Tax Reform Dies at Dawn, Tax Hike Fares Better

Richmond region business, government and transportation leaders line up at a dawn subcommittee meeting today to support $179 million in new regional taxes for transportation. More details at the end of the post.

By Steve Haner

The change in leadership in Mr. Jefferson’s Capitol has left one bad trend intact:  The House Finance Committee still worries first and foremost about whether any tax policy change – no matter how meritorious — would interfere with state spending. It was the same under Republicans, unfortunately.

New House Finance Chair Vivian Watts, D-Annandale, who waited patiently through the entire Republican majority era for her turn with this gavel, used a subcommittee meeting this morning to kill one of her own bills, the best tax policy proposal in the hopper for 2020. Her House Bill 735 would have required several elements of the state tax system to be adjusted annually for the effects of inflation.

The subcommittee — which meets at dawn on Fridays — also delayed for an entire year action on Del. Watt’s proposal to reinstate a Virginia estate tax and provided the first positive vote on a major transportation tax increase for the Richmond region, modeled on similar regional taxes elsewhere in Virginia.  More on those later in this story.

The Watts bill to adjust tax brackets for inflation had been endorsed by the Thomas Jefferson Institute and the group often at odds with us, the Commonwealth Institute for Fiscal Analysis. Both of us at the podium singing Kumbaya (one chorus at least) would have been a nice Instagram moment. 

But the bill had to go, Watts said, because of its relatively modest fiscal impact, outlined here. An economist would look at that $22 million for this year, $67 million for next year and $116 million for 2023 and say, see? That’s how even modest inflation raises taxes on Virginians without any needed vote by the legislature. But the legislators see that as the lost opportunity for spending and know that their own requests for this or that back home would be the first things chopped.

The same excuse was used to kill a more modest bill on the issue of indexing, House Bill 89, this one proposed by Salem Republican Joe McNamara, R-Roanoke (who was also a co-sponsor on the Watts bill.) In his case, the lost revenue (a.k.a. tax cut) was $22 million the first year and then a bit less going forward. Nope, no room for even reduction that in the state’s record $140 billion proposed budget.

It was a bipartisan massacre. Del.Jay Jones, D-Norfolk, lost his House Bill 1435 to change Virginia’s existing Earned Income Tax Credit for low-income workers into a grant program. Governor Ralph Northam tried the same thing last year, but there was no indication this year’s effort had administration backing.  The “reimbursable” EITC idea, often explored on Bacon’s Rebellion, is offered in most states and at the federal level, with Republican roots.

Based on its impact statement, the state would have started disbursing almost a quarter billion dollars annually to low income taxpayers who had an EITC amount so high that it was higher than their tax bills. Under current law that means they just pay zero state tax. Under Jones’ bill, they would get the excess credit in cash. The Commonwealth Institute and other advocates for the poor pushed hard in testimony, but the fiscal impact meant it was “laid on the table.”

One great (and broad) tax policy bill remains, probably because the subcommittee ran out of time this morning. Lee Ware’s House Bill 1717 increases the standard deduction from $4,500 per person or $9,000 per couple, to $6,000 per person or $12,000 per couple. The fiscal impact statement for that appeared yesterday and you get to decide this question for yourself: Is that $700 million over two years another major step to return to families the massive windfall of state revenue created by federal tax reform? Or is it a devastating blow to all the pressing demands for spending instead?

Since the bill still lives, we now have another week to explore that question.

Estate Tax. It was also Watts who dispatched her own bill to reinstate an estate tax in Virginia, almost 15 years after Governor Tim Kaine signed legislation to repeal it. She asked that House Bill 736 be carried over for consideration in 2021, even though this time the fiscal impact would have given the state more money to spend. Only a couple of dozen estates annually, at most, would exceed the taxable threshold of $11.5 million, but the state might still reap about $60 million annually.

Earlier reports that it would be imposed on more modest estates were erroneous, but her bill did represent a tax increase. Under the previous law, any state tax payment also provided a direct dollar-for-dollar deduction against the federal estate tax. That deduction for state taxes is gone now, so any state tax would be in addition to the federal tax.

Small business and farm lobbyists showed up to either oppose or ask questions about the bill, and to worry that her language to exempt certain farm or business operations might not do what she intended. The Commonwealth Institute for Fiscal Analysis was at the podium with the usual “the rich should pay more” talking points. Here are Watt’s own talking points on the issue for the very curious. She believes in this and will likely make another stab at it for 2021.

Richmond Regional Transportation Taxes. Delegate Delores McQuinn, D-Richmond, led a parade of Richmond regional business and civic activists to the podium asking for large regional taxes for transportation, with no one present to speak against it. Her House Bill 1541 cleared the subcommittee on a 5-3 vote, but Del.Lee Ware, R-Powhatan, indicated he is still listening and is not a hard no. The new fiscal impact statement projects tax revenues of $179 million in 2021, rising to $207 million by 2026.

The state sales tax of 5.3% grows to 6.0%, with the extra 0.7% dedicated to transportation. An additional 2.1% excise tax on gasoline and diesel fuel raises the most money. Both of those tax sources are also tapped for regional transportation spending in Northern Virginia and Hampton Roads, with the Richmond region late to the party because of regional infighting and residual anti-tax sentiment. The new transportation authority would include Charles City County, Chesterfield County, Goochland County, Hanover County, Henrico County, New Kent County, Powhatan County, the City of Richmond, and the Town of Ashland.

These regional taxes will be on top of the statewide fuel tax increase proposed in other legislation from Governor Northam.

So, Subcommittee Number 3 of House Finance, known as the Subcommittee of Death, does pass out a few tax increase bills from time to time. It is just tax policy bills which dampen the appetite for state spending that struggle to emerge into the full morning light.

To fight tax policy battles in House Finance you arrive at the Capitol before dawn….


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4 responses to “Tax Reform Dies at Dawn, Tax Hike Fares Better

  1. Thanks for the nice summary and updates.

    The question is why did Watts introduce her bill to index tax rates if she were going to pull it due to its impact on the budget. It should have been obvious to her that the bill would result in less revenue.

    If blowing a hole in the budget is going to be the reason to kill any tax bill that would result in less revenue, no such bill will ever get passed by either party. It seems the answer would either be to carry the bill over until the next session or wait until the “short session” to introduce it. In either case, if the effective date were made to be January 1 of the next biennium, then the current budget would not be affected and the next budget could be built around the revenue projections that were based on the new indexed rates.

    • Maybe she put it in so I could write about what a good idea it was a few times, here on Bacon’s Rebellion (she’s a reader) or for the TJI e-publications. I keep encouraging her to send out something the Appropriations Committee is opposed to to get this issue to a head on the floor! I can hope….

  2. Well if you two guys don’t know, I can tell you from the “end user” point of view , understanding why some “good sounding” bills go down with a thud is a complete mystery.

    but doesn’t inflation cut both ways – if people’s taxes are affected by inflation, isn’t the revenue collected from taxes also affected?

    Are we trying to adjust for inflation or use inflation to “help” taxpayers?

    Should we adjust DMV fees for inflation, for instance?

    • No mystery here. Spending comes first, and tax policy that might slow the revenue is not allowed to advance, even if the beneficiaries are all low income (the Jones bill…). Of course the Ware bill would help all who use the standard deduction, hence the higher fiscal impact.

      DMV charges are tied to the cost of the services offered, in theory, and they do go up over time. When VA first set $17,000 as the bracket for its top tax rate, that was a solid annual income. Now its barely above minimum wage. You may think somebody earning $10 an hour should pay the same income tax rate as someone earning $100K per year, but I do not.

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