Governor Youngkin uses his veto pen to protect farmers and lower-skilled workers 

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There is a near-universal consensus among economists that increases in the minimum wage harm low-skilled workers the most. Originally designed to mimic racially discriminatory laws elsewhere, the minimum wage continues to be a means of picking certain classes and geographic locations over others. For example, the minimum wage benefits the high-cost-of-living areas in the Northeast over the lower-cost-of-living areas in the South. It also benefits the more educated over the less educated, and as I have noted before in the Jefferson Journal, increases in the minimum wage benefits the healthy over the handicapped. Governor Youngkin’s understanding of the dangers of government intervention in wages is best summarized in the Governor’s defense of his veto of HB1 and SB1 — which would have raised the minimum wage to $15 per hour. In his veto explanation, the Governor notesThe free market for salaries and wages works. It operates dynamically, responding to the nuances of varying economic conditions and regional differences. This wage mandate imperils market freedom and economic competitiveness.” Acknowledging the regional differences in impact, the Governor noted“Implementing a $15-per-hour wage mandate may not impact Northern Virginia, where economic conditions create a higher cost of living, but this approach is detrimental for small businesses across the rest of Virginia, especially in Southwest and Southside. A one-size-fits-all mandate ignores the vast economic and geographic differences and undermines the ability to adapt to regional cost-of-living differences and market dynamics.” Even without the Governor’s signature, Virginia’s minimum wage was set to be indexed to the consumer price index beginning in October of 2024. This will keep the earning power of the current minimum wage intact going forward — which is a much more reasonable approach and will prevent a wage shock that will surely have an immediate negative impact on Virginia’s most vulnerable workers. The Governor also vetoed a companion bill, HB157, that would have removed the long-standing exemption from the minimum wage for migrant and farm labor. Governor Youngkin clearly understands the truism written on many bumper stickers that “farmland lost, is farmland lost forever,” when he wrote in his veto explanation“The agricultural sector has thin margins, and this bill will significantly affect the industry. The data from the USDA Census of Agriculture and the Weldon Cooper Center for Public Policy further emphasize the importance of supporting our agriculture industry. The loss of five thousand farms and nearly five hundred thousand acres of farmland in the last five years has dramatically altered our economy and communities.” It is refreshing to have a Governor who understands and can articulate important economic principles so clearly. We applaud Governor Youngkin for his bold use of the veto in defense of those the General Assembly foolishly put at risk when they passed these bills. We are thankful for the Governor’s clear desire to see the Commonwealth move forward with continued job growth, a strong economy, and healthy farming communities.
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The Sausage Factory Produces a Digital Sales Tax with Little Explanation or Debate

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The Virginia General Assembly has now jumped into the brave new world of taxing the digital economy, but the sales tax provisions it adopted in the budget conference report Saturday are not the same ones that appeared in earlier budget versions. The cabal of tax raisers in the secret final negotiation got creative.

As the final budget negotiations began, the House of Delegates and Senate budgets differed on the key point of whether to exempt businesses from paying sales and use taxes on a host of digital services and goods. By extending the tax to business transactions, the Senate proposed to collect about $1 billion more for its spending plans.

The tax amendment both bodies approved Saturday agreed with the Senate position of extending the tax onto business transactions but did not include the full list of digital services that will now be taxable for individuals. The business taxpayers will only have to pay on “software application services.”

If this budget provision survives and becomes law effective July 1, beginning in 2025 individuals will also have to pay on “computer-related services, web hosting and design, data storage, and streaming services.” Those are on top of the various digital products that more closely parallel traditional tangible goods, such as a downloaded movie or book.

The final draft adds very consequential language about how to tax bundled transactions of both goods and services, paragraphs that appeared in no version during the regular Assembly process. And it loops in Virginia’s existing sales tax on communication services, which was the state’s first foray into taxing services when approved more than a decade ago.

Both are complicated provisions, substantive changes in tax policy, that were sprung on outsiders as a surprise when the conference report was revealed late Thursday. In the 48 hours before the vote, no full analysis emerged. During the brief floor debates, neither issue was a topic. The infamous law of unintended consequences will be in full play.

The new code section on bundled services can be found in the text at §58.1-603.3. Then the bundled transaction language is applied to the communications sales tax at §58.1-650. If a different tax rate would normally apply to different parts of the transaction, the higher of the two rates could be imposed on all of it.

For the average taxpayer, these details will be gibberish. They will simply pay more tax on scores or hundreds of annual purchases, and in most cases will never notice the sales tax buried on the bill. But for Virginia’s business community, the details will matter, and the coming process to develop guidelines at the Virginia Department of Taxation will be fraught with peril.

Only a half dozen or so other states already tax digital products and services, and their rules on how to treat business-to-business transactions vary widely.

Republican Governor Glenn Youngkin is strongly opposed to what just happened, and the sales tax base expansion is the main reason 14 Senate Republicans and 37 House Republicans voted nay on the conference report Saturday. Youngkin is correct in his assertion that once it is fully in effect, it costs taxpayers about $1.5 billion per year. It also increases the cost impact on taxpayers of the bills on his desk allowing an additional 1% sales tax bite for local school capital projects.

But by burying the issue in the budget, something Youngkin did to himself, he complicated his ability to simply veto the budget item outright. There have been legal arguments in the past over gubernatorial vetoes of budget language, and now such a veto would have to be accompanied by a detailed list of major spending reductions.

To repeat a line from two months ago: “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.”

In the brief floor debates, Republicans did point out that the sales tax is regressive, in that it takes a larger chunk out of the incomes of lower- and middle-income taxpayers. In recent years Democrats have postured that they want to make Virginia’s tax code less onerous to the poor, but the 2024 session will make our tax code more onerous. To steal a song line, a pocketful of mumbles, such are promises.

More telling was a colloquy Saturday between Delegate Lee Ware, R-Powhatan, and Delegate Vivian Watts, D-Fairfax. Ware has been chair of the House Finance Committee, Watts is now.  Ware’s questions illustrated how that committee has totally lost its authority and the big spenders of the House Appropriations and Senate Finance committees have grabbed all that power.

Until just a few years ago, the power to tax and spend were centered in different committees, at least on the House side. And even on the Senate side, the rules worked to keep taxing and spending bills separate. A standing rule specifically required that any bill on revenue issues had to clear committee and the full floor vote first — in effect deciding the revenue amounts before the spenders got their hands on it.

A line appeared on every session calendar, designating a deadline for “Committees responsible for revenue bills to complete work by midnight,” in advance of the budget bills. That line is now gone from the calendar and the spending foxes are in total command of the taxpaying chickens.  The separate revenue process is also undermined by this growing practice of embedding tax bills into the introduced budget.

Legislators are not ones to surrender power, as all the failed 2024 campaign finance reform efforts proved once again. The passage of this massive tax policy revision within the budget bill, with the final language only appearing in the final hours, cements the future practice. It is one more reason Virginia is increasingly considered less and less a stable, reliable place to do business.

Posted in Taxes, Technology | Comments Off on The Sausage Factory Produces a Digital Sales Tax with Little Explanation or Debate

Bait and Switch: Reform Reverts to Mo’ Money

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Some years back, I ran into a friend, a Virginia Education Association unit chair, outside the General Assembly building, there to lobby on behalf of a state-wide teacher salary increase.

The real problem, I noted, was that across-the-board salary increases didn’t reflect reality, providing, for example, the same increases for hard-to-find physics, chemistry, or special education teachers as it did for those teaching subjects with dozens of applicants for each position. That’s far from the incentive needed to drive qualified professionals into hard-to-staff fields or to schools where educators struggle to teach educationally underserved students.

“I agree with you,” came the reply in a sotto voce voice: “Just don’t tell my members I said that.”

He had whispered the silent part out loud. Across-the-board increases fail to serve students best, but they are important to unions looking to collect more dues. Paying teachers the same with a uniform salary schedule — regardless of skill, subject or instructional challenge – is a disincentive for quality teachers, those with a STEM background, or those with the heart and skill to work in challenged schools.

To be clear: Virginia teacher salaries have lagged many other states for decades. In an effort to catch up, state funding has jumped from $5,840 to $8,200 per student between 2020-2023, with the amount of the state share for teacher compensation increasing 17 percent between FY 2021 and FY 2024. That’s not chump change.

But other states have also increased teacher compensation, not all instructional positions are considered part of the Standards of Quality (and thus not funded), and Virginia’s opaque funding scheme makes it impossible to understand or track what and how state dollars are spent.

Last year’s report by the Joint Legislative Audit and Review Commission (JLARC) on the state’s K-12 funding structure should have been a jumping-off point for reforming Virginia’s Byzantine formula to reflect 21st century needs and demands, empower local school leaders, and redirect funding towards those students harder to teach. It still might become that.

But so far, the report has merely been weaponized by those seeking to spend more money broadly rather than reform the process and improve education while increasing the compensation of quality teachers responsible for teaching our children.

Virginia could start down the road towards both goals. Instead, advocates have focused on merely upping the ante on costs across the board. Legislation now on its way to Governor Glenn Youngkin (SB104 and HB187) requires the Governor, through FY2028, to propose spending the state share of funding necessary to bring teacher salaries up to the national average (but only the one defined by the teachers union). If approved, it demands cumulatively spending $1.5 billion more through FY2028, $664 million of which is to come from local taxes.

My colleague, Steve Haner, a 40-year veteran of General Assembly wars, notes “I can’t remember ever seeing anything like what I read in the bill,” observing “it basically orders the Governor how to propose his budget.”  The proposed budget has always outlined every Governor’s vision for Virginia, but letting a Governor, or at least this Governor, do that is a bridge too far for the Left.

Once in their hands, of course, the General Assembly can do what it wants, making this an unserious “feel good bill,” but one with clear downsides. Although Democratic leaders turned down Youngkin’s tax cuts claiming fear of a recession, no such fears exist on the spending side: should a recession come, they would still put Virginia on the hook for spending.

Nor is there any guarantee it will accomplish the goal: localities can spend additional state funds only if they spend the local match. Reliant on property and business gross receipts taxes, will they be willing … or even able … to finance the sudden surge of spending at the local level? For many, already struggling, probably not.

Additionally, the legislation raises the specter of a two-tiered system of education employees: more than 50,000 school system employees are not covered by the proposal. The full load of their 16 percent salary increases will be borne exclusively by local taxpayers, raising costs even higher on localities.

All of these issues, and more, were observed in the JLARC study, but studiously ignored by the bills: the SOQ formula does not adequately account for higher needs students, like special education and English language learners. Nor does it adequately account for local labor costs. Nor for the economies of scale unavailable to smaller school systems. None of that is addressed by an across-the-board increase, and may even exacerbate the problems.

Nor do the bills address what is lacking most in Virginia’s education formula: accountability.

As we’ve written elsewhere, while no one doubts the greater difficulty of educating low-income, highly mobile, Limited English Proficient or disabled students, our funding mechanisms fail to recognize that harder (and more expensive) task. Education dollars flow, not on the basis of students, but on the basis of staffing ratios, special program formulas, and the political savvy of individual school division and school leaders.

Worse, while principals and teachers are held accountable for their results, they have little control over how money is used at their school or in their classroom. How school dollars are spent is decided elsewhere, using complex budgets and allocations that leave educators, parents, and taxpayers in the dark.

This has left Virginia with the worst of all worlds – expenses that can’t be tracked or understood, funds that don’t reach the targeted populations, and an inflexibility both archaic and inefficient in a 21st Century world.

Governor Youngkin has put forth two proposals of long-term significance in this General Assembly session: one was to reform taxes by lowering the income tax and expanding the base of the sales tax. And his appointed Board of Education has endorsed finding a new formula by using the same kind of system used by 34 other states. They offered a balance of ideas both “conservative” and “liberal.”

For his trouble, the Left in the General Assembly has chosen only to consider that which will raise taxes and spending. It’s a dishonest approach to serious problems and leaves already skeptical taxpayers even more cynical. Virginians – especially students and teachers – deserve better.

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Virginia’s Tax Code: An Analog System in a Digital World

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To many, testifying before a government  committee conjures visions of the drama surrounding the McCarthyWatergate, or Zuckerberg hearings.

In Virginia, not so much. Faced with processing more than 2,600 bills in 60 days, legislative hearings are often more of a kabuki dance while backstage choreographers figure out the next steps. Speakers are frequently limited to one minute and sometimes committee chairs simply ask the roomful of citizen and professional lobbyists to stand in support or opposition to a bill. Deep and incisive content, it rarely is.

But they are ideal opportunities to test the waters, grab a headline, position your bill for the future, ask a question directly of a bill’s sponsor, or determine where your adversaries are coming from.

That was surely the case at a recent meeting where House of Delegates Finance Subcommittee #3 considered a dozen bills, including Governor Glenn Youngkin’s tax reform legislation.

Asked to testify, we rose with our 1996 vintage “Motorola personal communicator” in hand, pointing out that the outline of Virginia’s tax code had been around for decades before the phone was produced.  A quarter century later, our world and our economy has changed dramatically. The phone is unusable; the tax code survives, with band aids.

It’s for the world as it was, not for the world as it is becoming.  It’s an analog tax code in a digital world.

As we have pointed out, one result of our outdated tax structure is that in nine of the last ten years, more Virginians are leaving the state than have moved here.  Twenty-two other states have reformed their tax code by lowering tax rates, but Virginia has stayed put.  As my colleague Steve Haner notes, “Virginia need only stand still to become a higher tax state.”

The Commonwealth’s tax code needs modernization to recognize a changing economy – not only to ensure a stable stream of revenue but to incentivize job-producing companies to relocate here and entice more taxpayers to move here.

Without reform, Virginia faces declining future revenues from a narrowing base that will serve only to incentivize more high-income taxpayers to leave, not stay.

That is a dangerous space for any state in competition with other states.

The Finance subcommittee referred Youngkin’s bill to a special Joint Subcommittee on Tax Policy, as were all the other bills considered that afternoon. Fair enough.  Policy changes this big should be undertaken after informed study.

But based on the interactions of the subcommittee, the Left telegraphed that many see this as merely an opportunity to raise taxes, not reform them.

Some Democratic members of the subcommittee provided a poor imitation of the Wizard of Oz (“ignore that man behind the curtain!”), hoping to ignore the loss of taxpayers leaving the state.

Despite the Census figures, Delegate Kathy Tran derided the “so-called incredible out-migration” and Delegate Shelly Simonds ridiculed the out-migration argument as “a sky is falling” claim, asserting that Virginia “lagged in international migration into Virginia.”

In truth, we are winning in international migration.  U.S. Census data demonstrates that of Virginia’s population growth of 36,000, most of it – 28,000 – came from international immigrants. In the previous reporting period, in fact, Virginia’s growth of 26,000 came only because 37,000 migrants arrived.

Those facts underscore the Youngkin Administration’s point:  We are losing domestic migration to other states.  Ignoring facts does not make them go away.

Others suggested the phenomenon of out-migration was limited to Northern Virginia.  Yet, these are the same legislators who refer to the region as “the Bank of Northern Virginia” – an area whose wealth funds much of the state’s activity. Have they not considered that if the depositors leave in a “run on the bank” there will be less wealth to fund the state?

A bevy of legislators and social justice lobbyists tried hard to suggest that the real reason people were moving away was in search of lower tuition, more public transit and more spending on schools, and that Virginia needs to spend more on those.  They appear not to have asked the more than half million who left CaliforniaNew York, and Illinois last year — all states providing higher spending in those areas.  Perhaps residents left because their home state spent too much on those services for what they are getting, which would have resulted in … oh, right:  Higher taxes.

The most significant signals came from other legislation considered.  Delegate Elizabeth Bennett-Parker would reinstate the “death tax,” potentially crippling family-owned businesses currently exempt even from the federal estate tax. Delegate Phil Hernandez would add a new state income tax rate of 10 percent, putting Virginia in the company of California, New York, New Jersey, and four others – all of whom saw more people leaving their state than arriving.

Tellingly, the social justice lobbyists lined up to enthusiastically support Hernandez’ bill.  When Delegate Vivian Watts’ more modest proposal for a top rate of seven percent arose, the silence from the Left was deafening.

That sort of disrespect is a pity since Watts is not only Chair of the House Finance Committee but also the rare legislator who has already given substantial thought to the notion of tax reform.

If the Youngkin reform measure is to get a serious hearing in the joint tax subcommittee to which it has been referred, it is going to need legislators who understand the need for reform, even if there is not initial agreement on the solution.

It is going to need to hear data and analysis from folks like Dr. Bob McNab of Old Dominion University and Lee Shalk of the American Legislative Exchange Council.

And it is going to require an understanding that bills raising taxes or lowering taxes are not by themselves reform. They simply raise or lower taxes.

True reform comes when the tax code offers efficiency and equity, encourages residents to stay through predictable and reliably lower rates, and incentivizes economic growth and investment in the Commonwealth that create more jobs.

For all the concern of the social justice establishment for low or no-income Virginians, they regularly ignore the fact that driving taxpayers away leaves fewer taxpayers to bear the burden, that without businesses or investment, there are no jobs – and that the best poverty program is a job.

Posted in Taxes | Comments Off on Virginia’s Tax Code: An Analog System in a Digital World

Two Big Tax Hikes Still Alive at Assembly, But Governor’s Tax Cut Package Has Failed

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Governor Glenn Youngkin’s package of proposed tax changes is now stalled in both the Virginia Senate and the House of Delegates. A House subcommittee spiked it Feb. 5 and then dashed other bills imposing major tax increases on higher income Virginians.

Of course, anything is possible until the General Assembly adjourns in March, but it seems only two major tax increase proposals are still viable in the 2024 Assembly.

The first would allow all Virginia cities and counties to add an additional 1% to the sales and use tax within their borders for school spending if a local referendum approves it. & Current law has allowed that in eight counties and one city, but this bill would expand that to the entire state. It is advancing in both chambers.

The second, not usually discussed as a tax hike, is the proposal for a new state trust fund to provide weekly payments to employees taking family or medical leave from work. The bill calls for a payroll tax to fund the benefits but does not specify a tax rate or indicate just how much of an employee’s wage would be taxed. The Virginia Employment Commission based its fiscal estimates on a tax of just under 1%.

Bills creating this new state-paid family and medical leave benefit program are now in the budget committees of both chambers, and they have until February 18 to reveal their budget amendments. This program could easily become a $1-2 billion annual entitlement. The underlying federal Family and Medical Leave Act (FMLA) provides no income replacement, just up to 12 weeks of job protection for covered absences.

The Republican governor’s tax package and most of the other proposals are being continued to the 2025 session and may be taken up for study in the interim.  Secretary of Finance Stephen Cummings was in the meeting before the vote on Monday, arguing that Virginia’s economic competitiveness is eroding, and tax policy is driving some Virginians to relocate to other states.

The bill was also supported in testimony by the Thomas Jefferson Institute for Public Policy, the National Federation of Independent Business, and the Virginia Manufacturers Association. An economist from Old Dominion University backed up the numbers on population loss and Americans for Tax Reform detailed the list of other states cutting taxes.   Virginia need only stand still to become a higher tax state.

The governor’s bill made slight cuts in the existing income tax rates, still leaving the top tax rate at more than 5% — far higher than the states seeing population booms. On the other hand, his bill would also have increased the sales and use tax by another 1%.  And it proposed to expand the items subject to the sales and use tax to include more digital goods and services, things now not taxed.

The income tax changes produced a big tax cut of greater benefit to those with greater taxable income. The sales tax rate increase and the expanded tax base took much of that benefit back. The net result, according to its fiscal impact statement, was an overall tax cut of about $460 million in the next two-year budget.

In the governor’s proposed budget, he assumed the tax cuts would pass. Killing the Youngkin tax bills means the House and Senate budget writers now have $460 million more to spend in their proposed budgets.

Another House subcommittee, meeting a week earlier, had already dispatched a bill to eliminate the local personal property tax on cars. That was another priority of the governor’s but not one he included in his proposed budget.

Democratic members of the House committee that carried over the income and sales tax bill Monday were dismissive of Cummings’ claims that Virginia’s economy is suffering and even disputed the evidence that Virginia is suffering a net loss of population. They stood firmly on the same ideological ground when, earlier in the same meeting, Republicans warned that bills to increase the income tax on higher incomes would also encourage migration.

One of those bills, which drew a parade of endorsements from progressive organizations, proposed a new tax bracket for filers with taxable incomes above $1 million. The new 10% tax rate would bring in a steady $1.5 to $2 billion more per year, according to its fiscal estimate.   The patron and others argued that few, if any taxpayers would flee to lower tax states despite recent evidence that since the pandemic, high income families increasingly move to lower tax states

The second bill, introduced by House Finance Committee Chair Vivian Watts (D-Fairfax), proposed a more modest 7% top tax rate, but at a lower income trigger of $600,000.  She indicated she was trying to match the top tax bracket for federal taxes.  Despite it affecting more taxpayers, with the lower rate, it produced about half the revenue of the other bill, $500 to $700 million per year.

Perhaps because of the lower rate, the same progressive organizations that enthusiastically testified for the 10% bill were absent from the podium when Watts’ 7% bill was discussed. Only the Virginia Education Association spoke for both. Not interested in the 7% bill were the Commonwealth Institute for Fiscal Analysis, Voices for Virginia’s Children, the Virginia Poverty Law Center, and others.

It did not matter in the end. The two income tax hike bills, both of which included provisions to direct the extra revenue to popular programs (child tax credits, family caregiver tax credits, local schools), suffered the same fate as the governor’s.  They were carried over until 2025.

So was another progressive priority that received the same host of endorsements during the meeting, a bill to reinstate Virginia’s estate tax.  It was to be applied only to estates also subject to the federal tax, which means no tax on estates smaller than $13.6 million.  Above that, a 16% tax rate would apply, and was estimated to produce $60 million in added revenue.  As was the pattern with the income tax increases, the bill sought to dictate how the funds would be spent.

The House subcommittee even punted on expanding Virginia’s existing earned income tax credit (EITC) to allow a state credit equal to 20% of the allowed federal credit. The bill would have made the credit “refundable,” meaning beneficiaries with little or no actual tax owed would get a check from the state instead. The impact estimate on that was only about $30 million per year.

So, the progressive wave that swept in Democratic control of the Assembly may produce few tax ripples, except for a possible FMLA payroll tax which would be significant. But it was sufficient to drown the governor’s aspirations for a third session with at least some positive tax developments.

Posted in Government Reform | Comments Off on Two Big Tax Hikes Still Alive at Assembly, But Governor’s Tax Cut Package Has Failed