Many states across the country have stood idly by while inflation and improving vehicle fuel efficiency have cut into their gas tax revenues, reducing their ability to build and maintain an adequate transportation network.  Fortunately, new developments in at least four states demonstrate an increasing level of interest in addressing the transportation problem head-on.

In Arkansas this week, a state panel created by the legislature endorsed increasing taxes on motor fuels, and taking steps to ensure that such taxes can provide a sustainable source of revenue over time.  Specifically, the panel expressed an interest in linking the tax rate to the annual “Construction Cost Index,” a measure of the inflation in construction commodity prices.  As the committee chairman explained, this method would provide a revenue stream better suited to helping the state maintain a consistent level of purchasing power over time. 

Wisely, the proposal would also ensure that fuel tax rates would not increase by more than 2 cents per gallon in any given year.  Such a limitation should help to prevent the types of political outcries that have surfaced in other states when indexed gas taxes have increased by large amounts in a single year.

In Texas, attention has begun to turn toward a vehicle-miles-traveled (VMT) tax which, as its name suggests, would tax drivers based on the number of miles they travel.  Such a tax is similar to a gas tax in that it makes the users of roadways pay for their continued maintenance.  VMT’s, however, are able to avoid some of the most serious long-run revenue problems associated with gas taxes, since their yield is not eroded as individuals switch to more fuel efficient vehicles.  But Texas Senator John Carona hit the nail on the head in his description of the VMT as an idea “far into the future and way ahead of its time.”  While states like Texas should begin studying this option now, they should also follow Carona’s lead in the meantime by embracing an increase in motor fuel tax rates to address the funding problem already at their doorsteps.

Nebraska legislators have also begun discussing the need for additional transportation dollars.  In a report outlining the testimony given at eight hearings conducted last fall by the Legislature’s Transportation and Telecommunications Committee, 31 separate options for raising transportation revenues are examined.  Among those options are an increase in the gas tax and indexing the tax either to inflation or directly to the costs associated with the continued maintenance and construction of the state’s transportation network.  As the report explains, “there was nearly unanimous support from all testifiers for some type of tax or fee increase to support the highway system.”  Committee Chairwoman and State Senator Deb Fischer expects to have a major highway-funding bill ready for the 2011 legislative session.

Finally, legislators in Kansas this week also pushed forward with proposals to enhance the sustainability and adequacy of their transportation revenue streams.  A joint House-Senate transportation committee advanced two options for raising motor fuel tax collections: (1) applying the state sales tax to fuel purchases and slightly lowering the ordinary fuel tax rate, and (2) raising the fuel tax rate and indexing it to inflation.  While either proposal would be a great improvement to Kansas' stagnant, flat cents-per-gallon gas tax, the inflation-indexed approach would provide a somewhat more predictable revenue stream since its yield would not be contingent upon the (often volatile) price of gasoline.

In addition to these four states, we have also highlighted stories out of South Dakota and Mississippi during the latter half of 2009 that indicated a similar interest in doing something constructive to enhance current transportation funding streams.  And more beneficial debate has occurred in a number of states where progressives have insisted on offsetting the regressive effects of transportation-related tax hikes by enhancing low-income refundable credits.

Virginia is one of the major exceptions to the trend toward a more rational transportation funding debate.  As the Washington Post explained in an editorial this week, “[Governor-elect Robert McDonnell’s] transportation plan, which ruled out new taxes, relied on made-up numbers and wishful thinking to arrive at its promise of new funding.”  Rather than acknowledging the futility of attempting to fund a 21st century transportation infrastructure with a gasoline tax that hasn’t been altered since 1987, McDonnell worked to repeatedly block attempts to raise the gas tax during his time in the state’s legislature. 

Following the leads of policymakers in Arkansas, Texas, Nebraska, Kansas, South Dakota, and Mississippi and keeping higher taxes on the table is absolutely essential to the construction and maintenance of an adequate transportation system.  As the Washington Post cynically suggests, new revenue is so desperately needed that McDonnell should even be forgiven if he has to rebrand new taxes as “user fees” in order to get around his irresponsible campaign promise not to raise taxes.

This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”  The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy.  The response has been overwhelming.

In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners.  It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift.  And it helps explain why the state is having trouble keeping up with funding needs for its most vital services.  The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”

In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax.  Currently, Michigan is among a minority of states levying a flat rate income tax.

Media in Virginia also explained the study’s importance.  The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving.  A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”

In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.”  The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”

In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.”  The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.”  Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall.  Can they also be considered low-tax states for poor families?  Far from it.”

Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana.  Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.

Up until last week, Virginia gubernatorial candidate Creigh Deeds had attracted a lot of criticism for failing to take a position on raising taxes to fund transportation.  Now that criticism is old news, as Candidate Deeds has firmly stated: “I have voted for a number of mechanisms to fund transportation, including a gas tax. And [if elected Governor] I'll sign a bipartisan bill with a dedicated funding mechanism for transportation -- even if it includes new taxes.”  In contrast, Republican candidate Bob McDonnell has put forth a plan that has been rightly criticized by The Washington Post as relying on “wildly optimistic assumptions, brazen exaggerations, gauzy projections and far-off scenarios.”  McDonnell’s package consists of a hodge podge of proposals: some of which run counter to federal law, some of which are politically impossible, and some of which are attached to revenue estimates that can only be described as being “invented or, worse, an intentional distortion.”

Much of Virginia’s transportation problem stems from its inadequate gas tax.  Unlike sales taxes, which are collected as a percentage of an item’s purchase price, gasoline taxes are collected as a specific number of “cents per gallon.”  In Virginia, the gas tax has been at 17.5 cents per gallon of gasoline since 1987.

Of course, given inflation, 17.5 cents today isn’t worth nearly what it was in the 1980s.  More specifically, in 1987, 17.5 cents had about the same purchasing power as 33 cents does today.  In other words, over the last 22 years, inflation has cut the real value of the gas tax by nearly 50%.  Add to that the downward pressure on gasoline sales brought about by increasing vehicle fuel-efficiency, and it’s clear why the state’s transportation infrastructure is in such dire straits.

In this light, Bob McDonnell’s transportation plan completely misses the mark.  His plan to turn Virginia’s interstates into toll roads will require approval from the federal government – something which is far from certain.  His promise to sell off the state’s liquor stores has been attached to a $500 million revenue estimate that has been thoroughly rebutted as being wildly unrealistic, especially given its assumption that $100 million in current liquor store profits will be siphoned away from “mental health, substance abuse and other human services” in favor of transportation.  Moreover, McDonnell’s pledge to redirect sales tax revenue away from schools and public safety, and toward transportation could be categorized as outrageous, were it not so politically unrealistic as to be laughable.

Adding to the absurdity, one of McDonnell’s recent campaign ads bragged that The Washington Post found his transportation plan to be deserving of credit for “the extent and specificity of its proposals.”  But “specificity” is of little value if the specifics don’t add up.  In fact, the same article that McDonnell cites in his campaign ad also included the following passage:

“Given [the] crisis in funding, and the centrality of transportation infrastructure to Virginia's economy, you'd think the candidates for governor would advance serious, plausible proposals -- and that they would include fresh revenue from new taxes or fees.  Unfortunately, former attorney general Robert F. McDonnell, the Republican, is pushing a plan that mostly rules out such revenue and that would deliver significant new funds for road-building only at the probable expense of the state's colleges, public schools, police departments, prisons and health programs… [In addition], unfortunately, the new revenue [McDonnell] identifies is one-time-only, many years distant or paltry.”

As we mentioned last week, California enacted, as part of its budget compromise, a change in the rules determining what share of a corporation's income is taxable in the state. To be specific, California adopted an optional "single sales factor" apportionment formula, which multi-state corporations support -- because it will help them avoid taxes. Virginia appears to be following suit this week. Both of the state's legislative chambers have approved optional single sales factor apportionment, though only for manufacturers. The Governor has yet to sign the measure, and he has reportedly taken no position on the bill. You can read the ITEP Policy Brief explaining how single sales factor apportionment can reduce the fairness and adequacy of state corporate income taxes here.

It's a familiar problem across the nation. Virginia is facing a significant budget shortfall, and its political leaders are trying to identify the right mix of spending cuts and tax increases to balance their budget. The budget plan announced by Governor Kaine this week is not as progressive as it could be. While it's hard to criticize too harshly most of the individual changes that have been proposed, the Governor does appear to have missed a golden opportunity for more meaningful tax reform. Among the Governor's ideas are:

- Bump the state's cigarette tax rate up by a modest 30 cents. Virginia's cigarette tax is among the lowest in the nation. But as the Virginia Commonwealth Institute points out, the tax is regressive and the revenue it generates will provide little more than a temporary budget fix.

- End the state's yearly $64 million giveaway to retailers by eliminating its "dealer discount" program that allows retailers to pocket a portion of the sales tax they collect as compensation for the cost of collecting the tax. Good Jobs First recently issued a very detailed report on the problems associated with these programs.

- Scale back a credit offered to land-holders who agree to preserve their land. This credit has ballooned immensely in cost in recent years.

But the governor's plan also includes damaging cuts in education, public safety, transportation, and other areas. Rather than slicing funding and jobs from these core areas, the Governor could have followed the lead of the Virginia Commonwealth Institute by proposing to limit the eligibility of senior tax breaks so that only those in need can receive them, or by enacting combined reporting in order to close corporate loopholes. In addition, a much-needed restructuring of Virginia's income tax rate brackets, as proposed by the Virginia Organizing Project, would bring a welcome change to the state's outdated tax system.

This week, the Iowa Fiscal Partnership (IFP) released a study examining Iowa's budget woes with an eye toward understanding how the state's fiscal situation will be impacted by Iowa's growing senior population. Not only are Iowa lawmakers currently grappling with a budget shortfall, this report predicts that more tough decisions are coming. One of the reasons that even harder times may be on the horizon is that Iowa, like many states, offers elderly preferences that are going to become more costly as America grays.

In fact, IFP found, "The aging of the population will probably produce a decline in state income tax revenue of 2 to 3 percent in Iowa, due largely to the adoption of tax preferences for seniors. If there were no elderly preferences in Iowa's income-tax code, the very small projected increases in total population combined with the aging of the population would increase income-tax revenues for a period of time, reaching a peak in 2015 at $2.27 billion."

The report offers helpful insight into why revenues aren't able to keep up with growing needs (beyond elderly preferences). Most notable is the sales tax base erosion taking place both because the state's tax base is made up of mostly goods and not services, and because of the continuing need to close the sales tax loophole which ensures that online purchases aren't subject to the sales tax. Resolving the problem of sales tax base erosion and poorly targeted elderly preferences is something many states could tackle now in their attempt to deal with their own budget mess. ITEP has written a variety of policy briefs on topics discussed here: elderly preferences in the tax code, sales tax base expansion, and taxing internet sales.

The Virginia based Commonwealth Institute recently issued their own set of recommendations offering suggestions on ways that the Old Dominion state could dig itself out of its budget crisis. These recommendations are good ideas any time, but will likely receive more attention now because of the state's budget crisis. Their recommendations include further means-testing of elderly tax preferences, and closing corporate loopholes through steps such as enacting combined reporting. The Institute takes a balanced approach and acknowledges that some cuts may need to be made and the state's rainy day fund may need to be tapped to deal with the state's shortfall. This balanced and comprehensive approach including both revenue enhancers and tax cuts may be the best solution for many states in crisis.

Of course, not every idea floated during these tough fiscal times is worth adoption or even consideration. Some are just downright bad. Take New York, for instance. As the National Conference on State Legislatures (NCSL) indicated earlier this week, the Empire State is expected to face a budget deficit of $12.5 billion in the coming fiscal year. Unfortunately, that dire outlook has not stopped Governor David Paterson from continuing to embrace an ill-advised property tax cap. On December 1, New York's Commission on Property Tax Relief issued its final report, recommending a 4 percent limit on annual property tax growth. Governor Paterson had backed the idea previously and does not seem likely to change his position any time soon, remarking upon the report's release that "Property taxes... have been the enabler of Albany's dysfunctional culture." As the Fiscal Policy Institute and others have observed, the problem with tax caps are legion and could be particularly harmful if put in place during a recession.

Similarly, North Dakota Governor John Hoeven, as part of his budget plan for the 2009-2011 biennium, has proposed cutting property taxes by $300 million and income taxes by $100 million. Fiscal circumstances in North Dakota are, to be sure, markedly different than those in New York; after all, the Peace Garden State is one of the few expected to experience a budget surplus by the end of the current fiscal year. Yet, as the Grand Forks Herald recently warned, "oil prices already have plunged, threatening the energy boom that has dramatically boosted the state's surplus," suggesting that state legislators should proceed slowly and carefully. Caution certainly seems to be what the voters of North Dakota want anyway -- in November, they resoundingly defeated a ballot measure that would have cut income taxes by more than $200 million.

Legislators in Virginia, despite that state's $2 billion plus budget deficit, seem bent on cutting taxes too, as a special House-Senate subcommittee has recommended that the state offer a new corporate tax break known as single sales factor. Where North Dakota officials should listen to the recently expressed views of their constituents, Virginia should follow the hard-learned lessons of other states. Simply put, single sales factor is a costly and ineffective means of spurring economic activity. Just ask Massachusetts: In 1995, Massachusetts adopted single sales factor for manufacturers, a move that was hailed by some proponents as "a bold step towards restoring Massachusetts as a manufacturing state." After thirteen years -- and millions of tax dollars and thousands of manufacturing jobs lost -- it's clear that that restoration has not occurred.

Four of the nation's most populous states, together home to more than one out of every four Americans, are facing serious budget problems. Important new developments occurred in each of those states this week, the theme of which is perhaps best conveyed through California Republican Mike Villines' question: "How many times can we say no to taxes?" State residents will soon learn that this is really saying "no" to keeping alive public services like education, transportation and health care that families depend on.

See the following posts on the budget situations in California, Florida, New York, and Virginia.

Sales and income tax revenues have both slowed in Virginia, stirring Governor Kaine to push his financial advisors to prepare a revised estimate of the inevitable budget shortfall a bit sooner than first expected. The official estimate won't be available until early October, but legislators and analysts are predicting that the shortfall will exceed $1 billion. The Governor has flatly rejected the idea of increasing any general fund taxes. Pure spending cuts, unaccompanied by any tax increases, appear to be in Virginia's future as well.

As we mentioned last week, this is the season for fiscally irresponsible sales tax holidays to purportedly give relief to working people on their back-to-school shopping. Sales tax holidays are a bad idea for the states' budgets and tax-payers alike. Low-income families probably cannot time their purchases to take advantage of a sales tax holiday, and it can be an administrative headache for retailers and government. Sales tax holidays are also poorly targeted to low-income individuals compared to other policy solutions such as low-income tax credits.

Now another group of states is ready to forgo needed tax revenue in exchange for a few dollars off the purchase price of various goods. These states include Alabama, Iowa, Missouri, North Carolina, Tennessee, and Virginia among others with holidays scheduled Friday through Sunday.

Meanwhile, a Birmingham News editorial points out that the sales tax holiday is a "gimmick" that has allowed state lawmakers to divert attention from their outrageously regressive tax code. Alabama is one of only two states that doesn't exempt or provide a low-income credit for its sales tax on groceries. If that were done, Alabama consumers would save far more money than they do on a three-day sales tax holiday (an average family of four would save about seven times as much). But instead of exempting groceries from sales taxes or raising the state's second-lowest in the nation income tax threshold, lawmakers pretend to help low-income Alabamians with a few tax-free shopping days a year.

Georgia's sales tax holiday began on Thursday and exempts articles of clothing costing less than $100, personal computers cheaper than $1500, and school supplies under $20. This week, the Atlanta Journal-Constitution mentioned some of the more amusing exemptions covered by that state's sales tax holiday. These exemptions include corsets, bow ties and bowling shoes. As the author noted, guys headed to their first day back in school "might combine the bow ties and bowling shoes, then just head straight for the restroom to collect their free swirlie." The article also mentions ski suits, highly unlikely to be big sellers in Georgia, and adult diapers, seemingly unrelated to the average family's back-to-school needs. Georgia lawmakers may want to revise their list of exemptions to concentrate on discounting necessities, or better yet, end this farce once and for all.

Virginia legislators last week proved themselves totally incapableof raising revenue, no matter how serious the need. In the wake of a ruling from the state's Supreme Court that struck down the previous regional transportation funding regime, legislators recently assembled in a special session with hopes of resolving the resulting $3 billion transportation funding shortfall that will hit the state over the next six years. In part as a result of regional rivalries, that special session ended in complete failure last week when not one tax increase could be agreed upon.

As one legislator stated proudly, "For now, asking families to pay more is something the public doesn't support, and as we've seen, nor does the General Assembly". What this sentiment fails to consider is that the public also does not support the gross underfunding of transportation that will result from this session. Even the business community, a group traditionally opposed to tax hikes, has begun to voice serious frustrations regarding the inability of the Virginia government to produce a means of paying for needed transportation improvements.

Two major plans to boost tax revenues were proposed during the session as a fix for Virginia's inevitable transportation shortfall. These plans included options such as raising taxes on the sale of real estate, vehicle sales taxes, state and/or regional sales taxes, and the gas tax. One of these options even included some progressive elements, such as eliminating the sales tax on groceries.

The gas tax is an especially appealing option in Virginia, where the tax hasn't increased since 1987. As a result of inflation, Virginians are currently paying the equivalent of 47% less per gallon than they did at the time of the last tax hike. In 2008 dollars, this amounts to about a 15 cent tax cut on each gallon purchased. While this is somewhat good news for lower-income families hurt by rising gas prices, it's very bad news for the state transportation infrastructure. A change in the gas tax could improve infrastructure funding while a low-income tax credit, as proposed by the Virginia-based Commonwealth Institute, could provide ample protection for poor families.

North Carolina is suffering from an increase in the cost of asphalt. Asphalt is made of petroleum derivatives, and its cost has increased 25% since the end of 2006. This is causing the state to cut back on road repaving projects which are likely to cost more money to accomplish the longer they go unrepaired.

In Missouri, the state has a projected $1 billion transportation fund deficit. It is only expected to be able to meet 40% of obligations starting July 2009. In spite of this, all three major candidates for Missouri Governor pledge not to raise the state motor fuels tax. The two Republican gubernatorial contenders, Sarah Steelman and Kenny Hulshof suggest dedicating general funds revenue to transportation and privatizing some state roadways respectively.

Virginia is currently confronting a "growing bridge and road maintenance shortfall" which is depriving money from road construction. Governor Tim Kaine has recently released a proposal to raise vehicle registration fees and sales taxes on vehicles, while keeping the state fuel tax unchanged.

These states have in common a tendency to tinker around the edges of transportation funding policy while failing to address the taboo topic of gas taxes. The root cause of these transportation troubles is that the gas tax has been kept too low to finance the transportation needs in all these states.

Most states have a "per gallon" gas tax that leaves them unable to cope with rising costs of transportation as inflation erodes the value of the tax collected on each gallon. North Carolina's gas tax has been capped at 29.9 cents since 2006 due to pressure from anti-tax activist Bill Graham, although it was formerly readjusted to reflect price changes twice a year. Missouri has not raised its gasoline tax since 1996 and Virginia's gasoline tax has stayed constant since 1992. None of these states index their gasoline tax either to transportation costs or the general inflation rate.

Sometimes even a major crisis is not enough to get politicians to consider gas tax adjustments. Due to Iowa's recent flooding, Iowa's legislature is likely to convene an emergency session to confront their newly pressing infrastructure needs and find sources of funds for disaster recovery. Legislators rejected efforts to raise the gasoline tax earlier in the year to fill the $200 million highway maintenance deficit, opting instead to tinker around the edges and simply raise vehicle registration fees. But even now, the Iowa House Majority Leader considers a hike in the gasoline tax "an absolute, absolute last resort," with gas selling for $4/gallon.

Even a spectacular tragedy is sometimes not enough to get politicians to wake up. Before the August 2007 Minnesota I-35W bridge collapse, Governor Tim Pawlenty vetoed a bill raising the gasoline tax 7.5 cents per gallon, calling it "an unnecessary and onerous burden" as consumers were paying $3 per gallon for gasoline in May 2007. This was in a state that hadn't adjusted its gasoline tax in 19 years. Not even a bridge collapse and transportation funding shortfall of nearly $2 billion were enough to change the governor's position that gas taxes are anathema. Needed road and bridge repairs were being neglected, with obviously dire consequences. Fortunately, Minnesota lawmakers were finally able to override Governor Pawlenty's veto in February, raising the gas tax by 8.5 cents.

For many, there will never be a "right time" to raise the gas tax. It wasn't the right time at $2 per gallon in 2005 when Gov. Pawlenty first vetoed a gas tax increase, nor at $3 per gallon in 2007, nor now at $4 per gallon. In fact, it's never the "right time" to raise any kind of tax... no one wants to pay more than they have to. But sometimes in order fund vital services policymakers need to come together and bite the bullet as they did in Minnesota, even if it is politically difficult.

Opponents have sometimes successfully argued that raising the gasoline tax would be regressive and particularly damaging to the economy in such a car-dependent nation. But gas tax increases can be done in conjunction with progressive measures, such as raising the Earned Income Tax Credit and creating a refundable gas tax credit as was done in Minnesota and proposed in Virginia.

Former Virginia Governor Jim Gilmore's quixotic quest to repeal that state's "car tax" a decade ago was emblematic of two popular (if misguided) tax policy themes of the late 1990s: unaffordable tax cuts prompted by ephemeral budget surpluses, and faux-populist efforts to cut state and local property taxes on motor vehicles. Gilmore's car tax cut was ultimately pared back in the face of huge budget deficits, and many observers have been sharply critical of his efforts to make his car tax cut seem more affordable than it actually was.

Nonetheless, after a six year absence from elected office, Gilmore has returned to Virginia to campaign for an open US Senate seat this fall. However, the ex-governor is finding less than a warm welcome from elected officials who still remember the car tax debacle: a Republican House member who was instrumental in the passage of Gilmore's original tax cuts has announced his endorsement of Mark Warner, Gilmore's Democratic rival for the Senate seat, citing the governor's use of erroneous fiscal forecasts in beating the drum for the car tax repeal effort. The lesson for policymakers: championing tax cuts isn't a recipe for political success unless your state can actually afford them.

At the request of Governor Tim Kaine, the Virginia legislature will be convening in a special session next month to figure out how to pay for much-needed transportation maintenance. The solution most observers expect to come out of that session will involve some combination of increases in the gas tax, in the sales tax, and/or in vehicle-related fees. Unfortunately, each of these options is regressive, taking a larger share of the income of lower- and middle-income taxpayers than from their wealthier neighbors. A recent report from the Virginia-based Commonwealth Institute offers a couple of inexpensive options for policymakers to offset the disproportionate impact these tax increases will have on more vulnerable low-income families.

Along the same lines as a program recently enacted in Minnesota, the report recommends coupling any gas or sales tax hike with a $30 credit per family member for families earning less than $20,000 per year ($40,000 for married families). By limiting the credit to only low-income families, this option would be a very inexpensive way of protecting families in need from further strain upon their already tightening budgets. The credit would cost only $80 million per year, while a one cent sales tax increase would raise $940 million and a ten cent gas tax hike would raise about $500 million. Even states not contemplating a gas tax hike should give consideration to the idea of new or expanded low-income credits. A refundable credit of this sort is much preferable to the gas tax holiday shenanigans being floated at both the federal and state levels as a solution to the squeeze many families are feeling.

In addition, the report suggests making the state's Earned Income Tax Credit (EITC) refundable. Of the over twenty states that currently offer an EITC, Virginia is one of only three that fails to refund amounts of the credit beyond one's income tax liability. The result of this is that for those low-income families who owe little or no income tax, the EITC is of very little use in offsetting the impact of regressive sales and property taxes. Failing to make the EITC refundable denies assistance precisely to those families who need it the most.

This week tax justice advocates in Virginia (including the Commonwealth Institute and the Virginia Organizing Project) defeated a bill that would have favored large companies with out-of-state business at the expense of smaller "mom and pop" establishments. House Bill 1514 had been approved by a daunting 94-0 vote in the House, but then the bill hit a massive road block in the Senate Finance Committee, which voted 9-7 to not take action on the bill this year and instead carry the bill over to next year.

This bill would have allowed manufacturers operating in the state to figure their tax bills using a Single Sales Factor (SSF) apportionment approach. Each state uses its own apportionment formula, which is basically a formula to separate each company's nationwide taxable business income into an "in-state" portion and an "out-of-state" portion. Often these formulas use three factors in determining tax liability: the percentage of the corporation's property, payroll, and sales that are in the state. Currently Virginia has a double-weighted sales tax formula that relies on all three of the factors mentioned, but doubles the sales factor in the calculation. The SSF approach would use only a sales component. The Commonwealth Institute published a brief describing the pitfalls of this approach.

Allowing manufacturers to have the option of using only a sales component has not proven to be an effective economic development tool in the eight states that had SSF in effect for at least six years. The brief explains that "smaller Virginia firms, which are not as likely to be taxable in other states, are not able to profit from this approach, while their significantly larger, multistate competitors are." Some have claimed that the SSF approach can lead to company relocation, but there is little evidence to back this. For example, in 2005 Michael Mazerov at the Center on Budget and Policy Priorities wrote a paper which found that the SSF "tax incentive have had little impact on Intel Corp's major plant location decisions."