Don’t Let Partisanship Stop Serious Tax Reform

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The American linguist Yogi Berra once said of a New York City restaurant: “Nobody goes there anymore. It’s too crowded.”

Overcrowding, however, isn’t what motivates a move to a state (or from a state). Those decisions are inspired by robust economic activity, jobs for residents, and a pathway for each generation to do better than their parents did. People move for a job, for higher pay, for lower cost of living, or for a better education.

Like our forebears, American still go where opportunity takes them. Migration is a reflection of the opportunities available in a state’s economy.

This is the biggest reason behind Governor Glenn Youngkin’s 2023 tax proposal. For nine of the last ten years, Virginia’s net migration has been negative. During that time, more people have left the state – 134,500 — than have moved here.

Worse, those from other states are going elsewhere: In the most recent Census estimates for the year ending July 1, 2023 North Carolina picked up more than 97,000 residents. Florida, more than 194,000. Texas has been the beneficiary of nearly 187,000 expats from the rest of the country and nearby Tennessee’s population swelled by more than 63,000.

Regionally, Virginia is losing the competition for residents, too. Of the five states bordering the Commonwealth, four of them saw a combined net inflow of more than 173,000 residents. People “vote” with their feet.

Admittedly, we might have done worse. Illinois saw a net 84,000 Illinoisans move out.  A net 338,000 Californians left the Golden State. More than 200,000 New Yorkers decided they couldn’t make it there, so they’d make it somewhere else.

A common factor: The states Americans are leaving are among those with the highest state income tax rates; the states Americans are flocking to are among those with the lowest.

What is particularly dangerous for high tax states is that high income earners, who pay the most in taxes to support government services, are the ones leaving CaliforniaNew YorkIllinois and elsewhere. The fact that many are not only wealthy but young poses another set of challenges.

California alone lost $29.1 billion in adjusted gross income from population migration in 2021, losing nearly 40,000 residents with graduate or professional degrees. The early signs are starting to be seen in Virginia, too, where the state lost nearly 7,000 net residents with bachelor’s degrees – with median lifetime earnings of $2.8 million — and another 3,400 with master’s degrees (lifetime earnings: $3.2 million). That’s a lot of brain power (and tax revenue) lost.

Youngkin is working to avoid that by making Virginia attractive through a reduced tax burden … along with recognizing the Commonwealth’s current revenue system doesn’t reflect a changed economy. A revenue system designed when Fairfax County was one of the largest dairy counties in the state doesn’t reflect today’s reality, when 70 percent of the world’s internet traffic passes through Fairfax and Loudoun Counties.

That changing economy was acknowledged by the liberal Commonwealth Institute for Fiscal Analysis in 2017 when it noted “Virginia’s current revenue system isn’t keeping up with changes and growth in the overall economy, and that’s putting the future prosperity of families and businesses at risk.”

The report it issued stated that Virginians’ spending on goods had declined from 37.3 percent in 2000 to 31.7 percent fifteen years later, and concluded “Virginia needs to modernize its tax code by adding more services to the sales tax base and passing legislation to improve sales tax collections connected to online and digital purchases.”

While the underlying assumption was correct, the goal of The Commonwealth Institute’s paper was to figure out ways to get more money from Virginia’s taxpayers. Youngkin’s is a different agenda: balance out Virginia’s revenues, reflect modern markets, and provide tax relief to make the Old Dominion more attractive in the new economy.

The proposal he submitted to the General Assembly is a mix of triangulated ideas: Reduce individual income tax rates by 12 percent across the board, increase the sales tax rate by less than one percentage point and expand the sales tax base by including “new economy products” like streaming and software, and expand the Earned Income Tax Credit to 25 percent of the federal credit.

Together, he notes, these proposals will put an extra $141 in the pocket of a single parent earning $35,000 with one child; $243 for a married couple earning $75,000 with children.

By proposing a mix of tax base expansion with tax rate reduction, even Richmond Times-Dispatch columnist Jeff Shapiro, never confused for a MAGA Republican, acknowledges “Youngkin is breaking the mold.”

But Senate Democrats instantly attacked the proposal as “absolutely disgraceful” and “a slap in the face of our most vulnerable individuals.” This comes from the same worthies who resisted increasing Virginia’s standard deduction (which ended the practice of taxing those earning as little $4,000 a year), oppose calls to end the car tax (which hurts low-income Virginians the most), and were quick to put Virginia on the road to higher taxes last time they controlled the General Assembly. One might be forgiven for concluding their concern for the poor had more to do with politics than with poverty.

Perhaps Senate Democrats view blocking the tax bill as an extension of their “Blue Wall” against all things Youngkin. But while Virginia’s economy remains slowly growing, visionary leadership demands looking not at where we are but at where we want to be – and how we should get there.

My colleague, Steve Haner, has correctly been critical of the failure to properly lay the foundation for a robust reform of this nature, but there is still time to engage in serious conversation and get the ball rolling. Stimulating economic growth and encouraging migration of new residents and businesses is long overdue. The General Assembly should not waste this opportunity to begin the work.

Posted in State Government, Taxes | Comments Off on Don’t Let Partisanship Stop Serious Tax Reform

Governor Youngkin Joins the “No Car Tax” Movement

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During Governor Glenn Youngkin’s budget submission to the General Assembly, he called for the elimination of the single most hated tax in the Commonwealth — the car tax.

He is right, the car tax is very unpopular. Back in 1997, Jim Gilmore made the elimination of the car tax the center of his long-shot campaign for Governor and it propelled him to an easy victory. A recent survey by the Coalition for Motorist Rights found that 80.5 percent of Virginians are in favor of eliminating the car tax, with 61 percent strongly supporting its elimination.

It is not surprising that there were 32 candidates for state office (some from both parties) in favor of eliminating the car tax. One wonders what the election outcomes might have been had Governor Youngkin made eliminating this tax a part of his election strategy to keep the House and flip the Senate. Clearly, it was a missed opportunity.

Unfortunately, replacing needed revenue remains the biggest impediment to its elimination and is the reason the car tax remains today.  While Governor Gilmore passed a phase-out of the car tax in 1998, due to an economic downturn, the General Assembly limited the car tax cut to 30 percent (which still makes it the highest in the country). While Virginia has an overall tax burden that ranks 23rd in collections per capita according to the Tax Foundation, it has the highest “car tax” rate in the country, according to a recent study by WalletHub. Car tax rates vary across Virginia from $3.40 per $100 in Henrico County to $5.33 per $100 in Alexandria. The rates are highest in Northern Virginia and lowest in Southwest Virginia.

The economic case for repeal of the car tax is pretty simple, as it is easily one of the most regressive taxes levied by states. Since the assessed value of cars tends to decline at a slower rate than income, particularly for older vehicles, the burden of the car tax falls more heavily on lower-income individuals who rely on older vehicles for transportation. In Virginia, with a significant rural population and a large number of households grappling with economic hardship, this tax hits hard.

The car tax discourages vehicle ownership, potentially hindering economic mobility and job opportunities for those reliant on personal transportation — especially in rural areas where public transportation is sparse.  Repeal of the car tax should also appeal to the Green Agenda community, as high car taxes are a disincentive to replacing old gas-guzzling, carbon-producing vehicles with newer more energy-efficient cars.

The debate surrounding Virginia’s car tax reflects a broader national conversation about the efficacy and fairness of different tax systems. Governor Youngkin jumped into the middle of that debate today when he pushed for dramatic reductions in income taxes as a part of his budget, offset in part by increases in various sales and use taxes. Again, the economic case for this shift is sound as outlined in the Tax Foundation’s study, “Not All Taxes are Created Equal” which noted that “sales taxes are less distortive than capital and income taxes because they do not affect decisions to work or invest, and when appropriately structured, they do not lead to tax pyramiding or changes in consumption.”

Because the car tax repeal was not actually a part of Governor Youngkin’s budget proposal today (it was just a mention), movement on this proposal will require a supportive General Assembly to move the legislation outside of his budget. It will also require that the tax proposals Governor Youngkin did include in his budget (lowering income taxes across the board while modernizing the tax code to shift to greater reliance on sales and use taxes) get passed. Of course, it would also help if we had revenue in excess of expenses, as we have had the last two years.

The Thomas Jefferson Institute has a long history on how to eliminate the car tax and wrote a paper twenty years ago, Car Tax Cuts: How Should Localities be Reimbursed? that made an attempt to tackle the hardest challenge of its elimination — namely, how to make localities whole.  More broadly, the Thomas Jefferson Institute has repeatedly called for a wholesale restructuring of the Commonwealth’s tax code, not dissimilar to what was proposed by Governor Youngkin today.  We believe Governor Youngkin is on solid footing and look forward to supporting this effort as more details become available.

The greater danger, of course, is that the new Democrat majorities in the General Assembly will limit any income tax reductions the Governor requested, support the increases in sales and use taxes he proposed, and outspend the Governor in all of his new spending requests, and add their own spending on top of his proposals. Governor Youngkin will need to sharpen his veto pen to avoid this scenario. There can be no allowance for increased sales and use taxes if there isn’t an offsetting reduction in income taxes as he proposed!

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Successful Tax Reform Requires Allies and a Path Through the Mines

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According to the Richmond Times-Dispatch, Governor Glenn Youngkin’s administration had its first formal discussion with Virginia’s local governments about eliminating their car tax collections two days after he announced it publicly.

The General Assembly convenes Wednesday and if there is a plan to replace the $2.8 billion in local government revenue raised by that tax source, it has not surfaced. Voters truly detest the local levy, mainly because it is one of the few taxes everybody pays by check or with a credit card, but at this point, it is safe to assume the idea is dead in the water.

The Republican governor and his staff also did little or no advance work before he made his other big announcements in December, two tax policy changes that he used as revenue assumptions for his proposed two-year budget. He wants to cut income tax rates across the board, but in partial compensation, he proposed to both raise the state sales and use tax rate and expand that tax to cover more digital services.

By including them in the budget, he gave Democrats the opportunity to kill them and increase spending on popular government programs, programs with strong constituencies. The dilemma the governor will face in the final budget showdown in March is obvious to everybody who has a cursory understanding of how the budget process works.

If there is a white paper explaining the details or rationale behind the effort to shift the burden from income to consumption taxes, it has not surfaced. If the governor assembled a political coalition of stakeholders willing to join him in selling the idea to the public and to legislators, there is no sign of that either.

Youngkin’s more extensive tax cut package for the 2023 General Assembly also lacked a public sales pitch in the months before the session or an organized campaign of support from outside groups to pressure the Assembly. For the most part it failed. It is discouraging that no lessons were learned.

The ostensible reason for seeking to lower individual income tax rates is to improve Virginia’s competitive position, and many surrounding states do have a lower top individual rate than Virginia’s. Others have no income tax at all. If there is objective evidence or testimony that Virginia’s 5.75% top rate is an impediment and reducing that to 5.1% would make a measurable difference, now is the time to make the case.

Does the Virginia Chamber of Commerce agree this would boost our economy? How about the Virginia Manufacturing Association or the Virginia Economic Developers Association? They were not recruited as active allies in 2023 either even though a cut in the corporation income tax was also on the table that session. The heavy lift of tax reform must be a team effort.

In the absence of that political messaging push, a common tactic when prior governors tackled major tax changes, the media coverage of Youngkin’s ideas is being dominated by critics. The Commonwealth Institute for Fiscal Analysis, with its liberal bent, immediately pointed out that the income tax cut for lower-income households might be wiped out by the higher sales taxes they would pay. The annoying thing about that is they are probably correct.

The plan drew praise from the Wall Street Journal’s editorial page. Nice, but that will not move a single vote in any of the key legislative committees about to carve this proposal into carrion.

For the past few years, the focus of the Thomas Jefferson Institute has been on broad-based state tax reform efforts that avoided conflict between economic classes. Increasing the standard deduction, for example, has a uniform utility.  Every $1,000 increase saves most households the same $58. In a similar manner, indexing the various exemptions and tax brackets to inflation does not have much impact on whether the tax code is progressive or regressive.

As a tax policy goal, reducing reliance on income taxes and shifting the burden to consumption taxes has credibility. It is a common recommendation from groups like the Tax Foundation, which reportedly had at least some advance notice this idea might be coming. Expanding Virginia’s sales tax to cover more digital activity (your Netflix or Fitbit subscription for example) is also logical in this changing economy. Given it produces more money for the government, this is one element of the plan likely to pass, but on its own.

The income tax reduction could just as easily be achieved by moving the brackets up from the bottom or even removing the tax on the under-$3,000 and under-$5,000 brackets. With that approach, again, every taxpayer, rich, middle-class, or minimum-wage earner, sees the same reduction. The class warfare whining dissipates. But that leaves the top rate of 5.75% in place.

And increasing Virginia’s basic sales tax rate is also problematic. In many parts of the state, it is already 6%, 6.3% or even 7%. In some places there are regional sales tax components dedicated to transportation. More and more counties add a penny for local-option school construction. Many localities also add major sales taxes on restaurant food and hotel bills. To promote Youngkin’s idea as merely an increase from 4.3 to 5.2% is misleading.

As to eliminating the car tax, it was a pipe dream in 1997 and the result then – even when an election result had endorsed it — was that the tax remained in place. Some of our state tax dollars were shifted to localities to merely pretend taxes had been reduced. Nothing more substantive than that is likely to happen as this movie plays again 27 years later.

Posted in Taxes | Comments Off on Successful Tax Reform Requires Allies and a Path Through the Mines

The Case for WMATA ‘Bankruptcy’

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Yesterday, the Washington Metropolitan Area Transit Authority (WMATA) warned that without substantially greater subsidies from DC, Maryland, and Virginia, they would be facing a $750 million annual shortfall that would require draconian cuts in services, including closing 10 stations, cutting 67 bus lines, and laying off 2,000 employees.  They would also freeze salaries, raise fares and parking fees, reduce bus and train frequency, and close all stations at 10 p.m.

The threat of such cuts was meant to be a bargaining chip for more funding rather than a true plan to save WMATA, as any such cuts would just accelerate, not slow, the demise of WMATA.  It is time for Governor Youngkin and the two other regional funders, all of whom are facing reduced federal aid in their own budgets, to seriously consider forcing WMATA into bankruptcy.  And if WMATA’s unique structure as a bi-state compact agency makes it ineligible for Chapter 9 bankruptcy — a complete restructuring and rethinking of WMATA along a similar line as Chapter 9 bankruptcy are in order.

The truth is that bankruptcy is not a new idea.  In 2016, WMATA hired one of the nation’s top bankruptcy lawyers, Kevyn D. Orr, to advise the agency on fixing its troubled finances.  At the time, WMATA had a $1.8 billion operating deficit (a loss of over 200 percent of operating revenue) with $917 million in long-term debt (not counting pension and other benefit liabilities).  The hope was that Mr. Orr’s expertise, short of bankruptcy, would help WMATA restructure its debt, take a tougher line on labor negotiations, and wrest more money from the three Washington-area funding jurisdictions.  Sadly, whatever reforms were implemented have had little, if any, impact on WMATA’s financial situation today.

Even before the pandemic, WMATA continued to run massive operating deficits.  In 2019, the year before the pandemic, WMATA’s deficit had ballooned to 291 percent of operating revenue and revenue from passengers had dropped to 25.1 percent of total revenue.  Ridership had dropped in seven of the eight years before the pandemic.  Then came Covid-19.

WMATA rail ridership dropped from 505,903 average daily rail entries in 2019 to a low of 121,544 in 2021.  While WMATA brags that 2023 rail ridership more than doubled from the pandemic low, it is still only 289,151 daily entries now.  For perspective, passenger revenue (both rail and busses) now only accounts for 4.8 percent of total revenue of $364 million with expenses of $3.7 billion.  Annual operating losses are now $3.3 billion or 916 percent of operating revenue.  Debt has risen to $3 billion, again, before counting pension and benefit liabilities.  This is not just unsustainable — it is a bankruptcy-level failure.

Of course, operating revenue is only a small part of WMATA’s finances.  The vast majority of WMATA revenue comes from state and local subsidies.  The best way to understand this is to look at a chart in WMATA’s planning document.

As you can see, WMATA’s operations have always relied on a growing base of government subsidies — subsidies that grew substantially during the pandemic (yellow Federal Relief on the above chart, plus the grey base).  More interesting, is that expenses barely went down during the pandemic, despite ridership collapsing.  Worse, as the chart shows, due to the historic inflation of the last two years, labor costs (which under union contracts rise with inflation and currently make up 48 percent of WMATA expenses), grew by 20 percent over the last two years.  This growth in wages will drive up expenses, as seen in the chart, and will carry forward indefinitely.

While Governor Youngkin and others have urged the Office of Personnel Management to issue a “return to work” order for Federal employees in hopes of driving ridership back up, as this chart shows, even if ridership returns to prepandemic levels, 75 percent of WMATA’s deficit will remain.  In fact, you could double prepandemic ridership and WMATA would still be in financial deficit.  Ridership was trending down before the pandemic, and realistically, the world today is far different.  The odds of ridership hitting 2019 levels are very low.  If you drew a trend line from the prior 8 years of pre-pandemic ridership, the 2023 level is only slightly lower than would have been expected absent the pandemic.  It is also important to know that the miles of rail in WMATA have increased with the addition of phase two of the Silver Line, meaning ridership per station or per mile of track has tanked.  WMATA has yet to learn they can’t build themselves out of financial collapse.

Setting aside the growing issues of fare jumpingcrimebroken 7000-series train cars, and resigning Inspector Generals — the issues with WMATA are far deeper than can be explained by those headline-grabbing problems.  The Washington Metropolitan Area Transit Authority is a failing institution in need of a bankruptcy filing if possible, or, at a minimum a total restructuring.

At a minimum,

  1. WMATA must find authority to restructure its debts and negotiate new labor contracts which account for almost half of all their expenses;
  2. WMATA must shed its old management and start over with new leadership;
  3. WMATA must free up resources for greater innovation and restructuring in line with the post-pandemic transportation needs of the region (more buses, less trains?);
  4. WMATA must halt all expansion plans, like the tunnel to Georgetown and the Blue Loop that were designed for a different time.
  5. WMATA must take time to value its assets and ensure it is maximizing income from both operating and non-operating income.
  6. Any investments in expensive and unreliable electric buses and charging stations must be put on hold until the system can sustain the buses it has (it is a curious fact that the most recent study of Metrorail showed that its carbon-reducing benefits were outweighed substantially by the carbon expended to run the system. Metro stopped producing this statistic after the pandemic, as I am sure Metro’s carbon reduction estimates have crashed with reduced ridership).

Governor Youngkin, with his background in private equity, surely understands the power of bankruptcy as a means of saving important businesses.  Let’s hope he applies this wisdom to WMATA before it is too late.

Posted in Transportation | Comments Off on The Case for WMATA ‘Bankruptcy’

Who Paid for the Abortion Ads? Green Energy

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You may think the recent Virginia election was about abortion, but follow the money. The wave of advertising on that issue was largely bankrolled by the renewable energy industry. This election was about energy and delivered to those special interests the legislature they needed to stay in control of that agenda.

Dominion Energy Virginia increased its donations to Virginia state politicians six-fold in just four years. The other major donors in the energy regulation arena, Clean Virginia Fund, and its founder, have done much the same. They are donating five times more in the 2023 election cycle than they did in the similar 2019 cycle.

The two political behemoths have donated about $23 million between them, compared to about $4 million four years ago. The totals really won’t be known until the final reports are due in the coming weeks. Throw in another $2 million from the League of Conservation Voters for good measure. Then the spouse of the Clean Virginia founder directly donated another $4.5 million in her own name.

While Dominion and Clean Virginia often disagree over regulatory issues, on many issues they are closely aligned. If any serious effort is put forward now to repeal or amend the Virginia Clean Economy Act, both will lobby against ending the net-zero targets. Both are keen for electric vehicles and will work to protect that mandate. Both strongly support Dominion’s offshore wind development and rapidly growing fleet of solar farms.

Virginia’s election laws are so porous, that the real spending amount may never be clear. In the last weekend, another round of mailings in favor of various candidates appeared from an advocacy group called Power for Tomorrow. It sent similar mailings out just before the June primary.

Reporting at that time noted that Dominion had provided funding for Power for Tomorrow, which basically is praising candidates who had voted for Dominion’s 2023 regulatory bill, which had its good and bad points. There is every reason to believe it is acting at Dominion’s behest and no question these mailers are intended to promote the candidates.

The Power for Tomorrow mailer appeared just one day after the State Corporation Commission implemented part of that bill, allowing Dominion to convert two years of unpaid fuel bills into a bond, and then make its ratepayers pay off the bond over 7 years.

Depending on the final interest rates on the deal, that will cost Virginians hundreds of millions of dollars in interest they otherwise would not owe. It removes a pesky $1.3 billion debt from the company’s balance sheet and replaces it with a quick infusion of free cash flow.

Keep those sums in mind as it helps explain what you will read next.

The Virginia Public Access Project’s most recent compilation shows Dominion’s 2022-23 total for donations at $12.8 million. Four years ago, when the House of Delegates and Virginia Senate were last both on the line, the total donated was a mere $2 million and change.

Clean Virginia was founded with the express mission of weaning Virginia politicians off of Dominion money. Its issue advocacy has included campaign finance reform, but it is also a lobbying group pushing wind, solar, and battery electricity generation and fighting to end fossil fuels. On the election reform front, it has merely started a bidding war for influence.

In this cycle, its total donations are up to $10 million and change. Four years ago, it donated less than $400,000. But its principal donor and leader is wealthy Charlottesville hedge fund founder Michael Bills, and in 2019 he mainly gave his money directly to candidates. Between them, the total was about $2 million, so the figure four years later is five times that amount.

This is equally astounding: four years ago, the largest sum Dominion gave to any individual candidate was $82,500. This time around, so far, 15 candidates have received more than $250,000, and the highest amount donated is almost $700,000. That went to an unopposed Democrat who may now be the new Speaker of the House. Clean Virginia’s largest donations exceed $600,000, including to two Democrats who won two of the most watched Senate seats.

Dominion’s money is fairly evenly divided between Republicans and Democrats. Clean Virginia over its years of giving has provided 98% to Democrats. So Dominion did fund some of the Republican messaging in response to the abortion attacks. In doing so, however, it cemented it relationship with those Republicans. Usually the Democrat in those cases was getting major Clean Virginia money so that nobody would vote against the joint agenda items. All bets were covered.

Four years ago, there was no Virginia Clean Economy Act, no mandatory renewable energy percentages, and no mandate to stop the sale of new gasoline vehicles. Four years ago, the $9.8 billion (or more) wind project was still in the planning stages and hadn’t filed for regulatory approval. Now the massive project is underway, one of the few in the U.S. still on track entirely due to its favorable regulatory environment. Those favorable rules were provided by these very same legislators.

A $23 million investment in keeping the legislature compliant and obedient makes perfect sense once you realize the billions and billions of dollars the transition to wind, solar, and battery will extract from Virginia’s residential and business ratepayers over the next decade. Dominion and Clean Virginia both understand return on investment.

This is the biggest mistake offshore wind developers in New Jersey and New York made, the ones that in recent weeks have backed out of various offshore wind deals. They failed to take the additional step of buying themselves a friendly legislature to write the procurement rules. Of course, those states both have campaign contribution limits in their laws, an inconvenience not faced by Dominion Energy or Clean Virginia.

A similar version of this was published before the election on Bacon’s Rebellion, but in light of the results it takes on additional importance.

Posted in Energy, Environment, State Government | Comments Off on Who Paid for the Abortion Ads? Green Energy