Time to index Virginia income taxes to inflation

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Inflation is eroding the value of each dollar earned by Virginians, making it harder for them to afford decent housing, put food on the table and educate their children. But what many Virginians don’t know is that they have also been paying more in state income taxes while their real income has declined because the commonwealth’s tax code is not indexed to inflation.

A new report by Virginia’s Joint Legislative Audit and Review Commission (JLARC) points out that state income taxes in the commonwealth “have far outpaced median income,  because income brackets have not been changed since 1990.”

Thanks to inflation, state income taxes owed by a median filer have increased 173 percent since 1990, while that same taxpayer’s actual income increased only 108 percent.

The result of 32 years of “bracket creep” is a 65 percent income tax hike automatically imposed on Virginia taxpayers without a single vote in the General Assembly. Over the years, bracket creep has made the state income tax much less progressive because, as the JLARC report explains, “a much higher percentage of each filer’s income [is] being taxed at Virginia’s highest rate of 5.75% on income of more than $17,000.”

That’s right. People earning just $17,000 per year are taxed at the highest rate, the same rate as those making a million dollars a year. That’s the opposite of a progressive system in which taxpayers making the most money are taxed at a higher level.

To make Virginia’s income tax more progressive, JLARC recommends “reducing taxes on lower-middle and middle-income filers,” including those earning between $36,000 and $68,000 per year, “by indexing the tax brackets to account for inflation.”

Indexing has been a longstanding policy objective of the Thomas Jefferson Institute for Public Policy. Back in 2018, TJIPP proposed indexing Virginia’s individual tax brackets, personal exemptions and standard deductions to inflation. But inflation was just 1.76 percent in 2019, compared to 8.20 percent in 2022.  The case for protecting Virginia’s taxpayers from the ravages of inflation is much stronger now.

General fund revenues have increased nearly 30 percent over the past four years. So it should come as no surprise that JLARC acknowledges that “revenue from the individual income tax is by far the largest source of state general fund revenue,” thanks to inflation-created bracket creep. This 30 percent revenue windfall was in addition to other taxes imposed on businesses and individuals in the commonwealth that led to a $2 billion state surplus.

The unfair effect of bracket creep is to force taxpayers to pay higher taxes on income that has lost some of its buying power due to inflation, and this unlegislated tax hike falls most heavily on lower- and middle-income Virginians.

The JLARC report notes that indexing alone, without any other needed tax reform, would increase the  progressivity of Virginia’s state income tax by 23 percent. Because indexing would have to address 32 years of bracket creep in the state tax code, it would result in a one-time revenue reduction of 6 percent.

Another option is to create more tax brackets than the current four, which would increase progressivity even more and result in a 4 percent decrease in state revenue. Or JLARC suggests that the General Assembly could index tax brackets for inflation and add progressive new rates at the same time, benefiting mostly lower- and middle-income tax filers and resulting in just a 2 percent revenue shortfall.

Whatever form indexing takes, it is imperative that the General Assembly make sure that inflation does not harm taxpayers more than it already has. Since Virginia is just one of 13 states that do not currently index their income tax brackets for inflation, lack of action on the part of the state legislature will continue to further erode the system’s progressivity over time. Virginians will watch helplessly as their income taxes continue to rise, while the buying power of that same income declines.

And this annual unlegislated tax hike will continue until and unless state legislators finally decide to do something about it.


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Wind Projects Faltering

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In recent days several proposed offshore wind projects, which unlike Virginia’s are not guaranteed by captive ratepayers, are showing cracks in their pylons.

Multinational developer Avangrid recently told Massachusetts regulators that its proposed 1.2 gigawatt Commonwealth Wind project is no longer economically viable.  It seems to be seeking to renegotiate the power purchase agreement for more money because the electricity price it promised in the contract is being eroded by rising costs and interest rates.

Then the developer of a smaller Massachusetts project, 400 megawatt Mayflower Wind, made a similar announcement.  An EE News Energy Wire story on both can be found here and included this:

Avangrid’s warning — echoed in part days later by Mayflower Wind, the developer of the state’s other upcoming offshore wind project — is the strongest signal yet that a chilling trend on renewable energy projects may migrate into the offshore wind sector.

That was before Monday brought another signal.  New Jersey’s Public Service Enterprise Group (PSEG) announced it is considering pulling out its stake in the 1.1 gigawatt Ocean Wind 1 project.  In that case, the utility does have a 25% equity stake in the project.  Bloomberg reports on that here, stating:

Higher prices and ongoing supply chain constraints are straining the project’s finances, the project’s lawyers said in an Oct. 20 filing.

The Biden Administration’s so-called Inflation Reduction Act shored up already fat subsidies for the industry, but with several conditions.  There is a clear preference for domestic-manufactured content, for example, which might be of no value to these overseas-based contractors.  Labor costs will now be dictated by unions.  The full impact of all that is still unclear.

Here in Virginia, of course, Dominion Energy Virginia’s ratepayers can simply expect to pay more for its planned Coastal Virginia Offshore Wind project.  That one project (2.6 gigawatt) is about the size of the three mentioned above combined, and of course the utility plans a second wave just as large.

This is why the discussion of risk is central to this debate.  In private projects financed with power purchase agreements, the developer’s investors carry most of the risk.  In Dominion’s projects, ratepayers do.

proposed agreement pending in front of the State Corporation Commission seems to be premised on an expectation that the construction cost will rise to at least $11.3 billion from the previous $9.8 billion, with $1 billion of that to be repaid to the utility by its customers over time (and with annual profit.)  The agreement mentions the possibility of a price tag up to $13.7 billion.  Those numbers were not chosen at random.

An additional $1 billion from ratepayers amortized over decades will substantially increase the projected bill impact of the project, which began to show up on Dominion’s monthly bills in September. (Look on the bill for Rider OSW).  The cost numbers reported earlier will be scrambled, and a new analysis may not appear before the SCC decides.

Avangrid, which has the Spanish firm Iberdrola as its majority owner, is also developer of the proposed Kitty Hawk project.  It will be built off North Carolina’s Outer Banks, but the power cables are going to come ashore in Virginia Beach to connect with the transmission grid.

Defenders of the proposed settlement have claimed privately that it is a consumer victory to put Dominion on the hook for some (one-third) of the cost overruns up to $11.3 billion, and all of the cost overruns beyond that point.  Again, the unspoken premise is the cost overruns are coming.  They also claim the SCC will have full power to stop the project if the costs explode.

Yes, but how likely is that?  Once ten or eleven billion has been spent, will the SCC impose that sunk and stranded cost on ratepayers with the prospect of no electricity production or renewable energy credit sales?  In another realm, does the Navy cancel ships when they are 80% built and costs rise?  Not often.

The original condition imposed by the SCC, holding Dominion responsible for any marginal energy costs if the project fails to produce power at 42% capacity, did more for consumers.  It also apparently imposed so much risk on the company that it was threatening to drop out, just like those other developers in other states.

Those other companies are taking steps to protect their shareholders.  Under the original SCC condition, Dominion might have done the same.  Absent that, it doesn’t have to.

A version of this commentary originally appeared on November 4, 2022 in the online Bacon’s Rebellion.  Steve Haner is Senior Fellow with the Thomas Jefferson Institute for Public Policy.  He may be reached at steve@thomasjeffersoninst.org.

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Virginia drops from A+ to C in worker freedom largest decrease in the country

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Virginia’s ranking fell more than any other state in the in the Commonwealth Foundation’s 50 State Labor Report “The Battle for Worker Freedom in the States: Grading State Labor Laws.”

Virginia plunged from an “A+” ranking in 2019 to a dismal “C” this year. This was due to what the report called “[t]he most dramatic government union victory of the post-Janus legal frontier” – Janus being the 2018 Supreme Court case Janus v. AFSCME declaring everything government unions do is political, and public employees have a First Amendment right not to subsidize this political activity.  It essentially brought right-to-work provisions to public employees across the country.

As the report noted “Three states experienced major grade changes since our 2019 report. Virginia dropped from “A+” to “C” for instituting collective bargaining, while Arkansas jumped from “C” to “A+” for banning it. Missouri’s comprehensive labor reforms were officially struck down, moving the state back down from “B” to “C.”

The reason for the fall was a law that went into effect in 2021 allowing localities to grant public employees the privilege of collective bargaining — something that had been illegal in Virginia for decades. Because of the new law, Virginia counties, cities, and school boards can enact ordinances giving government unions a monopoly to negotiate contracts for nearly all their public employees.

One of the large problems is that there are no guardrails on the legislation besides saying ordinances must have an unspecified mechanism for how unions can be formed and removed, and requiring local government take a vote if they are petitioned by a majority of public employees working at a specific job.

Besides that, and unlike most other states around the country which do specify what unions can bargain over, the law made Virginia the Wild West for collective bargaining. Anything not specifically prohibited by other provisions of state law was fair game.

Unions in Virginia can now pressure localities to give them more authority and privileges. The Commonwealth Foundation report offers Alexandria as an example. The City of Alexandria originally sought to give unions the ability to bargain but have that privilege limited to wages and benefits.

It quoted City Manager Mark Jinks’ worries about flexibility especially in light of emergencies like the recent pandemic which he said was a “large-scale macrocosmic example of how the City government needs to respond to crises and needs large and small, often immediately” Specifically, Jinks noted “COVID-19 required major shifts in how work was undertaken, immediate safety protocol development and implementation, reassignment of many City employees to new tasks not in their job descriptions, and dramatically changed work environments.”

Collective bargaining contracts in other states precluded flexible and immediate pivots in government services during the Covid emergency, even to the point of holding up online education services at the demand of the teachers unions.

Yet after unions such as the American Federation of State, County and Municipal Employees (AFSCME) put pressure on the Alexandria and its manager, the Ordinance was changed and the report notes “unions succeeded in including issues such as grievance resolution, safety, hours, and other working conditions in the final ordinance.”

The report also pointed to potential cost increases that will “likely put pressure on officials to raise taxes on state residents.”

This is not something that has escaped localities planning to pass bargaining ordinances. As of April of 2021 Fairfax County forecast a need to allocate $1.6 million for increased administrative costs due to bargaining for the county and the school division.

Loudoun County’s proposed FY 2022 budget included over $1 million to pay for extra staffing and overhead.

Estimates from the City of Alexandria were between $500,000 and $1 million per year for administrative costs.

The Commonwealth Foundation report grades states on the legality of public sector bargaining and it scope. It also gives weight to issues like release time (union officials paid with taxpayer funds to do union work), strikes, transparency, the ease with which an employee may leave or opt-out of a union, and right-to-work.

Virginia did have a few positives. The state protects employees with a right-to-work law — meaning a union cannot get a private sector worker fired for not paying them, although this is a right already granted to public employees thanks to the Janus case.

Virginia also has a secret ballot protection act and laws prohibiting strikes. However, provisions that have already been included in local ordinances are troubling signs. These include release time, almost unlimited bargaining, limitations on when public employees can exercise their rights due to arbitrary windows when they can leave and stop paying the union, and other issues.

Overall, the fall in ranking represents a worrying sign for Virginians and public employees across our Commonwealth.

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Wind Change: Turbine Failure Risk Back on Customers

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The big risk with Dominion Energy Virginia’s planned offshore wind extravaganza has always been that either the wind out in the Atlantic blows too little or it blows too much.  Too little and the ratepayers are paying an inordinate amount for intermittent electricity; too much (a major hurricane say) and the turbines could be damaged or destroyed.

Because the monopoly utility will own the project, not a third-party energy developer, all that risk lands on its ratepayers.  The State Corporation Commission (SCC) sought to protect Virginia ratepayers from the risk.  That was the point of its imposition of a performance standard on the project tied to its overall energy output.

That is the risk Dominion’s leadership refused to accept, threatening to kill the $9.8 billion project entirely.  It was not an idle threat.

Now Virginia Attorney General Jason Miyares (R) has a new proposal which protects Dominion and its shareholders from that risk after all, putting it back squarely on the utility’s 2.5 million customers.   Instead, the person charged by law as the protector of Virginia consumers is focused on the risk of construction cost overruns.

Given the massive profits it will reap over the possible 30-year life of the project, it is not surprising Dominion is willing take some risk on that front.  Should the project cost exceed $10.3 billion (note: that is already a 5% cost increase) and reach $11.3 billion, Dominion shareholders will split the additional cost with its ratepayers.

Even if consumers only have to finance an additional $1 billion to build it, that still increases Dominion’s potential annual return on equity by about $100 million per year.  An additional billion from its own coffers puts only a small dent in decades of profit.

With this approach, Dominion gets all those profits no matter how much power it produces, and consumers will fund any energy deficit.  The SCC could impose sanctions for poor energy production if Dominion’s own negligence is to blame, but too much or too little wind won’t hit its bottom line.  It will only hit customer energy bills.

The SCC’s hands are also tied on project cost overruns unless it approaches $14 billion.  Only then can the SCC step in and try to shut the boondoggle down.  Should it do so ratepayers will still be on the hook for amounts spent at that point.  Again, were this a third party developer’s project, the construction cost risk would never be on the customers.

This is not progress.  Unfortunately, with the Attorney General joining with the Green New Deal advocates to endorse it, and with the praise already heaped on it by Governor Glenn Youngkin (R), it enters the regulatory arena with a full head of steam.

Some background:  When we last visited this issue, the SCC had approved the wind project with its condition that Dominion would bear additional costs if it failed to hit output targets, a 42 percent capacity factor.  Dominion sought and got reconsideration of that, and all the parties filed another round of arguments and the public added more comments, one from the Thomas Jefferson Institute.  That was followed by a couple of weeks of silence, a sign that somebody was negotiating behind the scenes.

The deal emerged October 28, late on a Friday afternoon.  Miyares got to announce it first with great fanfare.  He called it “Historic” and touted “unprecedented consumer protections.”  You can read the document here, with pages 9-12 being the actual stipulation.  Basically five parties have signed on:  Miyares, Dominion, two environmental organizations and Walmart, the state’s largest employer and a huge Dominion customer.

The two judges of the SCC are not obligated to accept this stipulation and reverse their earlier stance.  Missing from the agreement are other parties, including the SCC’s own staff, another entity charged with protecting consumers.  Also missing are Clean Virginia, another major environmental group, and the Virginia Committee for Fair Utility Rates, representing industrial customers. The SCC may seek their reaction before deciding.

Every signatory to the deal, with the exception of Miyares, was basically in support of building this project all along because they all accept the premise that fossil fuel energy is a threat to human existence.  That includes Walmart.  If ten years from now Virginians regret the construction of this project and its impact on their electric bills, history will record Miyares as the political leader who kept Dominion from pulling the plug.

A good element of the stipulation involves accounting for any additional financial subsidy to the project provided by the Biden Administration’s Inflation Reduction Act.  If that does lower the final construction cost, the benefit should flow to consumers.  That would likely have been the SCC’s position anyway, but it is good to have that written into any final order.

In the last General Assembly, every Republican member of the House of Delegates voted to kill this project, or to at least remove the legislative provisions that made it mandatory.  Several Republican senators would have voted the same way if Senate Democrats hadn’t killed the bill in committee.  The House Republicans also voted in a different bill to fully restore the SCC’s regulatory authority to say yea or nay on its prudence.

In his recent energy plan document, Governor Youngkin spoke eloquently about the need to restore SCC independence and oversight.  Yet now once again we have a deal written in closed rooms by lobbyists and lawyers with varied motivations seeking to circumvent a valid SCC proposal to protect consumers.  An Attorney General who wrote a strong brief praising that SCC proposal has now undercut that position, for no other possible reason than to keep the project alive.

Support for this negotiated settlement flies in the face of those legislative efforts and eliminates any chance of a similar debate in 2023.  It belies the claims of trust in SCC oversight.  For reasons they should explain in more detail, Virginia’s top Republican leaders remain all in on offshore wind.

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Youngkin’s Energy Plan Pivots to Reason

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In his newly released energy plan, Governor Glenn Youngkin (R) makes it clear he sees the economic abyss created by the unrealistic and ideological green utopia demanded by his predecessor.  Seeing a looming disaster and stopping it are two different things.

The new document is not a full 180-degree change from the previous plan concocted by former Governor Ralph Northam (D).  For example, Youngkin is not reversing his previous endorsement of Dominion Energy Virginia’s planned $10 billion offshore wind project, a central part of the Northam plan. Also, Youngkin apparently is sufficiently convinced that carbon dioxide is harmful that he wants to spend your money on carbon capture and storage.

Nor does Youngkin call for outright repeal of the 2020 Virginia Clean Economy Act (VCEA), but rather he endorses removing its rigid mandates as to how rapidly to retire fossil fuel energy generation, and their mandatory replacement with wind, solar and related battery technology.  The problem is even tweaks require amending state law, and previous efforts to do that were thwarted by the Democrats who still control the Virginia Senate and who still accept the Green New Deal catechism in full.

But the change in direction in the new document is dramatic, and it has already been roundly condemned by the various groups that are heavily advocating the rapid end of fossil fuels.  By its enemies shall you know it.  Placing concerns over customer cost and system reliability as a higher priority than reducing carbon emissions guarantees that the plan starts yet another ideological battle for the governor.

Under another recent law those advocates pushed through the plan Youngkin issued October 3 was to be premised on a rapid move to a zero-carbon energy infrastructure, moving beyond transportation and electricity into agriculture and how to heat buildings and cook food.  Youngkin didn’t just fail to comply with that directive, he rejected the premise.

From the news release that came out with the Energy plan’s announcement in Lynchburg:

The plan adopted in recent years by the previous administration goes too far in establishing rigid and inflexible rules for the transition in energy generation in Virginia. We need to recognize that a clean energy future does not have to come at the cost of a healthy, resilient, and growing economy. We first must embrace a measure of humility as to our ability to project and predict 30-years of energy demand and technological innovation. And we certainly should not make irreversible decisions today to exit critical elements of power stack.

The “measure of humility” includes statements that Virginia might not retire all or even most (or any?) of its natural gas generation by the current deadlines, will continue to push for additional natural gas pipelines to grow that energy source, and will not follow California into mandating only electric vehicles on new car lots by 2035.   The report cites a Weldon Cooper Center estimate that the electric vehicle mandate will increase electricity demand by 25% (and that’s hardly the only electrification mandate from the Northam years) and then warns:

Transitioning from baseload generation (to wind and solar) while attempting to accommodate this increase in electricity demand could be a disastrous combination for Virginia’s grid reliability. California, which is now asking drivers to refrain from charging their electric vehicles to prevent blackouts, provides an instructive example of what banning non-electric vehicle sales and retiring all baseload generation would look like in Virginia.

Governors propose. Legislatures dispose.  The votes to repeal the clean car regulations were not there in the 2022 General Assembly, at least not in the Senate.  The attempt was made.  It surely will be made again.

The absolute best elements of the plan, and here there is some bipartisan consensus, are centered on restoring the traditional and independent oversight authority of the State Corporation Commission.  Several of Youngkin’s recommendations are complete reversals of recent General Assembly policies and practices which override the SCC, all adopted at the direct behest of the supposedly regulated entity.  Passing them will not be easy, either, because in that case too many Republicans signed on to the earlier bills.

Some of the regulatory elements the governor is challenging go all the way back to the seminal 2007 legislation that established Virginia’s unique and consumer-dismissive electric regulatory regime.  They include the proliferation of individual rate adjustment clauses on customer bills and the statutory profit margins protected by law.

A headline promise in Youngkin’s plan, probably unachievable within his term, is to develop a small modular nuclear reactor somewhere in Southwest Virginia.  Appalachian Power Company serves that territory, and no regional electric cooperative would need or could ask ratepayers to fund such a project.  A nuclear reactor is a bit more expensive than the usual highway or school construction project that gets tucked in a governor’s budget, and somebody needs to buy the power output.

Northam’s plan four years ago frankly laid out a deep green vision for an energy transformation, and he and his supporters then set about implementing it just about in full, aided by taking full control of both houses of the legislature for 2020 and 2021.  It was far more a legislative wish list than an engineering and economic blueprint.  Give them credit, they got it done.

The success of Youngkin’s plan will rise or fall on which elements of it are now translated into successful legislation.  Even the 90 degree turn he proposes may require that various legislators face an electorate angry over 1) energy prices, 2) the threat to eliminate their preferred transportation or home energy choices and 3) the fear that the various investments in intermittent renewable energy will prove disastrous.  (See Dominion’s refusal to actually back up its promises on offshore wind.)

Northam didn’t have the votes to do what he wanted in 2018 but did a year later.  Youngkin now has a different (we say better) plan that also lacks sufficient support in the legislature, but another election is coming.

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