Dump the Nonsense in Coming Conformity Debate

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

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

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

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

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

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

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

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

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

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

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

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9 responses to “Dump the Nonsense in Coming Conformity Debate

  1. Congrats to you Steve – your success is in spades and you do deserve it for your insight and years of practical experience in the political realm.

    What I got from Layne was that it was too late to make major changes without really knowing with any precision – the impacts to the State budget – as well as to taxpayers including businesses.

    In other words – do we go from the frying pan into the fire if we rush and then generate even more unintended consequences and I include the retro-active increased standard deduction – IF that is just a one-time change that could go away later after other changes are made… there needs to be a stable process for change not fiscal chaos….

    So I LIKE the idea of other entities doing their own substantive analyses.. as long as they are truly objective and not agenda-driven or lean politically… or philosophically.

    In other words get the facts out…. first – be fair and be right -THEN offer your own organizations preferred direction.

    And again – Congrats… “retirement” in your case is not the right term!

  2. Steve – well written article.

    What’s the history in Virginia for “general conformity”? Starting with Reagan’s tax cut in the early 1980s and his subsequent tax increase, we’ve had the following. Major tax reform in 1986. GHW Bush tax increases. Bill Clinton tax increases. GW Bush tax cuts. Barack Obama tax increases. And now Donald Trump tax cuts.

    Did the Commonwealth conform to each of the previous federal tax changes. Largely? Partially? How long after the federal laws were changed did the Virginia tax law change?

    If Northam gets his way, is it unprecedented?

  3. Larry, when you and Diogenes find a group totally without any agenda, call me, I’d like to meet them. But what the various groups can be is honest and willing to be constrained by pesky facts that might force them to think again.

    TMT, Virginia has not conformed to only a couple of provisions from congressional tweaks in the last several decades, mainly dealing with net operating losses and depreciation schedules – business provisions. On individual provisions I cannot think of an example of de-conformity.

  4. The state doesn’t get to use deficits to meet its spending goals. So, the subject of taxation is, in my opinion, secondary. The real question is the bi-annual budget. Ken Cuccinelli once proposed a law or constitutional amendment that would restrict Virginia’s budget from increasing by more than the sum of inflation and population growth without a super-majority vote in the GA. At least, that’s how I recall the proposed approach.

    Why should these various windfalls to the state change how much we spend in Virginia? It seems to me that many politicians and commentators are playing word games with these new sources of revenue. Conformity vs non-conformity, internet sales tax vs physical store sales tax, etc. Nobody seems willing to ask how these additional monies will be spent. If we don’t have pressing needs for more government spending in Virginia (and we don’t) then the monies should be returned to the taxpayers through lower state income tax rates.

  5. re: taxes , spending, and budget…

    I generally agree that taxpayers should be held harmless from conformity.

    Now comes the hard part. All taxpayers held harmless – equally at 2019 tax time?

    Can this be accomplished with simple/quick changes – like, for instance,de-coupling from the Feds on conformity?

    Would you go ahead and do quick/dirty changes even if it has a disparate impact on some?

    So this is where the non-partisan think tanks come in. No too surprisingly, Northam and company have their priorities and they have a credible proposal vetted by Cambridge… I don’t see anything from the GOP in the way of THEIR proposal just yammering about Northams proposal.

    A well-conceived alternative proposal that DID hold taxpayers harmless – equally – without unintended consequences would , in my mind, gain support and diminish both Dem or GOP ideas for spending it.

    I WILL say this – if a Virginia Earned Income credit actually would remove some folks from receiving entitlements.. it’s worth considering… 29 other states and the Feds have it – and the GOP seems to like it also.

    The more we can incentivize work and disincentivize relying on entitlements, the better. People who work – can receive employer-provided health insurance or buy it from the marketplace rather than receive MedicAid. It’s worth looking at IMHO.

    • Larry – It’s Northam whose the odd man out. Unless someone can show a precedent of not conforming with the federal changes, that’s the assumption. As far as removing people from entitlements, include a provision in the law that anyone taking an earned income tax credit that is refundable in the year that the tax refund is made is ineligible for any state or local welfare programs, including TANF and Medicaid.

      Northam is a dishonest man as he’s trying to buy votes by giving away other people’s money. Fairfax County residents deserve every cent of a tax refund unless we put a provision in the state constitution that prohibits conforming state law to any federal tax increase legislation.

      • I am not aware of any state the prohibits people from using other forms of assistance just because they get a cash supplement because of EITC – and I doubt that would fly in VA.

        In answer to your basic question, Larry, it is impossible to make changes to protect all taxpayers from any hike at the individual level. It is only about 25 percent of state income taxpayers that will see any kind of increase, according to the Chainbridge analysis. Might be off by some factor but I think that is basically correct. But TMT may be right that it’s the people with higher local property taxes who are now looking at a tough choice on whether to itemize.

        • My point with EITC and welfare benefits was to respond to Larry’s comment that expanding the tax credit would “remove some folks from receiving entitlements.” I get his logic but the welfare state never contracts. It only expands. If you think expanding the EITC would, indeed, remove people from receiving entitlements, then you need to put it in the law.

          Just as we tax Social Security, we need to tax every benefit we get from the federal, state and local government. There should be basic offsets built into the tax code so that truly low income people are not heavily taxed and everyone gets an amount that is tax free whether than is salary, investment income or government benefits. But about that, income is income.

          Let’s say we increase the standard deduction from $24 K to $30 K (just as an example-I don’t know what the right number is). Then consider wages and salaries, investment income and government benefits as income. Income is income. Forcing people to recognize it would temper many people’s love for the welfare state.

  6. Steve, congratulations on the affiliation with the Thomas Jefferson Institute.

    I normally oppose tax increases, and I totally sympathize with the sentiment that revenue windfalls should be returned to taxpayers. But I’m less adamant in this particular case. What the federal government giveth, state government (by conforming its tax code) taketh away… but only in part. The net result for most (almost all?) Virginia taxpayers still is a tax cut.

    I’d like to see more discussion focused on what Virginia should do with the money. Northam wants to benefit rural Virginians — a natural GOP constituency — with a beefed up EITC and economic-development spending. Personally, as one who thinks public finances are slowly but surely going to hell in a handbasket, I’d like to use the windfall to shore up state finances. The most obvious use is to reduce unfunded liabilities in the Virginia Retirement System. Preserving the integrity of state finances is in the best interest of taxpayers in the long run.

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