How Not To Do Tax Reform. Again.

By Steve Haner

According to the Richmond Times-Dispatch, Governor Glenn Youngkin’s administration had its first formal discussion with Virginia’s local governments about eliminating their car tax collections two days after he announced it publicly.

The General Assembly convenes Wednesday and if there is a plan to replace the $2.8 billion in local government revenue raised by that tax source, it has not surfaced. Voters truly detest the local levy, mainly because it is one of the few taxes everybody pays by check or with a credit card, but at this point it is safe to assume the idea is dead in the water.

The Republican governor and his staff also did little or no advance work before he made his other big announcements in December, two tax policy changes which he used as revenue assumptions for his proposed two-year budget. He wants to cut income tax rates across the board, but in partial compensation he proposed to both raise the state sales and use tax rate and expand that tax to cover more digital services.

By including them in the budget, he gave Democrats the opportunity to kill them and increase spending on popular government programs with strong constituencies. The dilemma the governor will face in the final budget showdown in March is obvious to everybody who has a cursory understanding of how the budget process works.

If there is a white paper explaining the details or rationale behind the effort to shift the burden from income to consumption taxes, it has not surfaced. If the governor assembled a political coalition of stakeholders willing to join him in selling the idea to the public and to legislators, there is no sign of that either.

Youngkin’s more extensive tax cut package for the 2023 General Assembly also lacked a public sales pitch in the months before the session, or an organized campaign of support from outside groups to pressure the Assembly. For the most part it failed. It is discouraging that no lessons were learned.

The ostensible reason for seeking to lower individual income tax rates is to improve Virginia’s competitive position. Many surrounding states do have a lower top individual rate than Virginia’s. Others have no income tax at all. If there is objective evidence or testimony that Virginia’s 5.75% top rate is an impediment, and reducing that to 5.1% would make a measurable difference, now is the time to make the case.

Does the Virginia Chamber of Commerce agree this would boost our economy? How about the Virginia Manufacturing Association or the Virginia Economic Developers Association? They were not recruited as active allies in 2023 either, even though a cut in the corporation income tax was also on the table that session. The heavy lift of tax reform must be a team effort.

In the absence of that political messaging push, a common tactic when prior governors tackled major tax changes, the media coverage of Youngkin’s ideas is being dominated by critics. The Commonwealth Institute for Fiscal Analysis, with its liberal bent, immediately pointed out that the income tax cut for lower income households might be wiped out by the higher sales taxes they would pay.  The annoying thing about that is they are probably correct.

The plan drew praise from The Wall Street Journal’s editorial page. Nice, but that will not move a single vote in any of the key legislative committees about to carve this proposal into carrion.

For the past few years, the focus of the Thomas Jefferson Institute has been on broad-based state tax reform efforts that avoided conflict between economic classes. Increasing the standard deduction, for example, has a uniform utility.  Every $1,000 increase saves most households the same $58. In a similar manner, indexing the various exemptions and tax brackets to inflation does not have much impact on whether the tax code is progressive or regressive.

As a tax policy goal, reducing reliance on income taxes and shifting the burden to consumption taxes has credibility. It is a common recommendation from groups like the Tax Foundation, which reportedly had at least some advance notice this idea might be coming. Expanding Virginia’s sales tax to cover more digital activity (your Netflix or Fitbit subscription for example) is also logical in this changing economy. Given that it produces more money for the government, this is one element of the plan likely to pass, but on its own.

The income tax reduction could just as easily be achieved by moving the brackets up from the bottom, or even removing the tax on the under-$3,000 and under-$5,000 brackets. With that approach, again, every taxpayer, rich, middle-class or minimum-wage earner, sees the same reduction. The class warfare whining dissipates. But that leaves the top rate of 5.75% in place.

Increasing Virginia’s basic sales tax rate is also a problem. In many parts of the state it is already 6%, 6.3%, or even 7%. In some places there are regional sales tax components dedicated to transportation. More and more counties add a penny for local-option school construction. Many localities also add major sales taxes on restaurant food and hotel bills. To promote Youngkin’s idea as merely an increase from 4.3 to 5.2% is misleading.

As to eliminating the car tax, it was a pipe dream in 1997, and the result then -– even when an election result had endorsed it — was that the tax remained in place. Some of our state tax dollars were shifted to localities merely to pretend taxes had been reduced. Nothing more substantive than that is likely to happen as this movie plays again 27 years later.

First published this morning by the Thomas Jefferson Institute for Public Policy. 

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34 responses to “How Not To Do Tax Reform. Again.”

  1. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    Obviously (at least, to me), the Governor was counting on “keep the House, flip the Senate” by using his abortion proposal. When he failed, likely to his great surprise, he had to scramble to come up with something to try to sweeten his income tax proposal. His other major problem is that his financial team is devoid of folks with deep (or any) knowledge of Virginia budget and tax policy and politics. Nowhere is there anybody comparable to Ric Brown, John Bennett, Paul Timmreck, or even Aubrey Layne in sight.

    Finally, cutting taxes is not tax reform.

    1. Lefty665 Avatar

      Ric was remarkable, a wonderful career of public service. We need more like him.

    2. DJRippert Avatar

      You’re right – cutting state spending including employee headcount would represent real reform.

      When Northrup Grumman announced its move of corporate headquarters from California to Virginia in 2010, that company had 120,000 employees. Today, it has 95,000.

      During the period from 2010 to 2022, Northrup Grumman’s revenues grew from $28B to $37B.

      Why is it that every entity outside of government is able to use technology to get more done with fewer people?

      1. Stephen Haner Avatar
        Stephen Haner

        Shedding (spinning off) the shipyard divisions had quite a bit to do with that, DJ 🙂

      2. LarrytheG Avatar

        govt contracts? 😉

    3. Stephen Haner Avatar
      Stephen Haner

      Well, reform is one of those “eye of the beholder” words. Like fairness. Shifting from income to sales is a valid goal, shared by Finance Secretary Layne. Deciding what the sales tax applies to is a big policy decision. But it is serious stuff. It took Mark Warner to year four to figure some things out.

      1. Dick Hall-Sizemore Avatar
        Dick Hall-Sizemore

        I meant to include in my comments that the governor’s staff either is unaware of the Jefferson Institute, does not read the material from that organization, or chooses to ignore it.

  2. William O'Keefe Avatar
    William O’Keefe

    Anyone with any experience in selling controversial policies would conclude that these were not serious efforts, especially given the makeup of the General Assembly.
    Younkin needed to build and sell the intellectual case and then gain the support of localities and the public. He did none of these.
    It’s a shame because he has wasted precious political capital.

  3. DJRippert Avatar

    Virginia will never be more successful than its relationship with the federal government so long as the following remain in place:

    1. One term governor
    2. Part time legislators for life
    3. Off year elections
    4. Unlimited campaign contributions
    5. Weak campaign spending disclosure rules
    6. No mechanism for voter initiated referenda
    7. Weak FOIA laws that can be easily circumvented

    Virginia’s 1971 Constitution was nothing more than the remaining elites of the Byrd Machine trying to preserve the Byrd Machine while removing the grossly racist ingredients of the 1902 Constitution that had (blessedly) become intolerable to the Federal government (and the rest of America).

    Our governance structure is designed to very quietly allow the state’s special interests to benefit through the actions of a near permanent group of gadflies collectively known as the General Assembly. Serious progress is retarded by our governance structure in many different ways.

    So long as the federal government continues to increase its massive spending with much of that spending flowing through NoVa and Hampton Roads, the Rube Goldberg approach we use will sort of, kind keep working.

    What the brain trust in Richmond ought to be worried about is the possibility of the federal government decentralizing itself. For example, the new FBI Headquarters could have easily been built in Kansas City rather than in metropolitan DC. Given that the cost of living in Kansas City is 32+% lower than DC, that decision would have saved the FBI a small fortune.

    Q: What’s the difference between Virginia and Mississippi?
    A: Proximity to the federal government.

    1. how_it_works Avatar

      I would say this:
      Q: What’s the difference between Virginia and Mississippi?
      A:The folks in Mississippi don’t think their feces aren’t malodorous.

    2. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Are you saying that the federal government structure does not benefit a relatively small group of special interests and does not function as a revolving door for employees of those interest groups to work in government for awhile to benefit their host employers and then go back, to say nothing of serving as nice cushions for retired members of Congress?

      1. The conservative approach would have the federal government do less and take less of our money, as was originally intended.

  4. Lefty665 Avatar

    There’s a local tax elephant in the room, the property tax. My house and land assessment has gone up almost 40% in the last year and a half. Whatever happens to the car tax is insignificant in comparison.

    Nice observations on what it takes to get things done in the GA. Youngkin has not been a quick study in the ways of Richmond.

  5. LarrytheG Avatar

    Here’s the sales tax for states without income taxes (if I transcribed it correctly):

    New Hampshire 0.0
    Alaska 1.8
    Wyoming 5.4
    South Dakota 6.1
    Florida 7.0
    Nevada 8.2
    Texas 8.2
    Washington 9.4
    Tennessee 9.5

    Wallet Hub ranks Va 26 on total tax burden on citizens per capita.

    If we’re gonna make tax policy changes, having the Gov being the opposite party of the GA (with no super majority) is a good thing in my view. Heavy knows what might have happened if
    Youngkin had a GOP GA!

    If Youngkin and the Dem GA cannot get to a compromise and the current policy stays in place, it won’t be the end of the world but perhaps a lost opportunity.

    The thing about the car tax. Probably not likely to go away 100%, i.e., both local and state part. More likely, it will be the State part – replaced with sales tax on digital and services and the localities will keep their current car taxes..which are truly onerous in some counties in Va but tied closely to the value of the vehicle. If you can afford a 40-50k vehicle, you are probably better off than someone who can only afford a 20k vehicle.

      1. LarrytheG Avatar

        yes.. I think that’s where I got the data… must not have provided the link.

  6. DJRippert Avatar

    Who was the last governor of Virginia that pushed through a major change to the state and what was that change?

    Jim Gilmore became governor 25 years ago and he couldn’t end the car tax.

    A quarter of a century later, Youngkin apparently can’t end it either.

    The governor of Virginia is a lame duck on the day he (or someday, she) shows up for their inauguration in that ridiculous looking morning coat.

    1. Lefty665 Avatar

      Uh, didn’t Gilmore run on the car tax, not against it? At least that’s my recollection.

    2. LarrytheG Avatar

      Gilmore was THE one who instituted the current wacadoodle situation with the car tax by having the state get involved in it when it should not have to begin with.

        1. Stephen Haner Avatar
          Stephen Haner

          As a campaign tactic it was brilliant, and the GA did pass something to pretend it was complying.

          1. LarrytheG Avatar

            because voters are RUBES and the GA was too spineless to stand up against dumb tax policy!

          2. James Wyatt Whitehead Avatar
            James Wyatt Whitehead

            I met him once while walking from the Capitol to the Museum of the Confederacy. He stopped and talked to me for a few minutes. I liked him.

          3. Dick Hall-Sizemore Avatar
            Dick Hall-Sizemore

            He was a personable guy.

          4. LarrytheG Avatar

            In terms of why, I thought I remember that part of his plan was to try to “cap” the local car tax, essentially freeze it in place so that was the “plan”?

    3. Stephen Haner Avatar
      Stephen Haner

      Warner had a major tax package of several elements that was mainly a net increase. McDonnell had his transportation tax package. Baliles’ on transpo was my first (0ne always remembers his first.) Baliles also had the state windfall from the Reagan federal tax cut and made some income tax adjustments.

      1. Lefty665 Avatar

        Affable but ineffective is my recollection of the Baliles years. That’s as opposed to the Gilmore years. Earl Dickinson used to growl at me “He’s so mean even his own mother don’t like him”.

    4. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      As for non-finance-related major changes, Allen eliminated parole. McDonnel instituted re-entry policies and practices in the the Dept. of Corrections and other agencies that are still largely in place.

      1. Stephen Haner Avatar
        Stephen Haner

        Both bipartisan. Coming out of the Assembly, they knew how it worked.

  7. Nancy Naive Avatar
    Nancy Naive

    Ready… fire, aim.

  8. If there is a white paper explaining the details or rationale behind the effort to shift the burden from income to consumption taxes, it has not surfaced.

    Of course, eliminating the car tax is not an example of trying to shift the tax burden from income to consumption taxes. In fact, the car tax is a consumption tax.

  9. energyNOW_Fan Avatar

    Earlier December version of this topic I already said “the localities – especially NoVA- urgently need to keep to the stupid car tax to keep the state revenue coming in. Hopefully Youngkin being from Great Falls knows how to navigate NoVA, otherwise it is just blowing smoke….” therefore blowing smoke it is.

    1. LarrytheG Avatar

      I guess I would have thought that many urbanized places would have strong enough economies, they could switch to higher sales taxes and maintain revenues.

      If it included sales taxes on services, almost certainly, no?

      1. Stephen Haner Avatar
        Stephen Haner

        ALL services, very much so. The Jefferson Institute, under its late founder, pushed such an idea but the numbers included taxing health care, child care, private education services, the whole gamut. I was on the other side of that idea on behalf of my clients, and my clients were right. The BPOL tax is already imposed on services so they are hardly tax-free. And they pay sales tax on their various inputs often. They don’t get any break on their current car tax either.

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