creation. Writes the WaPo:

[Basu] has concluded that Amazon must have rejected the state’s “antiquated” regulations and higher taxes for corporations and top-earning residents. Amazon has said salaries at the new headquarters will average $150,000. Unlike in Virginia, Maryland jurisdictions impose a local income tax in addition to the state tax.

According to the Tax Foundation, Virginia is has a more favorable tax climate than Maryland almost across the board.

Personal income taxes
Virginia ranked 35th
Maryland ranked 45th

Corporate taxes
Virginia ranked 10th
Maryland ranked 22nd

Sales taxes
Virginia ranked 10th
Maryland ranked 18th

Property taxes
Virginia ranked 30th
Maryland ranked 42nd

Only in “unemployment insurance taxes” does Maryland compare favorably to Virginia, with a 28th ranking compared to Virginia’s 43rd.

Bottom line: Virginians get to keep more of their paychecks. When you’re  a company recruiting high-end business and technical talent, that counts for a lot.

Update: I have edited the original version of this story to distinguish between Virginia’s “incentives” paid directly to Amazon and state and local promises to invest in transportation and higher-ed.

Bacon Bits: Taxaginia, SCC Approvals, Blue VA

The Taxaginia Total:  $1.7 Billion in 2020

The four taxes I wrote about in “Taxaginia” last month could reach a combined fiscal impact of $1.7 billion by about 2020.  In preparation for a talk (which I will not get to give today after all), I did a bit more digging and some additional information has since come out.

The $611 million estimate for the state income tax hike resulting from conformity to federal tax changes is a Northam Administration estimate, known since summer.

The legislative money committee retreats last month produced a firmer estimate for the provider assessments (a.k.a. taxes) on private hospitals, with $719 million tagged as the revenue haul for 2020.  (Don’t you wish you could develop a futures market on these estimates?  That’s not going to hold.)

The Virginia Department of Taxation is now using $165 million as its projection of additional revenue once Virginia revises its sales and use tax to comply with the Wayfair decision and demand more tax collection by online merchants selling and shipping into the state.

The estimate on the carbon tax that will be imposed when Virginia joins the Regional Greenhouse Gas Initiative (RGGI) is a year old and is likely being revised as a new iteration of the regulation is considered. I’m using the number of $203 million, the upper range from last year’s Department of Planning and Budget estimate.

Under the newest version of the proposed regulation, electricity producers burning fossil fuels will need to pay for permission to emit 28 million metric tons of CO2, and the price per ton can only be estimated until the auction process gets underway.  As it stands now, the plan is that all the money the utilities pay for their carbon rights will be returned to ratepayers somehow and not spike rates, but that mechanism is unclear. 

Nobody Fights The Energizer Bunny

Not all the proposals Dominion Energy Virginia makes spark controversy. Proposed guidelines on planned pilot programs for utility-sized storage batteries have now cleared the State Corporation Commission.  No objections were raised, no pile of testimony accumulated, and only a few tweaks were made to the original language.

One provision in the massive 2018 electricity regulation revision authorized Dominion to install up to 30 megawatts of storage, and Appalachian Power up to ten megawatts.

Another New Option for Customers Who Want Renewable

Also uncontroversial, but far more complicated, is a new choice offered to large electricity customers, the so-called Schedule RG tariff.  This is a way for a Dominion Energy Virginia customer to buy exactly the kind of renewable power desired, but still remain under the umbrella of Dominion’s existing monopoly.

Attorney Will Reisinger of the Richmond firm GreenHurlocker has written about the SCC’s approval of the new tariff on that firm’s blog.  Limited to 50 large customers, it is designed to prevent any costs being borne by non-participating customers, in contrast to a recent solar project.

Reisinger represented Mid-Atlantic Renewable Energy in the case, and other participants included Wal-Mart Stores and Sam’s East, Inc., possible customers for the new rate schedule.  Your correspondent admits he has not plowed through the record but relies on Reisinger.

“Finally, it is important to note that Schedule RG was not approved under Va. Code § 56-577 A 5 and would not constitute a 100% renewable energy tariff under this statutory provision,” Reisinger wrote.  “As we explained in our Regulatory Guide, this Code section authorizes any Virginia customer to purchase electricity “provided 100% from renewable energy” from non-utility suppliers, so long as the customer’s incumbent electric utility does not offer an SCC-approved tariff for 100% renewable energy.

 “Therefore, if Dominion received approval to offer a 100% renewable energy tariff pursuant to Va. Code § 56-577 A 5, Dominion customers would lose their existing rights to shop for such energy.

“Currently, no Virginia utility offers an SCC-approved 100% renewable energy tariff. Dominion and Appalachian Power have both applied for approval to offer such tariffs, which thus far have been rejected.”  

So that one chink in the utility monopoly remains.

And Finally, A Stunning Endorsement for Bacon’s Rebellion!

The following excerpt is from no less than Blue Virginia!  It was part of a piece where Jim Bacon was attacked for being a damnable climate-denier, of course, and the Richmond Times-Dispatch was roundly condemned for hiring him, but it also included this:

Let’s be clear: Bacon’s Rebellion material is sometimes entertaining and, in some of the material, has a form of wonkiness that can be attractive/engaging for policy nerds. On its best days, it can provides (sic) valuable windows and thinking about policy interests with enough substance that can enable thoughtful engagement.

The Push for EITC Cash Grants Accelerates

A useful EITC example from the Commonwealth Institute’s website. Whether anybody “earns” a credit is debatable, but that claim will appeal to those who benefit.

With the 2019 General Assembly now a handful of weeks away, the main advocacy group for a new cash welfare entitlement in Virginia is ramping up its efforts with various appeals, perhaps testing themes for later use.

On Wednesday on its website the Commonwealth Institute for Fiscal Analysis was arguing that the state Earned Income Tax Credit (EITC) should be converted to a “refundable” cash grant because of how it would help “communities of color,” who pay a larger percentage of their income in state and local taxes.

A few weeks back, the focus was on how “veterans and their families deserve full credit.”  And, of course, they have broken down their data by legislative district, conflating the number of people who claim the EITC already with the number who would benefit from their idea.  Not everybody who now claims the state EITC would qualify for a grant.

The first to advocate for converting the tax credit into a cash payment was Governor Ralph Northam, who mentioned it last summer as his favored use for the windfall state income tax dollars generated by conformity.  It has nothing to do with that windfall.  In order to benefit from this idea, you already must be paying zero state income tax.

In recognition of that, the argument now is people need to get the balance returned in cash because they are still paying sales, excise and other taxes, just not income taxes.  It’s not good enough to zero out their income tax, advocates claim.

As previously explored, the Earned Income Tax Credit is a program with conservative credentials and has succeeded in improving the finances of low-income working families.  At the federal level, if your income and family size qualify you for a credit which is larger than your tax bill, the difference is sent to you in cash.  To call it a “refund” is political fiction, because it is not cash you paid in taxes to start with.  It just comes at the same time the rest of us are getting refunds.

The federal version has grown into a major income transfer program, about $60 billion annually, and as always with these programs the push to expand them is constant.  A Democratic House of Representatives will be more attentive.

In an earlier tax reform effort, Virginia added its own version of the program, allowing a credit against state taxes equal to 20 percent of the federal EITC.  But Virginia did not take the second step of paying cash grants from state revenue to people who had larger credits than tax bills.  That is what Northam and the Commonwealth Institute are talking about doing now.

The cost impact is about $250 million, based on an earlier legislative proposal which failed, but a full analysis is lacking.  The cost to taxpayers – and it is a cost to taxpayers, not a refund and not tax reform – will need to be more carefully spelled out when a bill finally appears.  Advocates have developed a calculator for individuals and for some the grants would be substantial.

While this proposal is not tax reform, but instead is a way to share the windfall revenue with low-income working families, the idea is not incompatible with tax reform.  It would be possible to couple it with an increase in the standard deduction or some other change in personal income taxes that actually aligns with to the conformity windfall.  It is only a question of how much revenue with which the legislature is willing to part (for some, the answer is none).

The proposal to expand the standard deduction would reach far more Virginians – more in “communities of color,” more veterans, more in every legislative district – than would turning EITC into a cash grant.  The problem for some on the left is they would not all be poor or working-class and might even be well-off.

What they would not be is the same people.  As noted before, to qualify for the cash grant Northam and the Commonwealth Institute are talking about, you already must be paying zero state income tax.  If the EITC credit has already wiped out your state tax bill, an additional standard deduction is of no value.

But there is this, which should appeal to the Commonwealth Institute:  The additional standard deduction would add to the number of people who pay zero income tax.  An EITC cash grant would go to those already paying zero but would not grow their ranks.

And this:  The additional standard deduction would stay with you as your income grew.  EITC – whether a credit or both a credit and grant — shrinks as your income grows, and that is what people really want, growing income.

If the General Assembly must choose, it should choose tax reform and increase the standard deduction.  If its willing to do both, well, this is why the legislative process is great theater.  It cannot be predicted.

Confusion, Silence Will Earn Business Higher Taxes

State revenue impacts of conformity to federal business tax changes without a corresponding cut in tax rates. Source: Department of Taxation

“I’m not going to get into it unless anybody wants me to.”

So said Kristin Collins, policy development director for the Virginia Department of Taxation, as she neared the end of her November 19 slide presentation on federal tax conformity and its impact on Virginia state taxes.  The final handful of slides focused on the business tax issues, and not one member of the legislative panel asked her to get into them.

With all the focus and political discussion swirling around individual income taxes and conformity, the business tax issues have received little notice.  In the projections on the state’s revenue windfall the higher business taxes produced by conformity play a big role.  In 2023 and 2024, the later years in the state’s projection, higher business taxes account for over 40 percent of the new revenue, according to an outside consultant’s study.

Collins was presenting to the Joint Subcommittee to Evaluate Tax Preferences, the closest thing Virginia has to a permanent tax commission in its legislative body.  Many key players on the money committees belong.   The chair, Delegate Lee Ware of Powhatan,  who also chairs House Finance, intends to call the joint panel together again for a deeper discussion and perhaps some decisions before the General Assembly starts in January.

A group I’m working with has already recommended on the individual side that Virginia increase its standard deduction, and on the corporate side we think Virginia should start to cut the corporate income tax rate, from 6 percent now down to 5.5 percent for this tax year and 5 percent for next tax year.  The full Thomas Jefferson Institute paper on our proposal is now available.

The business community needs to get its act together and decide what it wants, or it’s going to get the full effect of these business tax increases.  Unincorporated businesses – S corporations, pass-throughs, partnerships – do very well under conformity but incorporated businesses get hit.  The cut in the corporate income tax rate we propose effectively short-circuits that tax increase in general but does not return the benefit directly to the companies hit with the highest new taxes.

Some in the business community would prefer to leave the tax rates intact but instead get the General Assembly to restore the corporate deductions targeted by Congress.  They would have Virginia refuse to conform to those certain aspects of the federal system, which does target the corrective action directly to those facing higher taxes.

Our proposal is full conformity but rate cuts aimed at all corporate taxpayers.  It represents general tax reform, not maintenance of the status quo.

A short list of changed business provisions create the big tax hike, and they are spelled out in the Tax Department chart above.  You can see that several grow in impact over time, and a major change in the treatment of research and development expenses doesn’t even kick in for three years.   Unlike some of the new individual tax provisions, these changes have no sunset date.

What is wrong with that chart – and potentially misleading – is it includes provisions for both unincorporated and incorporated businesses.  The two changes producing lower taxes are mainly for the entities exempt from the corporate income tax, and most of those raising taxes are for corporations.  It also fails to detail one of the more controversial changes dealing with repatriated international earnings.

That provision, which goes by the wonderful acronym GILTI, is already the subject of a lobbying effort by some Virginia corporate taxpayers, who note some other states (Tax-achusetts included) have already elected to allow that deduction despite the federal action. It stands for Global Intangible Low-taxed Income, and the IRS guidance runs to 150 plus pages.  The argument over whether and how to tax intangible income (royalties on patents and copyrights for example) is an old one.

The Section 199 deduction also known as the domestic production activities deduction (DPAD) has been a source of contention in Virginia before, because when Congress expanded it Virginia balked at going along in full.  Its purpose was to lower the effective tax rate on manufacturers, and by lowering the tax rate for everybody by 40 percent Congress largely addressed that problem.  It then killed Section 199. (Virginia should do the same:  accept the change and lower its rates!)

The largest cash impact comes from new limits on the deduction for interest expenses, and here Congress also had reasons for its move.  Why subsidize excessive debt?  Apparently there is also a push on in Virginia to keep that deduction in place on Virginia corporate returns.

The limits on amortization of research and development expenses have a delayed impact, but eventually a large one.  That’s another one where Virginia could stay the course, maintain the old rules, but at the cost of a lost opportunity to lower overall rates.

The business community has some decisions to make, and it may be a handful of companies who have a developed presence at the General Assembly who get to make them.  Long-term considerations and discussion of overall economic policy tend to get ignored when lobbyists can angle for their own client’s advantage. That game is now afoot.

Va 2019 General Assembly session – prefiled House of Delegates bills

Click here to see the 9 weird laws

Much ado about nothing.  As of this morning there were 83 prefiled bills for the House of Delegates and 225 prefiled bills for the State Senate.  With a few exceptions the House prefiles are pretty “ho hum”.  I will examine the Senate prefiles in a subsequent column.

One from column A and two from column B.  I use a somewhat arbitrary approach to categorizing the prefiled bills.  By my analysis … governmental process (17), education (12), crime and courts (10), election reform (8), finance and taxes (7), health care (6), nonsense (6), environment (6), transportation (4), campaign reform (4) and energy (2).

Governmental process.  These are the day to day clarifications, corrections and amplifications needed to make existing legislation more effective.  For example, HB246 clarifies the role of the code commission in preparing legislation at the direction of the General Assembly.  One of these bills will further depress Jim Bacon’s journalistic sensibilities.  HB1629 eliminates the requirement that Virginia procurement contracts be reported in newspapers.  Mixed in with the proposed routine legislation are some zingers.  For example, there are three separate bills to ratify the Equal Rights Amendment (HJ577, HJ579, HJ583).  There are also four bills proposing changes  to the Virginia Constitution.  HJ578 would add a right to vote to the state constitution, HJ582 would establish a redistricting committee, HJ584 would allow the governor to run for a second consecutive term and HJ585 has the governor and lieutenant governor running as a single ticket instead of separate offices.

Education.  The only theme in the education prefiles is an attempt to provide financial incentives for localities to rebuild the physical plant of their schools.  One of the more interesting bills would allow commercial advertising on school buses (HB809) while another would guarantee that our children’s God given right to wear unscented sun block not be abridged (HB330).

Crime and courts.  Bail bondsmen and bondswomen are forbidden from having sex with their clients (HB525) and shooting a police dog, or even showing a gun to a police dog,  becomes a more serious crime (HB1616).  Other than that, pretty mundane stuff.

Finance and taxes.  Way too many people and too many companies are paying taxes (HB966) and veterinarians really need a break from those pesky sales taxes (HB747).

Potpourri.  The remaining categories contain a few interesting ideas.  Del Rasoul wants to ban the use of fossil fuels in electricity generation (HB1635), Del Cole wants to give I95 some love (HJ580, HJ581) and he also has the radical idea that campaign contributions should not be for personal use (HB1617).  In fact, Del Cole’s proposed legislation is putting him perilously close to making my very short list of competent Virginia legislators.

Closer to home.  My delegate, Kathleen Murphy, continues to propose jaw dropping, eye popping examples of legislative uselessness.  She proposes to let her pals skirt Virginia traffic laws by displaying a special sticker on their cars (HB295) and offers some odd rules on distance learning reciprocity (HB659).  I guess issues like mass transportation don’t cross her mind these days.

— Don Rippert.

Just Give It Back and Here’s How

Senate Finance Committee chart separates the impact of business-related conformity provisions on individuals and corporations, key information for designing a response. TCJA = Tax Cuts and Jobs Act

A joke making the rounds Wednesday had Governor Ralph Northam agreeing that Virginians did deserve a return of the windfall tax increase flowing to the state due to conformity, but we’d have to take it as Amazon Prime memberships.  Don’t expect laughter if the 2019 General Assembly votes out a massive multi-year incentive package for a super-wealthy corporation and refuses a simple and broad-based tax reform proposal for almost everybody else.

Give it back.

In the past few days the General Assembly’s key money committees have discussed what to do about the gush of new revenue the state will garner when it conforms to this year’s new federal tax regime.  They should give it back.

After wrestling with different approaches over the last few months and consulting stakeholders, the public policy group I’m affiliated with, the Thomas Jefferson Institute, has settled on two basic steps that have always been on the options short-list.

1) For individual taxpayers, the state should double its standard deduction to $6,000 for individuals and $12,000 for couples.   That removes up to $6,000 from the taxable income of an estimated 2.8 million Virginia tax returns, the vast majority of Virginia taxpayers.

2) For Virginia’s incorporated businesses, the corporate income tax rate should be cut from 6 percent currently to 5.5 percent for 2018 and 5.0 percent for 2019.

Both steps should be retroactive to tax year 2018 so they would reduce the taxes you compute for the state in a few months.

Both steps are first steps, because all indications are the state tax increases created by the federal tax changes will accelerate in future, by the state’s own estimates.  Even a standard deduction of $12,000 is too low for a family and should rise more.

Neither step squeezes the state budget.  The amount of “windfall” revenue returned by these changes is still lower than the estimated new revenue conformity creates.  On an individual basis there will still be winners and losers, but the current state budget is not among the losers.  No spending need be cut.

The drumbeat on this issue started by multiple posts on Bacon’s Rebellion has spread, sparking only a few comments at a recent House Appropriations Committee meeting and a  presentation in front of the Senate Finance Committee Thursday.  The tone of the Senate meeting, which I did not attend, may be reflected in this Richmond Times-Dispatch account where any effort to prevent the tax increase is framed as a loss of state revenue.

The Senate Finance staff produced the slide used above which slices the conformity revenue projection a new and useful way.  It separates the business tax impacts into two measures, those that show up on individual returns because the business is not incorporated and those that show up on corporate returns.  With that split you can see that the state impact of conformity is immediately quite positive to pass-through businesses and immediately a substantial tax increase on corporations.

The way the Northam Administration had packaged the same data implied the impact on business in the first year was minimal.  Not so.

That extra $157 million hit to corporations in the first year represents about a 17 percent increase over the base projection for corporate income taxes and (don’t you love it when a plan comes together?) we propose a 17 percent cut in the rate.

The idea of increasing the standard deduction for individuals must also have great appeal, because the Senate is considering a temporary substitute – a tax credit that would have a similar impact for taxpayers (perhaps not as substantial) but would not be a permanent change in the rules.  What Virginia needs, and what taxpayers should demand, is a permanent change.  The idea that Virginia would continue to stand on its ridiculously low standard deduction deeper into the 21st Century is troubling.

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A Performance Rating for Virginia Local Governments

Click for more legible image.

Goochland County offers the most bang for the buck of the localities in the Richmond metropolitan region, according to a local government rating system devised by the Virginia Tea Party Patriots Federation.

The rating system compares fiscal indicators such as property tax rates and collections, per capita indebtedness, school spending per capita, and unfunded pension liabilities, as well as outcome metrics such as the clearance rate of crimes, fire department ratings, and Standards of Learning pass rates.

Mark E. Daugherty, former chairman of the Virginia Tea Party Patriots Federation and organizer of the rating system, presented the numbers for the Richmond region — plus the City of Norfolk for purposes of comparison to Richmond and Spotsylvania County for comparison to Richmond-area counties — to the Tuesday Morning Group, a monthly gathering of conservative and libertarian activists. The 20 counties and cities analyzed so far represent 23% of Virginia’s population. The group also has completed research on several Shenandoah County jurisdictions, and is now working on an analysis of Northern Virginia jurisdictions.

The purpose of collecting the statistics, says Daugherty, is to arm citizens and elected officials with data to stimulate questions and new ideas on how local governments and schools can improve performance. (Read more about the initiative here.)

Bacon’s bottom line: The Tea Party data represents a starting point for evaluating local government, not a finish line. Inevitably, the selection of one data set over another entails a value judgment and affects the ratings. Including other data sets would add more texture and context. But it’s a darn good start.

My sense from a brief conversation is that Daugherty acknowledges the difficulties that local governments and school systems are grappling with, especially urbanized cities with a large percentage of lower-income residents. Clearly, a down-in-the-dumps city such as Petersburg has much greater challenges than an affluent exurban county such as Goochland. Still, by highlighting Goochland, the rating system does suggest — not prove, just suggest — that Goochland is doing something right. Perhaps counties with comparable demographics and economic assets should take a look. After all, the purpose of the exercise is to stimulate questions and deeper analysis.

It would be easy for some to take issue with the methodology or criticize the source — ew, it’s the Tea Party! — but Daugherty and his colleagues have expended considerable effort without any overt agenda to identify and publish local government input and performance numbers, which is more than you can say for anyone else.

Updates: VCCS Transfers and Dominion Taxes

A Good Idea Which Is Spreading

A recent announcement from the Virginia Community College System provides a nice enhancement to an earlier Bacon’s Rebellion story about the smooth transition VCCS students can make to certain Virginia public universities.  A new articulation agreement has been signed with private Randolph-Macon College in Ashland.

The new agreement covers transfers from any of the state’s community colleges and “expands on an existing transfer program between R-MC and (J. Sargeant) Reynolds Community College, which already has facilitated transfers for more than 200 students over the past two years,” to quote the news release.

Not long ago there was a major cost difference between private schools such as Randolph-Macon and public universities.  Public-school price hikes have narrowed any gap and the private schools often have far more scholarship funds or work-study opportunities available.  Spending your first two years at a community college is still a substantial cost savings wherever you choose to finish.

“R-MC academic scholarships range from $14,000 to $21, 000, depending on the student’s GPA. All students are automatically considered for academic scholarships once they are granted admission to R-MC, and no separate scholarship application is required. In addition, (Guaranteed Admission Agreement) students who earned their Associate Degrees at a VCCS school will be eligible for a two-year College Transfer Grant from a program administered by the State Council of Higher Education for Virginia.”

This is a testament to the recognition throughout the higher education establishment that affordability is everybody’s problem, which of course requires recognition there is a problem at all.  It also indicates community colleges are providing a good educational outcome for students willing to do the work, which is always the essential ingredient.

Taxing Any Layman’s Ability to Understand

The State Corporation Commission is being asked to rule on yet another argument over recent federal corporation income tax reductions and how they should be reflected on utility bills.  Effective January 1, 2018, the tax rate dropped from 35 to 21 percent and the SCC quickly issued a directive to all public service companies that the benefits should pass directly to customers as soon as possible.

In a ruling earlier this year the SCC denied a Dominion Energy Virginia request to continue using the old, higher tax rate in calculating future bills for transmission costs.

The accounting behind that transmission issue was easier to explain than this latest issue, which centers on another of those specific rate riders which show up on your bill to pay for a specific purpose.  In this case the argument involves Rider W, for the Warren County gas combined-cycle generator, but the same question will crop up in all the other riders in effect during the change in the tax rates.  The decision on Rider W will be the precedent for all.

That charge on your bill is intended to collect the total lifetime cost of those individual projects, construction cost, operating cost, profit on capital, depreciation and taxes.  As the plant opened, a projection was made for how much to charge customers annually to cover all that, and it adjusted annually.  The adjustment looks back and includes an element of true-up, adding or subtracting a bit based on the actual experience of the prior year.

The argument at hand involves how to look at taxes which were accrued but deferred during the higher-rate period and paid later at the lower rate.  When I hit a phrase like “amortization of the deferral balance related excess deferred income taxes (“EDIT”) over the Projected Factor Rate Year” in written testimony, I’m going to step back and let the experts have it out.  For Rider W the dispute involves less than $3 million of the tax bill, and the total amount across all the various riders is not reported.  Forward-looking charges will reflect the lower 21 percent tax rate.

Two points, however:

  • Those folks down at the utility will not walk past one nickel on the sidewalk if they can help it.  They may have found a creative way to earn excess profits in a rider, which is supposed to be immune to excess profits. We need the SCC to be just as vigilant over small sums as large.
  • Should the General Assembly drop the ball on state tax policy adjustments to the new federal taxing regime, this process is going to work in the opposite direction at the state level. Dominion’s Virginia corporation income tax will grow, substantially, and every dollar will pass on to customers, not stockholders. Every dollar.

Blue Wave Does Not Change Do-Nothing Consensus

The 2018 Congressional elections have been dubbed by some as “the most important mid-term elections in history,” but that’s mostly partisan blather. Democrats did indeed re-take control of the House of Representatives. But two more years of hyper-partisan gridlock will not change the nation’s perilous fiscal trajectory.

While many bemoan the lack of consensus in Washington, there is in fact a consensus — a consensus to ignore growing deficits and the surge in the national debt, except as a club to be wielded hypocritically against the other party. No one wants to touch entitlements. No one is serious about cutting discretionary domestic spending. And no one has articulated a scaled-back foreign policy that would permit a prudent shrinking of military spending.

As Trump and his antagonists mud-wrestle one another and the news media focus on political spectacle to the exclusion of all else, deficits will continue to climb, the national debt will continue piling up, un-cuttable interest on the national debt will consume an ever-increasing share of spending, and the Medicare and Social Security trust funds will get two years closer to depletion. The Medicare Hospital Insurance trust fund is scheduled to run out in eight years, Social Security’s Old Age and Survivors fund in 16 years. If you think politics are ugly now, just wait.

I would say that Americans are like ostriches with our heads stuck in the sand — but that would be an insult to ostriches.

Meanwhile, back at the ranch… Insofar as the 2018 elections can be said to have been a blue wave, the epicenter of that wave was Virginia. The switch of three congressional seats from red to blue portend gathering strength for the Democratic Party in the Old Dominion. If the electoral trends of the past two years continue — and there is no sign that they won’t — Democrats will take control of the General Assembly in 2019, seize the machinery of redistricting, and ensconce themselves in power for the next generation.

For the moment at least, the Republican Party is in no condition to resist the blue tsunami. Corey Stewart was an unmitigated electoral disaster. Being Trumpier than Trump is not a winning electoral formula in Virginia. But pursuing a moderate, technocratic formula didn’t work much better for Ed Gillespie in the 2017 gubernatorial race. The GOP has roped itself to the shrinking demographic base of rural/small town Virginia. It has no coherent message. It is floundering.

A blue Virginia portends a more activist government, more spending on “social justice” priorities, and higher taxes. Steve Haner’s recent piece, “Taxaginia,” lays out where we’re heading in 2019. Admittedly, the blue wave this year was propelled in great measure by culture-war issues — in particular the #MeToo movement and suburban women’s revulsion against Donald Grab-Them-By-the-Pussy Trump. But if you think the electorate will exercise a moderating influence on the tax-and-spend proclivities of the political class, just consider the referendum on Question No. 1.

Seventy-one percent of Virginians voted in favor of a constitutional amendment that would subsidize continued building in flood-prone areas. Given all the other fiscal challenges Virginia faces — unfunded pensions, under-funded capital spending, budgeting sleight-of-hand, and all the rest chronicled on this blog — the vote was utter folly. Virginians are in fiscal denial. I once thought of state/local government as the bulwark against federal collapse. I’m no longer so hopeful.

Update: Looks like John Rubino at Dollarcollapse.com and I are in sync on our appraisal of the national election. Writes John today:

As contentious as the US midterm elections were, there was never a scenario in which they mattered. Any possible configuration of Republicans and Democrats in the House and Senate would have yielded pretty much the same set of economic policies going forward: Ever-higher debt, upward trending interest rates and (through the combination of those two) rising volatility. … The system is on autopilot and it matters exactly not at all which party or which configuration of parties is running the asylum.

Thumbs Down on One Amendment, Thumbs Up on the Other

Bacon’s Rebellion doesn’t do candidate endorsements — this is a public policy blog, not a political blog. But we do express our preferences for and against proposed constitutional amendments. And it happens that there are two proposed amendments on the ballot this year. The first one reads:

Should a county, city, or town be authorized to provide a partial tax exemption for real property that is subject to recurrent flooding, if flooding resiliency improvements have been made on the property?

And the Bacon’s Rebellion answer is, “No.” As a guiding principle, we oppose special exemptions and carve-outs from taxes. Taxes should be applied consistently across the population. Granting breaks to one group encourages other groups to lobby for special treatment as well. The accumulation of exemptions over time erodes revenues, which forces tax rates higher.

In rare instances the benefits of a tax exemption may be so compelling that the general principle can be ignored. This is not such a case. The idea behind the amendment is to reward property owners for making properties subject to recurrent flooding more resilient. A classic example would be to lift houses onto stilts.

My question is simple: Why would we want to encourage anyone to build or rebuild in a floodprone area, no matter how resilient the construction? There is a much better way to give property owners an incentive to make their buildings more flood resistant — it’s called flood insurance. Government should stop subsidizing flood insurance and make people pay for the risk they’re taking when they build in areas subject to periodic inundation. You’ve made your house more flood-proof? Fine, get a break on your flood insurance rates — not your property tax bill.

Making an individual property more resilient does nothing to make the government infrastructure serving that property more resilient. If anything, local governments should make property owners pay higher property taxes for locating in floodprone areas so they can afford to pay for hardening and repairing the roads, bridges, and utilities that make those areas habitable. Granting tax relief is the diametric opposite of what needs to be done. This proposed constitutional amendment is a fiscal folly that would only compound growing liability in coastal areas.

The second amendment reads as follows:

Shall the real property tax exemption for a primary residence that is currently provided to the surviving spouses of veterans who had a one hundred percent service-connected, permanent, and total disability be amended to allow the surviving spouse to move to a different primary residence and still claim the exemption?

This amendment also violates my stricture against tax exemptions and carve-outs. And there is no compelling public benefit that would warrant an exception. So, I see no logical reason for the amendment. But I support it anyway on purely emotional grounds.

I have seen veterans permanently disfigured and disabled from IEDs, and I feel strongly that there is no way our society can fully compensate them — or their families — for their sacrifices on behalf of our country. Granting a property tax exemption to surviving spouses is big gesture affecting a relatively small number of people. There is no moral hazard here. The subsidy won’t encourage soldiers to run off and get hideous war wounds. Women won’t start marrying disabled vets so they can get a tax break after their husbands die. Unlike subsidies for property owners in floodprone areas, we won’t get more of what we don’t want. So, although I harbor strong reservations about the amendment, I’ll still vote for it.

Taxaginia? Conformity Tax Would Be Number Four

Each of the four tax increases I discussed in this guest column for the Richmond Times-Dispatch today has a strong constituency behind it, and logical arguments in its favor.  Only one is in effect now (the hospital provider taxes), and the other three are merely pending.

Only one of them, amendments to the sales and use tax to apply it to remote sellers, will require specific legislation for that purpose.  The conformity tax hike happens if the 2019 General Assembly fails to stop it, the carbon tax is being imposed by regulation after legislation to stop it was vetoed, and the Medicaid taxes imposed on hospitals are authorized in vague language buried in the state budget with no separate roll call vote.

Would all four really be happening if each required a direct roll call vote in the General Assembly?  A fair question.

This started as a line in a presentation I made October 29 for the Thomas Jefferson Institute for Public Policy, when I mentioned that the state tax increase that results from conformity – if allowed to happen – would be one of three.  At the time I had forgotten the carbon tax at the heart of the Regional Greenhouse Gas Initiative (RGGI), but then a story about it reminded me.  Make that four.

The General Assembly, the Northam Administration, the business community and the voters need to at least focus a bit on the overall picture and own what is happening.  My quite transparent goal is to prevent the big hit, the tax hit to individuals and businesses coming from conformity to the federal taxes.  Conformity is instead an opportunity to make some positive tax reforms.

The newspaper posted the column online yesterday afternoon, and I quickly received an email from a friend inside the administration pushing back on the assertion that the Medicaid provider taxes on hospitals will eventually find their way to patients.  The argument is that the money will replace dollars being imposed on paying patients for uncompensated care, which is certainly how those patients have been paid for to date.

But there is no guarantee in the state budget language that hospitals will now reduce their charges to the rest of us, and the Medicaid expansion goes way beyond paying for those people who were already receiving care.  Hundreds of thousands of people who had been avoiding seeking care at all now have a way to pay, and that was the whole idea in the first place.   Even as I accepted that Virginia should do this (with some reasonable controls which are now in jeopardy), I never doubted it would be expensive.

On Friday it was revealed that the cost will be higher than the General Assembly had been told, even as the first enrollees are still filling out their paperwork, and those Medicaid provider taxes will grow.

The other thing about these four taxes is they are all easy to miss.  Hospital accounting is notoriously byzantine.  Dominion Energy Virginia’s payments for RGGI allocations will be part of your bills (although I hope at least in a separate line).  Few notice now whether sales tax has been added to an online purchase.  This conformity thing has people terribly confused.   The accounting is complicated and the accountability lacking, but all four represent major costs to Virginia’s families and businesses.

The Northam Administration released these estimates of the conformity tax increase in August. They assume full conformity with TCJA with no compensating state policy changes to rates or deductions.

 

Conformity: Option on Deductions Saves $370M

Allowing a split choice on deduction methods provides 87,000 taxpayers with a tax cut and reduces the conformity tax hit for 456,000. Source: Secretary of Finance.

If Virginia were to allow its taxpayers to keep taking itemized deductions at the state level, even though they take the new higher federal standard deduction, almost 550,000 more would be expected to itemize at the state level, Secretary of Finance Aubrey Layne told state legislators Thursday.

Almost 90,000 would be people who were not claiming itemized deductions before.

That idea is popular with some legislators, many of them House of Delegates Republicans, who are hearing from taxpayers who face a difficult choice.  Under current Virginia law, which would remain in place if Virginia simply adopted straight conformity with the new federal rules, the decision on standard deduction vs. itemized must be the same on both state and federal returns.

When Layne reported on an earlier projection that Virginia would gain $532 million in new individual income tax revenue during 2019, and $3 billion over six years, much of that would come from that situation.  More than 600,000 Virginia taxpayers were expected to switch from itemized to standard deductions, lowering their federal tax but increasing their state tax.

Along with the number of returns that might split their method, he also estimated the amount of tax dollars involved as $370 million.  That estimate was for 2020, and its not clear what the more immediate impact would be.  Layne presented that as lost revenue for the state but turn the coin over and it’s a tax cut for those families.

Why does this matter?  It puts a price tag on that proposal being discussed in some circles, and that price tag is less than the estimated revenue gain from conformity.  The idea could be implemented without blowing a big hole in the state’s already-adopted budget – a big point in its favor.  The budget was written with no conformity tax gains included.

Also, the price tag Layne announced (probably working with that new tax model the state has developed) is a bit lower than the revenue loss/tax cut value on the other big idea.  Previously Layne had estimated that if the legislature doubles the state’s standard deduction (to $6,000 per person or $12,000 per couple) that would cost (or save) $440 million.  He repeated that number Thursday in an interview with Bacon’s Rebellion.

The information is in a slide that Layne prepared for the monthly meeting of the Senate Finance Committee, but according to the Richmond Times-Dispatch the committee didn’t want to take up the topic today.  The newspaper story, at least the first iteration, seemed to characterize the $370 million as the state revenue impact if the state doesn’t conform to any of the federal changes.

That number would be far more complicated.  A failure to conform at all would involve a state-specific addition or subtraction on more than 20 individual and 30 business provisions and would remove from Virginia returns many highly positive changes – changes taxpayers would be furious to find they lost on their state returns.  Layne confirmed that his number was just focused on the proposal to let people split their decision the deduction method.

Layne also reproduced some pages of the forms that Minnesota taxpayers will use to accomplish just that, to back out all the various federal changes when they prepare their state returns.  That is a nightmare that no Virginia leader is promoting for here, but it is a very possible outcome if the General Assembly fails to act in early 2019 after having failed to act through all of 2018.  Conformity will require a positive vote by a super majority in both chambers to be retroactive for tax year 2018.

In his un-given presentation Layne continued to discourage the General Assembly from doing anything to remove the conformity tax bite for tax year 2018.  He argued against both proposals circulating, to double the standard deduction or allow the option state itemized deductions.

“Such responses will not only impact taxpayers whose state taxes were increased as a result of the (Tax Cuts and Jobs Act) but will also impact taxpayers whose tax liability did not change as a result of the TCJA,” Layne said.  That is correct. For tens of thousands of Virginians, they would not be revenue neutral removal of “conformity tax” but would be real tax cuts.

Moody’s: Virginia Local Government Credit Quality Healthy despite High Debt Burdens

Moody’s bond ratings for 28 cities and 38 counties in Virginia. Source: Moody’s. (Click for larger image.)

Moody’s, the bond-rating firm, has disseminated a new report on the credit quality of Virginia local governments — answering many of the questions we have been posing on this blog.

The good news is that Moody’s rates Virginia’s business climate highly and says that local governments have “wide latitude” to protect their bond ratings by raising taxes and cutting expenses.

The bad news is that local-government flexibility to raise property tax rates might reassure bond holders but is not a prospect that taxpayers will relish. Which raises the question: How likely are local governments to raise property tax rates? Moody’s does not get into that, but it does observe that that Virginia local governments have high debt burdens, big pension obligations, and aging infrastructure to contend with.

For your reading pleasure, I have extracted verbatim the high-level conclusions from the Moody’s report:

  • High debt burdens can constrain local governments’ financial flexibility. In general, Virginia local governments have debt burdens that exceed national medians, largely due to debt issued for schools. High debt burdens lead to higher-than-average fixed costs, including debt service, the annual required contribution for pensions, and the “pay-as-you-go” portion of retiree health benefits. In turn, local governments’ flexibility to raise funds to address capital needs faces limits.
  • The federal government’s major role in Virginia’s economy is a strength but carries some risk of cutbacks. The state is home to the world’s largest naval base and the Pentagon as well as a number of non-military operations. In 2016, it ranked first in the US in military spending as a share of gross state product (11.8%). While the Hampton Roads and Northern Virginia economies benefit from the large federal government presence, both face exposure to federal budget reductions, though massive cuts are unlikely.
  • Continued private-sector investment will boost revenues and provide stability. A highly education workforce, weak union protections and significant population growth will continue to generate private-sector expansion. The expanding private sector will fuel tax base growth and provide a stabilizing factor in case of cuts in military and other federal government spending. Virginia has experienced a substantial bump in Eds and Meds with the higher education and healthcare industries consuming a greater share of employment.
  • Legal framework helps local governments maintain solid reserves. Cities and counties can raise property taxes, their largest revenue source, without state-imposed caps or voter approval. The ability to control the tax rate, along with flexibility to reduce personnel costs, has contributed to strong financial positions. However, operating funds include school operators, so reserves generally trail national medians.

I’ll provide details in future blog posts.