Virginia’s Progressive Assembly Turns to Tax Policy

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The COVID-19 recession barely dented Virginia’s state budget. The massive spending growth adopted in the pre-COVID budget a year ago is largely back on track. Yet some legislators think the time is ripe to hunt for more revenue by re-writing the state’s tax code.

The two-year $48.2 billion General Fund revenue estimate endorsed by the General Assembly Saturday is less than $200 million lower than the comparable figure a year ago, a rounding error in a $143 billion overall budget.  There is every reason to believe the current tax estimates will prove too low as another round of federal stimulus revs the economy in coming months.

There is logic in examining tax policy without the pressure of a financial crunch.  There is also a new and very progressive Democratic majority in Richmond that will be applying its definitions of “fair and equitable” in these reviews.  The battle over whether and how much to tax Paycheck Protection Program grants to Virginia employers was a warning bell.

The centerpiece of the new effort will be the Joint Subcommittee on Tax Policy proposed by Virginia Senate Finance and Appropriations Chair Sen. Janet Howell, D-Fairfax, and included in the final budget conference report.  Six senators, six delegates, their staff and “any other stakeholders deemed appropriate” will gather to face a broad list of issues, including:

evaluating the fiscal impact of amendments to tax brackets, tax rates, credits, deductions, and exemptions, as well as any other factors it deems relevant to making Virginia’s individual income tax system more fair and equitable; (ii) giving consideration to the fairness, certainty, convenience of payment, economy in collection, simplicity, neutrality, and economic efficiency of the Commonwealth’s tax policies and any changes thereto

There is no deadline for any report or recommendations from the panel. This November voters will be refreshing the House of Delegates and electing a new Governor.  A list of tax recommendations from the majority party would be of great value to that process, so don’t expect one until after the voters have gone home.

House Finance Committee Chairwoman Vivian Watts offered her own successful study resolution, this one directing the Joint Legislative Audit and Review Commission to zero in on the Virginia’s income tax to increase its progressivity (higher taxes on higher incomes).  Her initial request was for a report in November, after the election but in time for the 2022 General Assembly.  The one major change in her proposal was to delay that to a November 2023 report.

Watts’ text mentions several issues that have come up in recent sessions. Progressives want to make the Earned Income Tax Credit into a refundable credit on Virginia taxes, meaning some who benefit might actually get checks from the state.  The Thomas Jefferson Institute for Public Policy, among others, has pushed for major increases in the state’s standard deduction, now ridiculously lower than for federal taxes and most other states.

The resolution also points to another perennial issue, efforts to tie the state’s income tax brackets and deductions to inflation.  Absent such adjustments, inflation can slowly raise taxes as incomes rise.  The state has a few examples of “indexing” in the tax code, but only when it means more revenue for the state, not less.

Assigning this income tax review to JLARC might not be benign.  JLARC is beginning to reflect the priorities of the new Democratic majority it works for.  A study on various economic incentives released in September claimed its first casualty this session, justifying the elimination of tax credits supporting the state’s ailing coal industry.  This was a minor skirmish in Virginia’s growing war on fossil fuels.

The corporate income tax is not cited in Watt’s JLARC study, but she does note that not all businesses are incorporated.  Those that are not incorporated use the individual tax rules, “and almost all of the more than 25 individual income tax credits available to taxpayers focus on economic incentives, rather than progressivity,” her resolution states.

There is one effort focused on corporations, however, hitting mainly the largest of them.  Watts introduced a successful resolution asking state staff to prepare for unitary combined reporting by related business entities.  And to figure out whether that would increase state tax revenue, and by how much, there is a directive in the state budget ordering such companies to provide key information.

The companies are directed to file information on the 2019 tax results in a unitary combined reporting format “prescribed by the Tax Commissioner,” and a failure to provide that report by this June 1 risks a $10,000 fine.  The Tax Commissioner will then report to the legislature by December (again, after the election) on the impact of a change in state law mandating combined returns from related business entities.

Finally, local taxes are not exempt from review.  Budget language directs the Commission on Local Government to compile data on the revenue localities lose from property tax exemptions mandated by the Assembly and any “fiscal stress” they create (on the government, not the taxpayers.) Some of those benefit individuals but business-related exemptions exist, too.  For once, the report is due pre-election, November 1 of this year.

Previous efforts at comprehensive tax reform have failed in recent years, including a Joint Subcommittee to Evaluate Tax Preferences, which accomplished nothing over several years. The historical pattern has been it takes the active attention of a Governor to move this usually immovable object. This would be a good topic to raise with the applicants for the job.

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The War on Fossil Fuels

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The lesson of the Texas grid collapse is not just about electricity.  Imagine the week Texans would have had if once the power went out and stayed out, they had no gasoline, diesel, propane, or natural gas to fall back on.  How much worse would their plight have been without natural gas heating homes and businesses, propane space heaters and grills, and gasoline or diesel-powered cars and trucks to get where they needed to go?

You might think it alarmist to imagine that, but it is not.  An all-electric economy, with the electricity itself reliant on unreliable wind and solar generation, is exactly the future envisioned for Virginia and being put into place by Governor Ralph Northam and the majority in the General Assembly.

The 2020 Virginia Clean Economy Act already requires the retirement of coal and natural gas electricity generation in the state in less than 30 years.  That’s what zero carbon means, although fortunately Virginia’s main electricity provider maintains a fleet of aging nuclear plants not mandated to close.  Yet.

Electricity is just the start. There is not one aspect of our economic lives where the debate is not being driven by the assumption – unproved and hotly contested – that our very existence is threatened by carbon dioxide emissions.  The constant drumbeat of such claims have evolved into conventional wisdom.  The lesson of Texas is we must slow down and think before we find ourselves over this cliff.

The proposed carbon tax and rationing scheme known as the Transportation and Climate Initiative is just a first step, with advocates admitting the ultimate goal is to eliminate gasoline and diesel as transportation fuels and make us totally dependent on electric vehicles.

This General Assembly was not asked to impose TCI with its taxes on Virginians.  Yet.  Once the 2021 election is past, the state is likely to join the interstate transportation fuel compact it has been negotiating for a decade.  This year’s General Assembly, however, did authorize joining with California and other states in a regulatory structure intended to ultimately end the sale of new internal combustion engines.  Virginia is ceding control over that process to California and other states.

A serious effort was made this year to impose a tax on your electric bill to finance, among other things, converting the homes of lower income Virginians from natural gas or oil heat to electric heat pumps.  Nothing would make the power companies happier, but that just makes us even more dependent on a single energy source.  Another bill tax would have financed a fleet of electric school buses, destined to grow.

The Atlantic Coast Pipeline to bring a huge new natural gas supply into the state was crushed by environmental opposition, as was a modest expansion of an existing Virginia Natural Gas line into Hampton Roads.  The Mountain Valley Pipeline is fighting for its life in the western part of the state.  One of the first actions of President Joe Biden was to kill a major Canada-to-Gulf Coast oil pipeline.

People see the threads, but not the whole cloth.  The war on coal is now a war on every fossil fuel.  Coal miners will be joined in fighting for their livelihoods by the entire oil and gas industry, from auto mechanics to the service station industry.

It took probably fifteen minutes into the Texas crisis for the climate change warriors to begin to claim that the cold snap was caused by global warming.  But the cold weather there was not out of line with past experience, and one day could do the same to parts of our electric grid.  All of the extreme weather claims tied to global warming collapse when compared to historical records.  But extremes will happen and will threaten the grid.

When those dark days come, we will not want an all-electricity economy, especially if dependent on intermittent sources.  We will need – as Texas just proved – gasoline, diesel, propane and natural gas for at least some of our homes, stores, and workplaces.

A version of this commentary originally appeared in the February 26, 2021 edition of The Fredericksburg Free Lance-Star.  

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Legislators Shift Green Energy Costs By Taxing All Other Customers, Employers

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Lower income Virginians who are customers of the two largest electricity providers may begin to receive subsidies on their residential bills in March 2022 under legislation moving forward in the General Assembly.  The money for the Percentage of Income Payment Plan (PIPP) subsidies will come from their fellow customers.

House Bill 2330 passed the House of Delegates on a 54-46 vote and is pending in the Senate Commerce and Labor Committee.  It was due for a hearing Monday but was delayed a week for further discussion and possible amendments.  As the program adds details, it also adds costs that will be added to Dominion Energy Virginia and Appalachian Power Company bills with a stand-alone rate adjustment clause.

The universal service fee that feeds the PIPP fund will be a flat per kilowatt hour charge, the same for residential, commercial, government, and industrial users.  In preliminary reviews that concluded in December, the State Corporation Commission estimated the coming charges at $1.13 per 1,000 kWh for Dominion customers, and $1.80 per 1,000 kWh for APCo customers.  This is a tax, pure and simple.

Those estimates are probably out the window because the new legislation makes substantial changes, as predicted.

PIPP was first approved in the 2020 Virginia Clean Economy Act, and frankly was an admission by that law’s advocates that it is going to explode Virginia electricity bills for decades to come.  With PIPP, the burden is shifted off lower income ratepayers and more heavily onto everybody else, especially commercial and industrial users.

PIPP participants will not have to pay more than 10% of their monthly income for electricity if they use it for heat and no more than 6% of their monthly income if they heat with something else.

The 2020 legislation offered PIPP bill caps to individuals or households enrolled in certain specific benefit programs, such as Supplemental Nutrition (formerly Food Stamps) or Temporary Assistance for Needy Families (TANF.)  The new bill sets a simpler and far broader qualification and offers benefits to individuals or households with income up to 200 percent of the federal poverty level.  Of course, the higher the income the higher the monthly electric bill they will have to cover themselves.

The 2020 bill required PIPP recipients to participate in existing energy efficiency programs designed to lower their bills, but again, this legislation goes further. It seems to mandate such energy reductions, by whatever means necessary. The PIPP revenue extracted from all APCo and Dominion ratepayers can be used to create additional efficiency programs, including:

weatherization or energy efficiency programs and energy conservation education programs including whole home retrofits or other strategies as determined by the Department of Social Services in accordance with this section.”

What is a whole home retrofit?

“Whole home retrofit” means significant improvements to a building’s shell and operations that include any necessary health and safety repairs, weatherization, efficiency, and electrification.

Wait!  It gets better.

“Electrification” means converting building systems that use coal, gas, oil, or propane to high-efficiency equipment powered by electricity supplied by an electric utility.

So, you will be forced to pay for homes to be converted from fossil fuels (i.e., natural gas) to electric heat, through a tax on your bill.  You may also pay for others’ “necessary health and safety repairs.” As broad and expensive as that job might turn out to be, do not ignore “or other strategies as determined by the Department of Social Services.”

This has morphed from a bill subsidy into a blank check. The SCC has no discretion over how much is spent on programs, or how high the universal service fee might go in annual adjustments. While the goal is to reduce demand, human behavior might point to a different outcome if a family is told their monthly bill will be capped no matter how much electricity they use.

During the earlier reviews, when the SCC basically concluded it and the utilities had too little information to really project costs, it did have an estimate of $3 million for administrative costs. This newly expanded universe of recipients and goals will blow past that as well and add to the size of the PIPP fee (again, it is really just a tax.)

During those 2020 hearings, the SCC was pressed to make one decision where it has discretion under the law.  Advocates complained that the caps of 10% of income (with electric heat) and 6% (without) needed to be lower, but in its opinions the SCC declined to consider lower levels.  Yet.

As noted, this bill keeps changing and may change again.  If March 2022 is the final target start date (at one point it was December 2021), the universal fee will have to be imposed at some point in advance and begin to fill the new fund.  According to a final enactment clause, as soon as the first dollars are extracted from ratepayers and deposited, the Department of Social Services can begin to spend it.

Do not be confused.  The PIPP tax coming to your electric bill is separate from and in addition to the extra charge coming for the Regional Greenhouse Gas Initiative and its carbon tax. It is separate from and in addition to bill charges Dominion is seeking to cover a fleet of electric school buses.

Hiding the bill for major government programs on your electric bills has become a standard operating ploy for Virginia’s legislators, with the utilities fully supportive.

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Subsidies for Electric Cars, Buses and Charging Will Accompany TCI’s Taxes and Rationing

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The ultimate goal of the Transportation and Climate Initiative with its tax and rationing scheme is to eliminate fossil fuels for transportation and get us into electric vehicles.  That is something advocates have admitted and critics have pointed out.  While Virginia TCI participation is on hold in this statewide election year, the 2021 General Assembly is following other pathways to the utopian EV future.

The House of Delegates has sent the Virginia Senate a bill to create a state financial incentive of $2,500 for purchase of a new or used electric vehicle.  An additional $2,000 rebate is offered to a low- and middle-income buyer of a new car and $500 if that buyer choses a used EV.

The House has also passed legislation empowering the state’s Air Pollution Control Board to adopt state regulations on vehicle fleet fuel economy and to model California’s existing program forcing manufacturers to offer more zero- and low-emission vehicle sales in the state.  This bill sets no goals but puts an accelerated process in motion, bypassing the full regulatory review, with a goal of regulating the 2025 model year vehicles offered in the state.

It is California’s Air Resources Board that runs its LEV and ZEV programs which will be the models for Virginia.  In part, that is because the big financial winners include the electric utilities, with California now planning for a 25 percent increase in power demand from EV expansion.

third bill orders the State Corporation Commission and other agencies to plan how best to build out the tens of thousands of charging stations needed to service a planned EV fleet, and whether the state’s utilities should own them.  If they do become additional assets of the monopoly utilities, the investments could enjoy the same guaranteed high-return profit margins they earn on power plants and transmission lines.

Last but hardly least, Dominion Energy Virginia is pushing again to provide – subsidized by general ratepayers – more than 1,000 electric school buses, which cost three times as much as a bus fueled by gasoline or diesel. A small utility-controlled EV school bus pilot is already underway.

A similar electric bus proposal was defeated late in the 2020 session, but now is back with both House and Senate versions, each successful so far but incompatible.  The House version was initially funded with a new 5 cents per gallon tax on off-road diesel fuel, used by farmers and manufacturers.  That tax was estimated to raise $3.2 million annually but was stripped out of the bill, leaving it with no funding mechanism.

The Senate bill funds the school buses by treating them as mobile energy storage devices. It would allow the utility to charge ratepayers for them the same way it will charge for the other energy storage systems mandated by 2020’s Virginia Clean Economy Act.  Ratepayers would even pay schools a compensation for accepting the utility-owned vehicles in their fleets.

The Senate bill would limit Dominion to 1,250 buses statewide, at least at first.  Enthusiasm over replacing $100,000 conventional buses with $325,000 electric buses just drips from a Virginia Business story on the proposal that reads like a company media release.  There is no mention in the article about utility ratepayers buying these buses, not the school systems.

Setting what may become an interesting precedent, the bill treats the bus and all the related equipment as pollution control devices, and thus exempt from any state and local property tax.  That is not the normal tax treatment of utility assets.

With the generous customer rebates on the table, Virginia’s auto dealers have joined in pushing for both that proposal and the related bills.   Auto Dealers Association President Don Hall put its arguments in a guest column for the Richmond Times-Dispatch last month, and the advocacy didn’t stop with the taxpayer subsidies for the cars.

“We also need infrastructure. In California, for example, there are more than 7,000 charging stations with more than 30,000 outlets for EVs to plug in. Virginia has only 711 stations with 2,150 outlets,” Hall wrote “Virginia should be committing no less than $720 million over the next five years to prepare and grow market demand. These funds need to be appropriated by the commonwealth and must happen in advance of any mandate becoming effective.”

As with the Virginia Business article, his is silent on who might pay for all that.

The enhanced rebate amounts of $4,500 for a new vehicle and $3,000 for a used one would be available to buyers with incomes at or below 300 percent of the federal poverty level, or about $70,000 for a family of four.  Millionaire Tesla buyers would get at least $2,500.

A fiscal impact statement for the bill projects over $20 million in taxpayer-financed customer rebates in 2022 and about $75 million by 2026. The early funding was to come from raiding an existing fund for coal industry tax credits.  Another pending bill ends those credits as of this year.

But the rebate legislation was amended before passing the House, removing any reference to that coal industry fund. As it now stands, the General Assembly would need to find another funding source or tap General Fund revenues to start offering the grants in future years.  It can pass the bill now and fund the grants later.

One of major goals of the VCEA last year was to put the electricity providers on strict demand reduction targets, but apparently the General Assembly is willing to make an exception for electric vehicles.  A late, one-sentence amendment to the bill authorizing the air board regulations would remove EV-related demand growth from those calculations.  Use all the power you want for that.

A year from now, the General Assembly will point to all this and claim Virginia is ready to join the TCI compact, ready to tax and ration motor fuels and raise family transportation costs to a level where the EV option is no longer that much more expensive.


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Senate Taxes PPP Less House Version “Wholly Inadequate”

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Majorities in both chambers of the Virginia General Assembly agree with Governor Ralph Northam and have voted to tax the federal Payroll Protection Plan grants that saved Virginia jobs in the pandemic. They only remain at odds over how much to tax.

The Virginia Senate has passed a bill 39-0 that allows employers, who used the money to maintain their workforce, to exempt the first $100,000 of their PPP grant from 2020.  The rest is taxed.  The bipartisan compromise allowed the bill to pass with the emergency clause it needs to go into effect immediately upon approval, in time for this tax filing season.

The average Virginia PPP grant was about $107,000, state officials reported.  More than 20,000 employers would still see some taxes on their grants under the Senate bill.

The House of Delegates passed a bill 55-43 that allows only some employers – those not incorporated – to exempt the first $25,000 of their 2020 PPP grants.  Because all Republicans opposed the bill, it did not have enough votes for the emergency clause.  More than half of PPP recipients would be taxed on all or part of their PPP grants under the House bill.

Governor Ralph Northam had introduced legislation to tax the grants with no exemption.  It was part of the annual bill that advances the date of the state’s conformity with federal tax law.  Congress, which created PPP and disbursed $12.3 billion to Virginia employers, had decreed the money to be fully free from any federal taxes.  Northam’s bill sought to de-conform from that, capturing state taxes.

Both the House and Senate bills do de-conform for federal law as Northam asked, but each created new deductions elsewhere in state law.  Both deductions are only for 2020, leaving businesses to wonder about the rule for funds they receive under the PPP Round Two just getting underway.  They better hold back 6% for state income tax just in case.

The Senate’s position for a larger exemption could still prevail as the legislative session enters its second half, where differences between the two bodies are resolved.  In theory, the House could relent and simply adopt the Senate version in coming weeks.  But Northam had assumed and spent all the revenue created by the tax when he drafted his budget, and House Finance Committee Chairwoman Vivian Watts, D-Fairfax, warned that the Senate position meant about $92 million less for state spending.

It was clear she was loathe to part with even the $38 million the state would “lose” by allowing the $25,000 deduction.  Her bill and the Senate’s also allow a similar deduction for Virginia business which did not get PPP funding, but were given job-saving grants by a similar state program called Rebuild Virginia.  Absent the agitation over PPP, those employers too would have been taxed in full.

Del. Kirk Cox, R-Colonial Heights, told colleagues that while he is a member of the Appropriations Committee, usually focused on spending, “I would rather give the benefit to the business than to the state.”  He joined with the other Republicans in voting no.

The House deduction translates to a tax savings of $1,437.50 (5.75% of $25,000) per taxpayer.  The Senate deduction would reduce an employer’s taxes $5,750 if the business is not incorporated, and $6,000 if it is.  The funds involved are less important than the illustration of competing views over what is fair to tax, with the Democrats claiming any funds not taxed represent “tax relief,” a subsidy to business on the state’s part.

Watts said her goal was to help small business, but Republican Del. Joe McNamara, R-Roanoke, said it was really the “micro-micro” employers that received grants of $25,000 or less, those with perhaps one or two employees.  He called it “wholly inadequate” and recommended the Senate approach as at least a reasonable compromise.

He also disagreed with the policy of refusing the deduction to an employer who had incorporated the business, rather than running it as a sole proprietor, partnership, or limited liability company.  Small firms might incorporate and very large firms can be partnerships or other structures.

As she has before, Watts repeated the argument of Northam’s Secretary of Finance, Aubrey Layne, and disputed this is in any way a tax on the PPP grants.  The PPP grants are not counted as income, she repeated, which is correct.  That is only half of the equation and it is misleading to stop there.

What she is ignoring – and Delegate McNamara made this point in reply – is the state is also refusing to allow deduction of any payroll or other expenses used to qualify for the grant, which has “the same effective result as if the income had been taxed.”  The larger the amount of PPP money received as a grant, the higher the resulting tax bill.

In the Senate, the Republican minority offered a floor amendment to provide full deductibility for the PPP-related business expenses, in effect ending any tax on the PPP grants.  It failed on a 17-22 vote, with one Republican joining the Democrats.  That was Sen. Emmett Hanger, R-Augusta, like Cox the ranking GOP member on that body’s budget committee.

The Senate’s position is a compromise, both financial and philosophical.  It is a substantial improvement over the House position, has the emergency clause, and any message to legislators now should be that simple:  Support the Senate version as is.

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