The Logic Behind Northam’s Plan for Spending the Tax-Reform Windfall

Finance Secretary Aubrey Layne

The starting point for understanding the Northam administration’s logic behind divvying up the tax windfall from federal income tax reform is the conviction that Virginia cannot count on the personal and corporate tax cuts lasting more than a few years. Democrats may regain power in Washington, D.C., and reverse the tax cuts, or at the very least block any attempt to extend the personal income tax breaks beyond the five years provided in the legislation.

While the tax reforms might survive, explained state Secretary of Finance Aubrey Layne in an hour-long interview with Bacon’s Rebellion Tuesday, political volatility in the nation’s capital makes it unwise to count on an ongoing boost to state revenue, which is estimated to amount to $532 million in fiscal 2019 and $444 million in 2020. It would be irresponsible to expand ongoing state expenditures in the hope that the revenue gusher will continue. Prudence dictates that Virginia allocate the funds to non-recurring programs and capital projects.

There are many possible uses of the money, Layne conceded. Some say give the money back to taxpayers. Some say dedicate the money to school improvements. Governor Ralph Northam prefers initiatives that would benefit mainly rural Virginia: Earned Income Tax Credits for lower-income wage earners and non-recurring investments in broadband, workforce development, and affordable healthcare.

The controversy swirling around the impact of federal tax reform on Virginia finances has created considerable confusion, Layne said. One sticking point is the issue of “conformity” with the federal tax code. When Congress enacted new tax policies in the past, Virginia traditionally has enacted the changes needed to make the state tax code align with the federal code. Congress’ new tax code will require 20 or more significant changes in the Virginia code. Failure to conform is not an option, he said. It would throw state tax collections into confusion at enormous expense to tax payers.

If Virginia conforms and makes no adjustment to tax rates, brackets or deductions, as he expects, the Commonwealth should see a spike in revenue. There has been some controversy over the effect on taxpayers – the impact will vary widely from household to household — but there is no question that, absent any action to return money to taxpayers, the state treasury will be a big beneficiary.

Then comes the question of what to do with that money. Virginia may not spend any revenue from tax year 2018. The tax year is advanced and the state is still awaiting guidance on the details. “There’s a lot we still don’t know,” said Layne. There will be no time to update tax preparers much less modify tax-calculation software such as Quicken. Returning money to taxpayers that year might make sense, although, he added, he’s not advocating such an action.

The 2019 tax year is a different matter. He expects the General Assembly to bring the tax code into conformity in the 2019 session, eliminating the uncertainty, and the Commonwealth will be in a position to start spending money.

Northam wants use the money to help working families in rural Virginian, said Layne. The governor proposes to do that by dedicating about half the windfall to increasing the Earned Income Tax Credit (EITC), a tax refund that would eliminate state income taxes for many lower-income households. The money would flow to lower-income Virginians across the state, but the beneficiaries would be concentrated in rural localities, especially in Southside and Southwest Virginia.

The governor wants to use the other half to fund economic development programs for rural Virginians. A top priority would be to accelerate the deployment of broadband Internet in low-density areas where Internet Service Providers cannot profitably invest. The state needs about $1 billion to make broadband ubiquitous, said Layne. Perhaps the windfall could use public dollars to seed public-private partnerships that could leverage private investment.

Northam also has talked about using the money to underwrite programs for workforce development and education — although Layne conceded that the welter of state workforce training programs is redundant, inefficient and needs fixing — and to improve rural access to healthcare. The priorities are conceptual in nature, and no specific proposals have been advanced. He readily agreed that the state might consider other alternatives such as raising money for Interstate 81 improvements, upgrading the Central State mental health facility, or paying down the pension liability. Northam would consider an alternative to the beefed-up EITC if it would benefit rural Virginia, he added.

Whichever priorities lawmakers approve, said Layne, they should be one-off projects. “I don’t know how we could go to the [bond] rating agencies and use this money for ongoing expenses.”

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15 responses to “The Logic Behind Northam’s Plan for Spending the Tax-Reform Windfall

  1. What superficiality. The argument that Virginia doesn’t need to reconcile its tax code to that of the U.S. because the tax cuts might not last. What B.S. if the tax cuts are not continued or are repealed, then deal with it with more conforming legislation.

    And even assuming a Democratic Congress and President in 2021, we have no idea what they would propose.

    I tended to respect Northam as a principled Governor. He’s just one more thieving Democrat who cannot spend enough money.

    And, of course, don’t expect the Ministry of Enlightenment and Propaganda to address this issue. But imagine if the Commonwealth didn’t want to conform state tax law to federal in there were a tax increase. Richmond is as corrupt as Trenton or Springfield or even Baton Rouge.

    • Sheesh what I doing wrong- lived in NJ then Baton Rouge now Virginia , pretty close to Springfield.

    • For the record, I’m not endorsing Northam’s plan, just explaining it. In that spirit, it is incorrect to say that Northam believes that Virginia doesn’t need to reconcile its tax code with the U.S. tax code. Indeed, Layne made it clear that conformity is absolutely necessary.

      What Northam doesn’t want to do is return the extra revenues to those who would pay the extra state taxes. He wants to divert the money to lower-income Virginians, especially those in rural areas.

      Also, Layne is arguing that, due to the uncertainty about how long the personal income tax piece of the tax reform will last, the Commonwealth should not use the money to increase its base budget. It should funnel the funds into non-recurring expenditures.

  2. People are forgetting here – the Federal Tax cut is NOT paid for. There are no spending cuts commensurate to the tax cuts and basically the tax cuts are being funded by borrowing money and increasing the deficit and debt.

    The tax cuts ARE generating additional revenues -more than originally thought but even Investors Business Daily admits

    ” That faster growth will also reduce federal entitlement spending keyed to the economy — unemployment insurance, food stamps, welfare and the like — by $150 billion, the CBO says.

    If you subtract that from the cost of the tax cuts, the net cost drops to $440 billion.

    This is what we and other backers of the tax cuts had insisted all along. Not that tax cuts would entirely pay for themselves. But that the economic growth they generate would offset much of the costs.”

    Now…. saying that 440 billion a year in deficit spending is “not as bad as we originally thought” just totally ignores the reality that we STILL ARE ADDING to the annual deficit and long term debt… that’s the reality that Layne and Northam ARE looking at. They do not believe that Congress is not going to act; in fact, these cuts are currently set to expire in 4 years… Will Congress act to extend them when they are adding to the deficit/debt?

    So who would vote to continue deficit spending? The Dems? How ironic! For decades, for as long as I can remember, the GOP and Conservatives have billed themselves as fiscal hawks – violently opposed to deficit spending – and warning like Jim Bacon that Boomergeddon will wipe out our budget with ever increasing interest payments on the debt. No more!

    So here we have folks who have billed themselves as fiscal conservatives – NOW saying that deficit spending on the order of 440 billion a year is a “good” thing for the economy.

    So the question for Northam and Lane is – do they believe Congress will continue the deficit spending without changes? And CLEARLY they do NOT – they see this as temporary and that sooner or later the reality of the ever expanding deficit/debt WILL cause some changes – either doing away with some of the tax cuts or cutting some spending or both – the net results of that will affect tax conformity – again.

    I’m not at all surprised that some partisans would blame Democrats and Northam for Federal tax cuts funded by deficit spending… in the current political world, for partisans, up is down and left is right… etc…

    What has happened in simple terms is we cut taxes but not spending and we got a higher level of economic benefit than originally thought so that the deficit is LOWER than originally thought – but people are missing the fact that it is STILL a DEFICIT that is going to add a trillion dollars every two years to the debt…and the interest on that increased debt will start eating into the increased revenues.

    Bottom Line: We are STILL going deeper in debt no matter how we put lipstick on that pig and the most amazing thing is that the GOP and Conservatives – fiscal hawks since time began – have now converted to economic idiots… This is the very same GOP that refused to do tax cuts for stimulus in the middle of the worst recession in US history Now we’re out of that recession and they support “stimulus” – tax cuts funded by deficits.

    And here is Virginia, we have fiscally responsible leadership – people who KNOW the revenues are not going to be forever – taking appropriate actions to not view that money as recurring as “thieving”.

    Let’s wait and see what the Va GOP supports. If they support rolling back conformity in toto – so all those revenues roll back to taxpayers… and the state receives no increases in revenues – I’ll give DUE CREDIT to them for their principled position… but at this point – they don’t seem to have a solid position. Perhaps Jim B can get an interview with one of them to get their position!

  3. WAIT? WHAT?

    TRUMP LOWERED OUR TAXES.

    NORTHHAM WANTS TO KEEP ALL THE TRUMP TAXPAYER MONEY “WINDFALL” NOW DUE BACK TO THE VA. TAXPAYER FOR HIMSELF (THE STATE).

    HERE IS WHAT HE’S GOING TO DO WITH THE MONEY HE’S STEALING FROM THE TAXPAYER:

    1 – HE IS GOING TO SPIT UP SOME OF THAT MONEY HE STOLE FROM THE VA. TAXPAYER BY GIVING IT DIRECTLY TO HIS VOTING BASE.

    2. HE IS GOING TO KEEP MOST OF THE REST OF THE MONEY HE STOLE FROM VA. TAXPAYERS TO FUND PROJECTS THAT WILL BUY DEMOCRATS MORE VOTES FROM THEIR VOTING BASE.

    3. WHATEVER THERE IS ANY LEFT OVER FROM THE REST OF THAT MONEY HE STOLE FROM VA. TAXPAYERS, HE IS GOING TO DOLE IT OUT TO HIS FRIENDS. THUS HE IS SO VAGUE ABOUT THAT MONEY.

    AND NORTHAM HAS THE GALL TO CALL THIS TAX REDUCTION, THE RETURN OF THEIR OWN MONEY THAT THEY EARNED, AND WHAT BELONGS TO THEM A “WINDFALL.” VIRGINIANS, YOUR GOVERNMENT IS NOT YOUR FRIEND. IT JUST ROBBED YOUR BANK ACCOUNT.

    PLEASE TELL ME HOW THAT “ANALYSIS” IS WRONG?

    • PS –

      Remember, the term “VOTING BASE” for politicians means using other peoples’ money to purchase ever expanding groups of voters, groups of citizens whose votes they think they can buy with your money as a taxpayer, and so convert your money into power for themselves.

      That is why Northam looks at this Trump tax reduction as a “Windfall.” For him as a politician it is a “windfall.” Because a portion of money that Trump tried to give back to the taxpayer falls into the State of Virginia’s lap. This gives the state of Virginia an opportunity to steal the money for itself, thus diverting away from the taxpayer the return of his or her own money. It is no different from simple theft. Plain and Simple.

  4. Jim was not alone in the meeting and I can confirm that he is faithfully reporting Secretary Layne’s arguments. Layne was also pointing out the many ways all of this is being badly abused for political purposes (some of which has appeared again in this comment string.) I came back from the beach last week and immediately wrote three full and one partial post on the wave of information from the August 17 state meeting and the Chainbridge report. More to come, but not just yet.

  5. Steve says:

    “Layne was also pointing out the many ways all of this is being badly abused for political purposes (some of which has appeared again in this comment string.)”

    That is great Steve, Love to hear your explanation, as to why politicians always use taxpayer money in selfless ways for the great benefit of the people, and how they achieve such magnificent results. This is a story that I eagerly await.

    • I wouldn’t claim “always” but would you agree to “sometimes?”

      • Give me a bit of time, to think of an instance.

        I will say for now that my sense is that Aubrey Layne and Steve Moret are highly capability people, and very good at what they do. The problem lay in their political masters. This Virginia brand of politician, Democrat and Republican, are creatures of Virginia’s system of governance, its entrenched customs and habits that drive decisions and their implementation.

  6. The thing is, sounds nice to divert money to rural Virginia, but we already have essentially a bifercated state with high tax metro area/low tax rural areas. Also the perception is NoVA sending a lot of taxes downstate to RoVA.

    • Give the people of rural south and S/W, and north east coastal regions highly cost effective tools that they can use to rebuild their lives and their communities for the long term, instead of costly transfers of other citizen’s cash from high tax metro areas that addicts these poorer Virginians to generations of dependency and despair.

      What are those highly effective tools? That is the question. Money has little to do with it. But money is the only thing politicians understand and can take advantage of for their own benefit.

      It’s like the health system with the brand new MRI machine. A patient comes in who needs an Aspirin, but the modern doctor in today’s health care system give that patient an MRI instead.

      Why?

      Because the doctor and his masters need the patient’s money (or insurance coverage) to pay off the mortgage on the new MRI machine, and the doctor’s graduate school debt.

      Recall Governor Bob McDonnell breaking open Virginia’s piggy bank that was said to cut loose big bags of theretofore off limits monies to pay for all Virginia’s transportation needs forever and a day. What happened to all the new found money, that great “windfall” created by McConnell?

      Did all that money just evaporate? Yeah, sure did, or feels that way. The traffic mess and its gridlock now is worse than ever.

    • I would not be surprised if NoVa politicians were unhappy with Northam’s plan. Much of the money under Northam’s plan would come from NoVa and most of it will go to RoVa. Layne conceded that the plan would constitute an inter-regional transfer of wealth.

      However, because most NoVa politicians are Democrats, they may not have a problem. It will be interesting to see how the political dynamic plays out.

  7. Fairfax County has more poor students than most Virginia school divisions have students. Fairfax County spends substantial sums of local tax dollars on Title I schools. The LCI formula does not accurately recognize the differences in cost of living between NoVA and the rest of the state. Nor does it properly account for the extra costs for educating poor children.

    So why would (make they should) any NoVA legislator vote to support Northam’s plan?

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