Virginia is Facing a Citizen Revolt on Inflation-Driven Tax Increases

Virginia’s Capitol

by James C. Sherlock

Virginians must fund their local governments.

It is not wise to chip away at local government revenue without an integrated plan to ensure they are funded to carry out the things we need them to do.

However, two key ways in which we raise local revenue, property taxes and sales taxes, are both regressive and highly exposed to inflation.

Those are taxes that with high inflation, without any increase in rates, hit everyone. They hit the poor, persons on fixed incomes, the middle class and small businesses the hardest.

What to do? I believe that Sen. Emmett Hangar and others have it right. He suggests a joint subcommittee on taxation and a complete study so that next year the General Assembly can enact tax reforms.

Studies disappear into the ether, you say. I honestly don’t think this one would.

Virginians will have had way more than enough of inflation-driven tax increases by this time next year.

Inflation. The periods of highest inflation in the 20th century occurred during the years after the two World Wars and in the oil-shock of the 1970s. Most people living today have never experienced high inflation. Until now.

The annual inflation rate that used to be 2% is now 6 or 7 %, and rising.

Interest rates must rise to meet inflation or inflation will get worse. At the national level, the Fed has raised rates to nearly 20% to beat inflation. It worked. But what we did not have in the 1970’s is a national debt that we cannot pay if bond interest rates climb very much. So, at the federal level we have a hall of mirrors.

There is nothing Virginia government can do about that. But it must address the effects of inflation on state and local taxes.

Homeowners and businesses may be comforted by the rise in the value of their property. They will not be equally comforted by the rise in the assessed valuations of their homes, businesses and vehicles at fixed tax rates.

Sales taxes, while perhaps a necessary part of the revenue mix, are highly regressive. Low income people and those on fixed incomes are paying not only higher prices for necessities, but higher taxes on the bills for those necessities.

Property taxes, relying only on the value of real property, are also regressive.  Real property is a much higher percentage of wealth for the middle class and of the value of small businesses than is the case for large businesses and wealthier people.

Any valuation-based tax or fee is affected. Inflation can translate into open- ended tax increases without the consent of the governed.

I have seen this movie before. I lived in California in the ’70’s when steep increases in property values, as in Virginia today, resulted in taxes that drove people out of their homes.

California has very citizen-friendly constitutional initiative laws. The taxpayer revolt there was Proposition 13. Proposition 13 was enacted in 1978 as a change to the constitution by means of that initiative process. Opposed fiercely by governments and public unions at every level, it passed with a nearly 2-1 majority of the popular vote.

From Wikipedia:

The proposition decreased property taxes by assessing values at their 1976 value and restricted annual increases of assessed value to an inflation factor, not to exceed 2% per year. It prohibits reassessment of a new base year value except in cases of (a) change in ownership, or (b) completion of new construction. These rules apply equally to all real estate, residential and commercial—whether owned by individuals or corporations.

The other significant portion of the initiative is that it requires a two-thirds majority in both legislative houses for future increases of any state tax rates or amounts of revenue collected, including income tax rates. It also requires a two-thirds vote majority in local elections for local governments wishing to increase special taxes. (A “special tax” is a tax devoted specifically to a purpose: e.g. homelessness or road repair; money that does not go into a general fund.)

That constitutional provision has proven bulletproof, even in today’s dark blue California.

Virginia. I hope for a more fully considered approach here. I recommend a structured re-consideration of all of the ways state and local governments are funded.

Local governments in Virginia have control of real estate tax rates as a percentage of assessed valuation and of the assessments themselves, but not sales tax rates.

Local governments had the same options in California in the 1970’s, but were drawing up ever-expanding 5-year plans to spend the windfalls on things their bureaucracies and biggest businesses wanted to see done.

It has been my experience that city managers all have “unmet needs” for greatly expanded revenue.

I suggest Virginia voters would vote overwhelmingly for a cap of something like 3% on inflation-driven annual tax increases above which a vote of elected officials is required, not optional. That is the kind of thing a republic does.

Virginians might even pass Prop 13 by this time next year if it were to be presented as a constitutional amendment. That proposition was so popular in California because voters were not seeing any indication of action in their state and local governments.

I hope the Governor and General Assembly head that kind of sentiment off.

Tax overhaul will be a hard vote. Revision of the tax code will require real compromise. Most Virginians would like members of both parties to listen to the voices in their parties that will be most shrill in a tax debate. And then vote against them.

Regressive taxes raise a lot of money but as a consequence hit hardest those least able to pay. Progressive taxes drive some of society’s most productive and highest-taxpaying citizens away, as in New York and Connecticut and other blue states, lowering the revenue gains expected from raising their taxes.

The progressive left and the libertarian right must both be asked to consider that government must be funded to do what we have constituted it to do, not what some on either side may wish it to do or not do in the future.

Do it. Virginians want government funded, but we want how it is funded to be carefully reconsidered and revised to account for the nefarious effects of inflation.

And, respectfully, we would like comprehensive tax legislation on the floor in next year’s General Assembly.