Category Archives: Taxes

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.

Virginia is for Lovers of Tax Cuts

by John Sims

After years of sluggish post-recession growth, our state’s recent history shows that Virginia is for lovers of pro-growth policies—at the foundation of which is the Tax Cuts and Jobs Act.

Efforts to pursue these pro-growth policies have led to a red-hot economy. According to the latest report from the Bureau of Labor Statistics, the nationwide unemployment rate dropped to the lowest level in 49 years: 3.7 percent. For Virginia, the rate is even lower, at 3 percent.

Moreover, job creation is competing with wage growth in a race to the top. Wages are growing at their fastest rate in a decade, and Virginians from Fairfax to Halifax are feeling the love. From the first quarter of 2017 to 2018, 11 of the 12 largest counties in Virginia saw increased wages, while Richmond’s average wage growth was among the top performing cities in the country.

These vibrant economic indicators are just the beginning. Projections show that over a four year period, the 2017 Tax Cuts and Jobs Act will be credited for creating almost 25,000 jobs in Virginia, while the average Virginia worker will realize a take-home pay increase of almost $25,000 over the next 10 years.

Recent polling conducted by the Job Creators Network and ScottRasmussen.com shows that Americans, regardless of political persuasion, are generally supportive of tax cuts and other less restrictive fiscal policies. Sixty-three percent of Democrats, 84 percent of Republicans, and nearly three out of every four independents support free markets and individual liberty.

Embracing individual freedom helps create a level playing field between Wall Street and Main Street. Virginia is home to over 700,000 small businesses, which employ almost half the state’s workforce. By cutting red tape and supporting job creation, tax cuts keep hard-earned revenues in the communities that created them.

Conversely, tax hikes allow for the federal government to expand, which in turn causes bureaucracy and bloat. Only 27 percent of all Americans want a larger role for the federal government. Even Democratic Governor Terry McAuliffe has admitted that Virginia needed to diversify its economic portfolio to decrease our reliance on the federal government, and has credited lower tax rates for attracting businesses.

Congress is working hard to lock in long-term economic growth. Last month the House passed what’s been dubbed “Tax Cuts 2.0” which would make the individual tax cuts (set to expire in 2025) permanent, and would expand tax breaks for start-ups.

These savings give folks freedom to choose how to create a better future for themselves and their families. The formula is simple: whatever it is you do, work hard, and you’ll be rewarded. That’s it. It was always your money; use it as you see fit.

Virginia is an incredibly diverse state, with diverse needs. Whether you’re a veteran in Hampton Roads, a doctor in Richmond, or a farmer in Roanoke, pro-growth policies will let you decide how best to spend your money.

John Sims is the owner of LeafSpring School which is based in Richmond, Virginia.

A New Tax Policy Principle: Harm Reduction

Source: Legislative Services Presentation

Despite a long tradition of taxing traditional tobacco products, Virginia should not now tax the alternative products from the same industry based on nicotine-laced heated liquids because they serve the high social purpose of harm reduction, legislators were told Tuesday.

Carrie L. Wade of the R Street Institute, who never quite stated who had paid her to be there, told a meeting of the General Assembly’s Joint Subcommittee to Evaluate Tax Preferences that “good state regulation” of these products would “treat combustible products differently than non-combustible products” and “send a public health message through differential tax rates.”

The United Kingdom, Japan and Sweden have all found that nicotine delivery without benefit of fire has moved people away from cigarettes, she said.  In Sweden the product mentioned was smokeless tobacco inserted in the mouth, which is illegal in the European Union.  Asked why it was banned by the EU, she didn’t quite answer.

The reason of course is mouth cancer.

Having made uncounted billions selling a deadly and addictive product that King James I and Mary Baker Eddy understood could kill and having addicted government at all levels to the related tax revenue, the industry is now arguing that its newest and possibly slightly-less-deadly products should be tax free or at least taxed far less.

This being Virginia, where tobacco leaves decorate the House chamber ceiling, the assembled legislators listened patiently.  Lobbyist Reginald Jones on behalf of Altria was up immediately following Wade, mentioning his client’s 3,700 Virginia employees and billions in sales and its downtown Richmond research center now focused on “heated products” which are “less harmful products.”   He too used the new key phrase:  harm reduction.

Jones was deeply appreciative that the committee would consider this issue, but it was merely responding to a mandate slipped into the state budget, a small item sponsored by Senate Finance Committee Chairman Emmett Hanger.  “I view this as the beginning of a process,” said Hanger.   Some lobbyist certainly handed him that language and requested its insertion, perhaps the same one so grateful to be there.

Over the years I’ve devised several laws to explain the world of politics and government, and today I formulated a new one:  the more obscure a budget language provision, the more delayed its appearance into the sunlight, the more interesting it will turn out to be.  This legislative study committee was created to trim the instances of special tax treatment in Virginia law, but this discussion was all about preserving or enhancing one.  That’s the kind of lobbying creativity that produces the big bucks.  Scores of lobbyist meters were running in the room.

Virginia does not now tax these vapor products except for the standard sales tax.  Traditional tobacco products suffer an additional excise tax at the state level (the second lowest in the country) and in most cities and towns.  The local taxes can be higher than the state tax and the patchwork of more than 100 different tax authorities has always annoyed the industry.  Customers can usually go a short distance to another locality for lower-tax product.  That is in part what the budget language meant by “modernization.”

Combined the state and local levies produce about $200 million in revenue, but the amount has been dropping steadily as tobacco use declines, in part due to switchers to vaping and also because new state laws reduced cigarette smuggling from Virginia to high-tax states.  Over the past few sessions a handful of bills – all quickly killed – have proposed extending taxes to vapor products.

The most recent, House Bill 2056 in 2017, proposed a five cent per milliliter (or about $1.50 per ounce) tax on the liquid and a ten percent tax on the various devices to use it, such as those pictured above.  Seven other states and the District of Columbia are already taxing one or the other, but usually not both.

Delegate Mark Keam of Vienna was one of those most engaged in the conversation and, after assuring everyone he thought what informed adults did in this area was fine with him, asked if there had been previous discussions of whether or how to tax these increasingly-attractive products.  Not really, he was told.  As noted any previous bill had never even gotten a vote in committee.

Wade also argued against any effort to regulate the use of attractive flavorings in the products.  Adults are just as fond of them as younger users, and hence they are an element of harm reduction.  “We want to keep these products away from kids, but we think we can do that with existing regulations,” she said.

As Virginia contemplates special taxing treatment, the Food and Drug Administration is on the warpath over the explosion of these products among young people.  Given how the industry marketed cigarettes as healthy and featured doctors in their advertising, perhaps these new health claims should be viewed with at least a little suspicion.

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.