Tax Justice Digest stories about Virginia

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 incapable of 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.

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.