Virginia’s “Swiss Cheese” Tax Code

In my previous post, I argued that Virginia could pay for elimination of the corporate income tax by slashing more than $600 million in tax loopholes identified in 2003 by the Warner administration. Ridding the state of the corporate income tax would have a powerful stimulative effect on the economy — putting some $660 million back in the hands of Virginia businesses and spurring inward investment from companies outside the state. By contrast, the special-interest loopholes have very little stimulative impact to speak of.

Reader R. Stanton Scott is skeptical. “I would want to know just what ‘special interest’ loopholes you mean before agreeing that this would be revenue neutral,” he writes in a comment to the previous post. “This looks like raising taxes on some groups so you can lower them on other–no less special interest–groups.”

Fair enough. What are the loopholes cited by the Warner administration? Well, I’ve dug up the list from the musty Bacon’s Rebellion archives. You can take a look here. Rest assured that the list needs updating. The General Assembly adds to the loopholes over time, it rarely deletes them.

Surveying the list, I can see that the loopholes for corporations would be rendered irrelevant by eliminating the corporate income tax. Therefore, we cannot count deletion of corporate loopholes toward the revenue offset needed to pay for eliminating the corporate income tax. Still, it makes you wonder. Why does Virginia have special exemptions for “qualifying steam producers,” the “purchase of vehicle emission equipment,” “technology investment in tobacco-dependent localities” and the like?

The rest of the list enumerates special privileges that cry out for deletion. Do we really need to exempt drugs for “for-profit hospitals” and “optometrists and medical practitioners” from the sales tax?

Do we really need to exempt “tax credit for rent reductions,” “equity and subordinated debt investments,” and “income received by Holocaust victims”?

Admittedly, eliminating some of these loopholes would be controversial. It may be politically impossible to eliminate the sales tax exemption on food. But as much as we love “those aged 65 and older” and those who earn “military wages,” I don’t see how they warrant special tax treatment. The elderly tend to be wealthier than young people — why a special tax break for them? And, as much as we appreciate the sacrifices made by military personnel, don’t they already get recompensed for fighting in theater?

Tax simplification is a goal we should pursue on moral grounds. Why should one classification of citizens be exempt from taxes that the rest of us have to pay? Deleting these exemptions in order to help finance elimination of the corporate income tax, which would stimulate economic growth and job creation, is icing on the cake.

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13 responses to “Virginia’s “Swiss Cheese” Tax Code”

  1. get rid of the corporate tax since they are not "people" and while we're at it outlaw financial contributions to candidates since they are not "people" and don't have "free speech" rights.

    Set the law so that Corporations can choose the no tax- no lobby path .. or not….

    we'll find out pretty soon which corporations want the tax more than the lobbying.

  2. Anonymous Avatar

    Oooh, I like it.

    Put your money where your mouth is, so to speak.


  3. Anonymous Avatar

    I agree with Larry that only flesh and blood people should be able to make campaign contributions – no corporations, labor unions, associations or nonprofits.


  4. Anonymous Avatar

    Better check the bills introduced for the 2010 session; probably at least a dozen more tax credits & exemptions. Also, there are a number of bills that would mandate reduction in certain local taxes, so that localities will have to raise their real estate tax. Great! Bosun

  5. The Commonwealth Institute for Fiscal Analysis has identified $2.5 billion in tax expenditures – tax exemptions, exclusions, deferrals, credits, or preferential rates in the tax code – that are implemented and then forgotten. While some of these are sacred cows, there is no doubt that there is some money in there that could be used to offset other items, including the corporate income tax, if that's what they want to do.

    (A link to the pdf is in this post on my blog.)

    And yes – do look at the bills that have been filed. They are full of additional deductions and credits.

  6. Groveton Avatar

    Some of the "loopholes" aren't really loopholes. For example, credit for taxes paid in other states. When a Virginia resident travels to another state to work (for a day or a week or a month) that peron earns income in the other state, not Virginia. However, employers report all income on the tax documents. So, the traveler is obliged to track work in other states and file tax returns in other states (including, of course, the payment of taxes to other states). Then, the salary earned in these other states is a reduction to the revenue earned in Virginia.

    I think this is more of a procedural point than a tax loophole.

  7. James A. Bacon Avatar
    James A. Bacon

    Vivian, Excellent resource. But link doesn't work. Anyone interested in following the link should try this.

    Your point is well taken. The Warner list is way out of date. Even if we don't include the car tax rebates, according to the Commonwealth Institute, there are still $1.45 billion in tax expenditures.

  8. Anonymous Avatar

    I have a problem with this statement from the report.

    "The Personal Property Tax Relief Act reduces the general fund by roughly $950 million every year."

    My experience with car taxes was always that I was getting taxed on a presumed value for my vehicle that was completely unrealistic. I think many other people felt the same way, which is why the tax was soo unpopular.

    If the vehicles had been assessed realistically the taxes generated would have been much less.

    I have similar complaints about some of the other tax expenditures, and consequently the potential "savings" proposed in the report are overstated.

    For example, the report lists $250 million as the "cost" of reducing the sales tax on food, yet it also notes that other states have done the same and 31 states have no tax on food.

    It is only a $250, million dollar loss if you consider only that single entry on the government ledger. The actual net social loss could be much less than that.

    Total Costs = Production Costs + External Costs + Government Costs

    The report distorts the truth by looking only at government costs.


  9. Shoot – I typed a long response and lost it.

    Anyway – Jim thanks for fixing the link. Shows you how good my HTML coding skills are 🙁

    Groveton – agreed that some of the items listed are not real "loopholes" which is why I consider them sacred cows. No way VA does away with the credit for taxes paid to other states – they have agreements in place that would make that impossible.

    Some of those credits/exemptions/deductions are related to federal mandates, like the recently enacted Military Spouses Residency Relief Act. VA's hands are tied on those kinds of things. I mentioned the report only because of Jim's comments about the over 65 tax deduction and the military pay deduction. We implement these things and never look at them again.

    RH – the car tax was a completely local tax until Gilmore. The Gen Assembly capped the reimbursements to localities @ $950M in 2005. Here in Norfolk, cars are assessed based on blue book value – and that can be challenged. My sense is not that people were concerned about unfair valuation; rather, their concern was that they had to pay the tax at all.

    Bottom line is that VA is still a relatively low tax state. As a CPA with clients across the country, I see how other states get their money. Some choose to have fewer types of taxes and higher rates on the taxes that they do impose. It takes X $ to run a state – the question is where does that money come from. I prefer VA's approach of a little from a large group rather than a lot from a few.

  10. Anonymous Avatar

    At least cap the "dealer discount" on sles taxes. There is no reason why the taxpayers of Virginia should subsidize Wal Mart, Kroger, Target or Best Buy.


  11. Anonymous Avatar

    RH – the car tax was a completely local tax until Gilmore.


    It was uniformly administered in a screwed up way. No matter what locality I lived in I was being overtaxed for cars that were mostly junk.

    Cars were assessed by the NADA blue book, and of course the auto dealers only see the best cars.

    The report claims a "tax expenditure" for not collecing money they should never have collected in the first place.


  12. Anonymous Avatar

    Here in Norfolk, cars are assessed based on blue book value – and that can be challenged.


    Yes, you spend all day getting three appraisals from dealers, and the difference is a few hundred or a few thousand dolars and the tax is a percentage of that.

    Yes, you can challenge, but the procedure makes it not worth the effort. Same deal with zoning law, and this kind of cynical "relief" is exactly what pisses citizend off and makes themthink the government is against them.

    So, you shrug and pay the tax and hate it, and the government that is screwing you over.

    I didn't mind paying the tax, I hated paying th eexcess tax, like a $200 tax bill on a battered pickup worth 500. Yeah, I could have got it reduced to $25, but it would cost me $200 to do it.

    I got tax bills for cars and I would have gladly sold the car to the county for half of what they claimedit was worth.

    Good riddance to the car tax.


  13. Anonymous Avatar

    " I prefer VA's approach of a little from a large group rather than a lot from a few."


    Toll roads are an attempt to get a lot froma few.

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