House should hold the line on tax cuts

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You got to know when to hold ‘em, know when to fold ‘em,” country singer Kenny Rogers sang in his classic hit, The Gambler. In other words, playing a winning hand is just as important as cutting your losses.

Members of the House of Delegates should remember that bit of homespun wisdom when it comes to negotiating with the Virginia Senate on their competing budgets, specifically Governor Glenn Youngkin’s proposal to return $1 billion of the $3.6 billion record surplus back to taxpayers still struggling with inflation.

The differing budgets passed by the House and Senate offer a stark contrast between the two chambers. The Senate version offers no tax relief. Senate Finance and Appropriations co-chair Janet Howell, D-Reston, told fellow committee members that after agreeing to an earlier $4 billion tax relief package, “to go further at this time would be premature given the inflationary pressures our economy has been experiencing.”

But this extraordinary admission by one of the Senate’s top leaders that inflation – now at 6.4 percent – is a problem for state government failed to acknowledge that inflation is also a problem for Virginia taxpayers, whose income taxes fund 77 percent of the commonwealth’s General Fund, according to the Department of Planning and Budget.

The Senate’s refusal to even consider returning at least some of the surplus to those same taxpayers while voting to give state employees another raise is such a glaring example of a “what’s-mine-is-mine-and-what’s-yours-is-mine” mentality, it should convince even the most spineless Republicans in the House to fight for tax relief.

In contrast, the budget passed by the House of Delegates returns $466 million to individual taxpayers by lowering the top tax rate from 5.75 percent to 5.5 percent and raising the standard deduction to $9,000 for single filers and $18,000 for married couples. This is long overdue, but it is still modest tax relief. Much if not all of the gains will be negated in future years by the General Assembly’s continuing refusal to index state income taxes to inflation, which the Thomas Jefferson Institute for Public Policy has long been urging the legislature to do.

The House version would also lower the business income tax rate and give small businesses in Virginia an added 10 percent deduction – all while using the remaining $2.6 billion of the surplus for new spending. The Senate’s refusal to share less than a third of the excess funds with the same people who were overcharged is the extreme position here, which legislators will have to defend in an election year when all 40 seats in the state Senate are on the ballot.

Ironically, Howell and five other Democratic members on her committee (co-chair George Barker, D-Alexandria, Senate Majority Leader Richard Saslaw, D-Springfield, and Sens. David Marsden, D-Burke, Adam Ebbin, D-Alexandria, and Mamie Locke, D-Hampton) who voted to torpedo tax cuts are from Northern Virginia and the “urban crescent” including Hampton Roads, which for the past nine years has been experiencing the largest out-migration in the state as residents — including young adults aged 18-29 — flee the high cost of living.

During an appearance before this same committee in December, Youngkin pointed out that Virginia’s tax structure needs to be reformed because taxpayers “are voting with their feet.”

Youngkin’s high-profile anti-tax campaign has not hurt him politically. On the contrary, according to a Mason Dixon survey released earlier this month, he enjoys a 56 percent approval rating – the highest since he’s been in office.

That’s why when negotiating with their counterparts in the Senate, budget conferees on the House side hold a winning hand on tax cuts – if they don’t snatch defeat from the jaws of victory.

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Deadlocked Again on Taxes vs. Spending

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We have seen this before in Virginia and here we go again: the classic conflict between tax cuts for the many versus more government spending for a few.

The Republican-dominated House of Delegates has passed a series of broad tax reductions, while the Democratic-dominated Virginia Senate has killed its versions of the same bills.  Last Sunday the Senate then produced a budget proposal about $1 billion richer in funds for education, mental health services and other poll-tested priorities.

Killing the tax bills creates even more revenue to spend in future years, billions more.

The 2023 Virginia General Assembly tax debate is just another revival of an old political show. Last year it ended well for new Governor Glenn Youngkin (R) and for those hoping to pay less in state taxes.  This year is not guaranteed to see the same outcome, not unless there is a late push to engage public attention as the House and Senate seek compromise.

The long list of tax cuts which passed the House should also be whittled down to the essentials, which might make it easier to build that public support.

It is a long list of proposals, perhaps too long. The Senate killed a proposed increase in the standard deduction, a reduction of the corporate income tax rate from 6 to 5 percent, a reduction in the top personal income tax rate from 5.75 to 5.5 percent, and a state version of a popular business deduction available at the federal level.

The Senate even rejected (so far) a highly popular proposal to expand a major tax break for military retirees.  Last year bipartisan majorities in both houses supported creating the big tax subtraction but allowed it only for those age 55 or older.  The House has now voted to eliminate the minimum age, but the Senate didn’t even have a bill on that issue.

What of all that is essential?  The most important tax measure the 2023 General Assembly should pass is not even under consideration.  The recent spate of serious inflation has provide the best opportunity in 50 years to index Virginia’s tax code.  The tax brackets, subtractions and deductions should all be adjusted for inflation and then set to rise gradually with future inflation.

The Thomas Jefferson Institute inserted a single question on the issue in a recent Mason-Dixon Polling and Strategy survey, and the idea was universally applauded by Democrats, Republicans and Independents.  Support was strongest among Democrats (70 percent).  Everybody grasps the impact of inflation now, even the younger folks who missed the last wave in the 1970s.

But Youngkin didn’t propose it and probably the most comprehensive bill on the topic was introduced by a House Democrat.  It never came up for a vote, not even in committee. Unless indexing reappears out of the budget talks, inflation will continue to produce revenue windfalls for government and higher taxes for people.

In the absence of indexing, Youngkin’s effort to add another $2,000 to a couple’s standard deduction becomes the highest priority in his package.  The other high priority item the Assembly really should adopt in any compromise is the qualified business income deduction, only of benefit to businesses which are not incorporated.

Little has been done to promote the package beyond talking points on Virginia’s anemic economic performance and population loss, with the premise being that lower corporate and individual tax burdens will turn things around.  Go to the public website for the Virginia Chamber of Commerce and look up its legislative priority list and you find a vague endorsement of “tax reform to better position the Commonwealth for economic growth and investment” with no mention of the corporate rate cut or qualified business income deduction.

From the outset, the only way to sell a major corporate income tax reduction was a compelling argument it would improve economic outcomes coupled with a strong show of support from the business community.  The window is closing on that.  There might be value in trimming the top rate from 6 to 5.75 or even 5.5 percent just so Virginia’s economic marketers could advertise a rate “less than 6 percent.”

There may also be value in arguing that the top rate for corporations should mirror the top rate for individuals. So much business activity now is in non-incorporated entities.  Gig workers and many small businesses are taxed under the individual tax rules.  That is why the other high priority item is the qualified business income deduction based on a similar federal provision.

The qualified business income deduction at the federal level was created in the 2017 Tax Cuts and Jobs Act to level the playing field between incorporated and unincorporated businesses. At the federal level it creates an additional deduction equal to 20 percent of the business net income and Youngkin’s proposal would grant a 10 percent deduction on the state return.

Only businesses organized as sole proprietorships, S-corporations or partnerships (and some trusts) can claim it.  While many of these are small, it can include large companies.  But they are large companies not organized as C corporations.

As the fiscal impact statement on the bill reports, only Iowa, Colorado, Idaho and North Dakota also recognize the qualified business income deduction for state taxes.  If competitive positioning is your goal, Virginia should make every effort to adopt this pro-business provision that is not recognized in most direct competitor states that also have income taxes. For once, let’s lead.

But again, that argument has not been pushed in any public messaging, either from political leaders or from the various business groups that might benefit.  If squeaky wheels get grease, silent wheels just rotate around the shaft.

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Is Virginia Ready for Mandated Electric Vehicles?

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In all of Virginia, Northern Virginia – with its urbanizing and wealthy population — is the place where electric vehicles are most likely to be popular.

But will a population demanding choices support having no choice?  That’s the requirement of a law passed in 2021. Does the Commonwealth have the capacity to seriously switch to 100% electric vehicle (EV) sales by 2035 … without being a detriment to Virginians?

The current data outlook says “no.” A bill to repeal the law, HB1378, has passed the House of Delegates and is on the way to the State Senate.  Virginia’s lawmakers should approve it.

According to the Virginia Department of Motor Vehicles (DMV), there were 8.5 million vehicles registered in the Commonwealth in 2021. Only around 30,000 of those vehicles were electric. Moreover, the state has only 1,181 public charging stations with 3,435 EVSE ports currently available. Considering most of these charging stations are Level 2s, which can take around eight hours to fully charge a vehicle, replacing more than eight million internal combustion-engine vehicles with EVs is unsustainable.

While it is true that Virginia will be installing more charging stations on highway corridors, drivers will have to share these stations with everyone else on the road — unless they opt to install a charger at home. The new charging infrastructure, however, won’t be cheap. According to NeoCharge, the total cost of installing an EV charger can range anywhere from $800 to $4,000. That number doesn’t include the electricity bills incurred when charging the actual vehicle. And rural Virginians who don’t have easy access to highway corridors and may not be able to install their own chargers, have been effectively ignored by this legislation.

Millions of new EVs will also result in a significant drain on our power grid. The average electric vehicle requires 30 kilowatt-hours to travel 100 miles. That is the same amount of electricity the average household uses each day to run appliances, computers, lights, heating, and air conditioning. If every driver starts consuming this much electricity regularly, the U.S. Department of Energy predicts that the national consumption of electricity could increase by as much as 38% by 2050. Where is all of this additional electricity supposed to come from?

The strain that would be felt by our state’s electric grid would be astronomical. Currently, our electric grid is primarily powered by natural gas and nuclear energy, but it also includes power generation from renewable energy sources. However, many of these renewables, such as wind or solar power, are not able to be sufficiently stored for electrical generation down the line. According to Roy Nutter, a Computer Science and Electrical Engineering professor at West Virginia University, “power storage will be required if we are going to move toward fickle power sources such as solar and wind. Solar does not work at night. The wind doesn’t blow all the time.” Virginia does not have enough power storage capacity to do this on a large scale.

Simply put, if we are unable to improve the Commonwealth’s power storage to provide for EVs, the grid won’t be able to handle it.   The result will be Virginia looking like California, which asked its citizens not to charge their cars amid a heatwave last summer–just days after announcing the switch to 100% EVs.

No matter your beliefs on the subject, the data doesn’t lie — Virginia isn’t ready for the Clean Cars law, which currently mandates that 35 percent of all new cars and trucks sold by 2026 must be electric; 100 percent by 2035 If the Commonwealth expects to see a 100% EV future, enormous, costly changes must be made, and at the current rate, we won’t be ready by the 2035 deadline.

If Virginia’s elected lawmakers value sensible and realistic efforts to improve Virginia, they should unanimously support repealing Virginia’s Clean Cars law. There are ways to make Virginia greener, but this initiative is both counterproductive and unrealistic.

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Youngkin Thwarts Dominion Push for Higher Profit

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A Virginia House of Delegates committee has rebuffed Dominion Energy Virginia’s bid to change the rules on how much profit it can earn, setting up a confrontation with the utility and its allies in the Virginia Senate.  Governor Glenn Youngkin (R) reportedly encouraged the delegates to take the step and sent a member of his cabinet to speak in favor of watering down Dominion’s bill.

When they were introduced a few weeks back, House Bill 1770 and Senate Bill 1265 were identical.  It was probably Dominion’s game plan to have them remain identical as they passed in their houses of introduction by the February 7 deadline.  Now the bills likely to pass have morphed into very different substitutes, with all observers now expecting a high stakes joint conference committee.

The House substitute, approved by the House Commerce and Energy Committee Thursday afternoon, removes most of the original bill.  Now it merely changes the schedule for rate cases and requires additional scrutiny by the State Corporation Commission before fossil fuel generation plants are closed.   The sections dictating a higher profit margin are gone.

The provision that might prevent the future closing of a coal or natural gas plant, however, was sufficient to lose the vote of every Democrat on the committee.  They are fully committed to restoring the State Corporation Commission’s independence over ratemaking, but still want to dictate by law the elimination of fossil fuels.

The Senate substitute remains the bill Dominion wants. It also faces a full Senate vote next week.  Several of the original elements are stripped out, including the language about additional SCC oversight before plants are closed.  But the heart of the bill remains a new formula for setting Dominion’s return on equity (ROE), its annual profit on capital.  It also includes a potentially expensive approach to retiring Dominion’s huge bill for fuel, a solution that will cost consumers years and years of interest payments.

It is important to note the House committee didn’t kill the bill, but instead amended it and sent a clear message the poker game was just beginning.  It is too soon to assume Dominion’s plans are dashed.

Before the House acted, two of the House committee members asked the SCC to produce some cost estimates on Dominion’s proposal for a higher return on equity.  The SCC letter to the two delegates estimated the utility would collect another $2 billion from customers by 2040 under the higher ROE  calculation.

Since 2007, Virginia has been the only state that dictates to its regulatory commission a formula for profit based on the profit margins of peer utilities.  Current law allows the SCC to determine which peer utilities to use, which has produced authorized profit margins lower than the average of them all.  The proposed bill dictates the SCC must use them all.   Had that happened in the last review, it would have moved the profit margin from 9.35 percent up to 10.07 percent, the SCC reported.

Allowing the regulatory bodies of other states to dictate Virginia utility profit margins is really no different than allowing the California Air Resources Board to dictate Virginia’s auto emissions standards. In both cases the legislature has consciously decided to surrender Virginia autonomy out of state.

The House substitute that removed the return on equity change drew supporting testimony from Travis Voyles, Youngkin’s Acting Secretary of Natural and Historic Resources.  He cited the Governor’s 2022 Energy Plan document calling for increased SCC independence on ratemaking. It also called for greater caution before reliable and dispatchable power plants are closed.

One of Attorney General Jason Miyares’ (R) assistants, a litigator in the Consumer Counsel Division, also spoke up for the bill, calling it pro-consumer.  Neither elected official had any staff members testify during the meetings on the Senate version of the bill, but their advocacy now may put some pressure on Republicans in that body.

Credit for derailing the bill in the House is also due to a very aggressive lobbying effort by a coalition of liberal and environmental groups, backed by serious investments in direct mail and digital advertising.

The coalition also backed a pair of bills which add a strong restatement of SCC’s “sole discretion” to lower or raise base utility rates, despite all the handcuffs that now exist elsewhere in the law.   Gone would be the existing requirement that the utility has to earn excess profits in two review cycles before a rate cut can happen.

Those bills, House Bill 1604 and Senate Bill 1321 were amended into substitutes, but all the extra verbiage may not have weakened them.  The spokesmen for Youngkin and Miyares also endorsed the House version in committee Thursday.  The Senate version was approved 40-0 on February 2.  Dominion did not oppose them but was probably assuming its own bill (limiting SCC authority in other ways) would also pass.  That is now in doubt.

And there was yet another bill Youngkin’s endorsement helped push out of the committee, House Bill 2267, which restores SCC independence on a different aspect of ratemaking. The bill seeks to give the SCC control over when a utility uses a rate adjustment clause to pay for a project rather than base rates.

Current law encourages utilities to create stand-alone rate adjustment clauses (RACs) for specific purposes or projects, such as the offshore wind development.  RACs are outside of and additive to base rates and are charged separately, even if base rates might be sufficient to cover the project.  The bill patron complained in particular about the games Dominion has been playing with an on again, off again RAC to pay its regional carbon taxes.  Reducing the number of RACs was another element of Youngkin’s energy plan.

Like the ROE formula, the process of creating multiple RACs goes back to 2007 and its major revisions to Virginia’s regulatory approach.  The unanimous House committee vote for the bill to end the RAC racket is earthshaking in its implications, but as noted in this column and a previous one, this game is just starting.  Even if the Assembly reaches compromise on all these interlocking provisions, then Governor Youngkin gets his turn to propose amendments to a reconvened session in April.

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Will RGGI Tax Return to Your Dominion Bill?

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The on again, off again, direct tax on your Dominion Energy Virginia bills to pay for the Regional Greenhouse Gas Initiative (RGGI) may be on again.  If you feel like you are watching a shell game and just cannot find the pea, that is intentional.

In its sales pitch for its latest effort to create a more favorable regulatory environment, Dominion Energy Virginia is touting its proposal to take several of its existing stand-alone rate adjustment charges (RACs) and roll them into its base rates.   The claim is that will save ratepayers $350 million.

Don’t plan on spending that money.  Dominion will take it right back to cover the cost of all the carbon emissions allowances it continues to buy every quarter so it can operate its coal, natural gas, oil and biomass generators.  And, frankly, the move with the RACs really saves you nothing, but more on that in another column.

Virginia joined the RGGI interstate compact two years ago, with Dominion being the largest purchaser in the state of the mandatory emissions allowances.  The money collected by the carbon tax has now passed the half a billion dollar mark. Governor Glenn Youngkin (R) is working through the slow regulatory process to end Virginia’s participation as of the end of this year, when the current RGGI contract period ends.

As part of that regulatory process, another major public comment period is now open, lasting until March 31.  The portal to file comments electronically is here.  A first round of comments was heavily dominated by individuals or groups seeking to maintain the tax and arguing that RGGI has been extremely effective in reducing CO2 emissions that otherwise will melt the polar regions, flood Virginia up to Richmond and kill thousands in heat waves.

All indications are the current Air Pollution Control Board, with a majority appointed by Youngkin, is committed to repeal of the underlying regulation.  Nevertheless, a stronger showing of comments from individuals or groups skeptical that RGGI is doing anybody any good at all would be useful.  Polls indicate that when RGGI is understood to be just a carbon tax, voters don’t like it, including plenty of Democrats.

 Tactically, that case is easier to make when the RGGI tax shows up as an individual line item on the monthly bills for Dominion, the state’s dominant electric utility with 2.6 million customer accounts.  It was on their bills from September 2021 until September 2022, when Dominion got regulator permission to remove it and promised to cover the cost within its base rates instead.

 That didn’t mean customers would not pay it, as was explained here.  But they wouldn’t be able to find it on their bills. Late in 2022, Dominion quietly reversed course and filed with the State Corporation Commission seeking to reinstate the direct, separate charge.  Suddenly the utility wants to make the cost visible again.  The petition is actually just a continuation of the case it filed to remove the charge, a step the SCC just approved in June.

 The RGGI tax removed from bills in September was $2.39 for every 1,000 kilowatt hours of usage, a fixed amount for all classes of customers.  The petition now pending would increase that to $4.64 on every 1,000 kilowatt hours, much of the money to cover the period when no tax was collected.  Dominion reports that by the end of 2023 it will have spent about $640 million on RGGI allowances.  The earlier tax collected only $84 million.

 Dominion is not the only Virginia energy producer that needs to buy RGGI allowances to operate, and at current rates Virginia may have collected closer to $800 million in tax by the end of this year.  The way the RGGI auction works, producers in other states could be buying Virginia credits and vice versa.

The RGGI tax is likely to remain on Dominion customer bills for a period of time after Virginia leaves the compact, until the utility recovers its costs in full, including carrying charges.  It is, however, hardly a done deal that repeal will happen.  Advocates for RGGI are expected to sue if and when the Air Board decides to leave RGGI, arguing only the General Assembly can do that.

It will be a fascinating legal dispute. There has been something of a dance underway for years as both Democrats and Republicans have taken both sides of the argument as to whether it was a legislative or regulatory prerogative.

Virginia’s relationship with RGGI actually started under Governor Terry McAuliffe (D), who initiated a regulatory process to join the compact.  He first promised that the tax revenue from allowance sales would be returned to ratepayers.  That promise had disappeared by the time a final regulation was adopted under Governor Ralph Northam (D) in 2019.

But implementation of the regulation was blocked by legislative Republicans, then with sufficient votes to impose their will in budget language.  Democrats at the time complained of legislative overreach by the Republicans.  Democrats routinely voted no on GOP bills that would have required legislative approval to join RGGI, bills which passed and were then vetoed by McAuliffe and Northam.

 The 2019 election gave Democrats full control of both legislative houses, and they promptly passed legislation of their own on the issue.  The bill clearly dictated several changes to the regulation, which already existed, and directed how the revenue would be spent.  But – perhaps cognizant of their earlier position that the Republicans were overreaching – Democrats merely “authorized” the Northam Administration to proceed and join.

 Adding to the argument there was no mandate was a separate section of the law which opened with:

 If the Governor seeks to include the Commonwealth as a full participant in RGGI or another carbon trading program with an open auction of allowances, or if the Department implements the final carbon trading regulation as approved by the Board on April 19, 2019… (emphasis added.)

In Virginia, when the legislature is making its directions to the executive branch clear, the operative word is “shall,” never “if.”  The door was left open for a future Air Board to amend or repeal the action of the previous board, as is the normal course of business.

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