Northam Tax Hikes Squeeze Virginia Businesses and Individuals

Posted on May 4, 2021 by Stephen D. Haner
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With Virginia’s fiscal year now three-quarters complete, and basically one year since the depths of the COVID-19 recession, state tax revenues are soaring. Despite reports that the boom results from the economic rebound, it remains clear that changes in tax policy under Governor Ralph Northam are the major driver.

Usually the state financial reports compare results year over year. Instead, compare the recent data to four years ago. Four years ago it was Governor Terry McAuliffe coming to the end of his term as President Donald Trump began work on what would be his legacy tax bill, the Tax Cuts and Jobs Act of 2017.

In the four years since the March 2017 report, the state’s overall general fund collections to date are up 26%, almost three times the basic inflation rate for the same period (under 9%.) That is an extra $3.35 billion compared to four years ago at the same point. That is just the General Fund, ignoring all the other ways the state taxes us, such as last year’s gasoline tax increases.

About half of the added General Fund revenue came from individual income tax withholding, up 17% or more than $1.5 billion. It is the largest revenue category, so you would expect that to lead the pack. But it leads only in dollars, not in percentage growth.

Corporate income taxes grew 68 percent over four years ago. The revenue category that includes the state’s tax on real estate transactions recorded at courthouses was up 72%. State policy didn’t spark the real estate price boom behind soaring recordation taxes. But intentional state policy has increased the corporate income tax harvest by two-thirds, to $315 million more than four years ago.

Following right behind those categories is estimated income tax payments, which come from individuals with self-employment or partnership income, or with income from investments or retirement accounts. Those receipts are 51% higher in the first nine months of this fiscal year compared to four years ago. That increase also reflects intentional policy decisions.

Rounding out the top categories, the sales and use tax revenue is up 23% over four years ago. That is largely due to the General Assembly’s decision to impose sales tax on remote purchases, arguably correct policy but still a policy decision.

Both the corporate income tax and individual estimated tax receipts have been boosted by the state’s decision to tax a substantial amount of the federal Payroll Protection Program business rescue funds. The General Assembly’s decision to allow a deduction for the first $100,000 in such revenue still left billions subject to Virginia tax.
The bulk of the higher taxes on business income can be traced to the decisions made in the wake of the Tax Cuts and Jobs Act. The 2019 General Assembly went along with Northam’s recommendations and conformed to the various ways TCJA eliminated deductions and tax preferences. It refused to match the federal reductions on tax rates. The same tax rates were applied to higher levels of taxable income, producing more tax.

By allowing only a small increase in the standard deduction for individuals, a windfall tax was also imposed on many of them. For the richest, the coup de grace was General Assembly approval of a state-level wealth tax, a form of Pease Limitation to cap deductions.

The state is not done with corporate taxes. The General Assembly has ordered Virginia corporations which are part of affiliated groups to prepare mock tax returns for 2019 using an approach called unitary combined reporting. The biggest targets are companies which operate in multiple states. The theory is that taxing each entity separately (as Virginia does) allows the firms to pay fewer taxes, so they should be forced to file a unified return.

The review of those sample returns may encourage the General Assembly to make the combined returns mandatory.

In November of 2017, just after Northam’s election, the Commonwealth Institute for Fiscal Analysis published an article with a list of complaints about Virginia’s tax system as it stood. Read it and the parallels will strike you. It advocated on-line sales taxes, increases in corporate tax collections, new state rules on employee classification, and a clear retreat from Virginia’s former practice of confirming to the IRS.

Imposing unitary combined reporting on the largest corporate taxpayers will check off another box from that list. Virginia’s recent spurt of state revenue growth did not come mainly from economic growth or federal stimulus spending. Taxes have been consciously and substantially raised following a progressive roadmap.

A version of this commentary originally appeared on May 1, 2021 in The Roanoke Times. Steve Haner is Senior Fellow for the Thomas Jefferson Institute for Public Policy. He may be reached at steve@thomasjeffersoninst.org.

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Public Sector Collective Bargaining Could Impose Massive New Costs

Posted on April 20, 2021 by F. Vincent Vernuccio
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Instead of compensation increases for public employees, taxpayer relief or COVID safety, Virginia local governments are estimating six- and seven-figure costs just to implement the process of collective bargaining.

While local governments in Virginia debate whether to allow public sector collective bargaining, many are already pointing to the high cost of implementing the process.

Fairfax County is forecasting a combined $1.6 million for administrative costs surrounding collective bargaining for both the county and the Fairfax school district, just as a start.

Loudoun County proposed almost $1 million in their planned FY 2022 budget just for increased staffing and overhead. However, with a $2 million funding shortfall some are starting to rethink the proposed expenditure.

The city of Alexandria estimates administrative costs alone will cost between $500,000 and $1 million per year. This amount varies depending on the scope of bargaining and how many individual unions they need to negotiate with.

Since there is no statewide infrastructure set up, each local government will be on its own.

If a Virginia local government passes a resolution allowing collective bargaining, it will need to decide if it’s going to create a labor board or use an appointed labor relations administrator (with appropriate staff). The labor board is necessary to administer union elections, resolve impasses during contract negotiations and adjudicate violations of the ordinance or of the collective bargaining agreement, known as unfair labor practices. All of this will come at a costs.

It needs to be stressed this is not money that will be passed on to the city or county’s workers. These are simply the costs for infrastructure, lawyers and others to administer collective bargaining.

While it is difficult to do an apples-to-apples comparison since most public sector labor board functions are done at a state level outside of Virginia, looking at other state budgets may give an indication of the costs associated with these boards. For smaller localities these costs in the long term may be lower, but all localities allowing collective bargaining will still need to provide many of the same functions as the statewide boards. Additionally, the boards in other states are dealing, for the most part, with established unions. This means they don’t have to administer elections or negotiate first contracts with every new unit, as will need to be done for localities allowing collective bargaining for the first time here in Virginia.

A few examples of labor board costs in other states (and New York City) that run public sector union elections and handle unfair labor practice charges and grievances for public employees are below:

There is no doubt the administrative costs of collective bargaining will be high and the cost to create this infrastructure is not insignificant. When considering allowing public sector bargaining, local elected officials should weigh these costs against how the money could otherwise be spent. Is the cost of bargaining worth potential increases in pay or benefits for public employees, money dedicated to COVID responses and reopening, or worth the cost to taxpayers?

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Fuel Tax and Caps Detailed in TCI Model Rule, Now Open for Public Comment

Posted on April 14, 2021 by Stephen D. Haner
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Read the governing document for the Transportation and Climate Initiative and it becomes clear there is more going on than just an effort to reduce motor fuel use with a combination of taxes and shrinking caps. That may really be a secondary goal.

How would TCI regulate and change the motor fuel business in Virginia, should the state decide to join in 2022? What are the initial carbon taxes likely to be? Some details can be found in a draft model rule published March 1 and now subject to an open comment period through May 7.

You can find the 153-page model rule here. There is an open portal for any public comments you wish to provide, and you can also find summaries of the comments filed to date. Certainly, all fuel wholesalers and retailers and businesses dependent on transportation need to study this document and the regulatory structure it creates.

The Rhode Island and Connecticut legislatures are currently considering legislation on TCI. Massachusetts intends to join with its governor claiming he already has authority to sign the interstate compact. If Virginia joins in 2022, that is still in time for it to be in on the first carbon dioxide emissions allowance auction in 2023.

Asserting that lower income urban communities have suffered the most damage from the use of fossil fuels, a premise treated as a given, the model rule insists that each state must commit “no less than 35 percent of the proceeds from the auction of allowances to ensure that overburdened and underserved communities benefit equitably from clean transportation projects and programs.”

How to spend the funds would be determined by a state advisory body “with a majority of members being representatives of overburdened and underserved communities or populations.” In Connecticut low-income advocates have already increased that in their pending bill to 50% of the proceeds which must be focused on that segment of its population.

More than 30 pages of the model rule focus on another aspect of this ignored so far: Carbon offsets. Extensive use of offsets would mean that the goal of 30 percent or more reduction of fossil fuel use is even less likely to come to pass. By planting trees, capturing animal-emitted methane, or engaging in other “offset projects that have reduced or avoided atmospheric loading of CO2 equivalent or sequestered carbon,” the firms can be awarded “offset allowances” to continue selling fuel. Expect the cost of those offsets to also end up in the consumer price.

The heavy focus on addressing alleged inequities makes TCI a major income transfer mechanism, as most of the TCI carbon taxes will be paid by business entities and people with long commutes. The opportunity for offsets provides a direct subsidy to the burgeoning and highly-lucrative industry of claimed environmental interventions that do not really reduce the use of CO2 fuels on the region’s highways. Are these the real goals of this proposal?

Virginia Governor Ralph Northam’s decision to not press the issue in the 2021 General Assembly gives the state’s voters a chance to weigh in during the November election. The 2021 General Assembly did move forward on creating possible ways to spend the TCI carbon tax revenue the state would reap. Advocates will likely point to them as uses for the tax money to come.

Legislators approved a state-funded subsidy program for the purchase of new or used electric vehicles. House Bill 1979 calls for the subsidies to begin January 1, $2,500 for any EV buyer but that increases to $4,500 for lower income buyers. The Assembly, however, provided no funding in the final budget despite a fiscal impact prediction of almost $70 million by 2026. The TCI carbon taxes are a natural source to fill that gap.

Another measure signed by the Governor creates a different state fund to finance electric school buses, again with no funding or funding source identified.

In the discussions underway in New England, a minimal future tax amount is being discussed, perhaps about 5 cents per gallon. But previous data provided by the advocates themselves, analyses by outside economists, and the model rule itself all point to much higher figures.

The model rule, copying other systems that use allowance auctions to set a commodity price, sets floor and ceiling prices. An emissions containment reserve (ECR) sets the floor price and would reduce the number of allowances for sale if the auction price falls below $6.50 per ton of carbon dioxide in 2023 (about 6 cents per gallon). That target then rises to $12.30 (12 cents per gallon) by 2032.

The ceiling price, a cost containment reserve (CCR), provides more allowances for auction if the bid prices go too high. The published CCR price starts at $12 per ton (about 12 cents per gallon) in 2023 and rises to $30.16 per ton in 2032. So under that document the likely starting tax in 2023 will be 6-12 cents per gallon, rising to 12 to 30 cents by 2032.

So the likely first year carbon tax will be between 6 and 12 cents per gallon in the first year, and between 12 and 30 cents nine years later in 2032.

This would be on top of Virginia’s existing gasoline tax, which goes to 33.8 cents per gallon on July 1 of this year, then even higher in 2022. It is worth noting that in his recent infrastructure proposal, one thing President Joseph Biden did not do is propose raising the federal fuel taxes, unchanged since 1993. Perhaps that was to leave states room for this approach, but it might also reflect voter antipathy to higher fuel taxes in general.

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May Day Brings Virginia’s Labor Revolution

Posted on March 31, 2021 by Stephen D. Haner
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Four major changes in Virginia’s labor laws delayed at the beginning of the COVID-19 recession will all take effect May 1. All were approved by the 2020 General Assembly once Democrats controlled both legislative chambers and then delayed at the 2020 Veto Session. May Day 2021 is almost here.

Minimum Wage. The 31 percent increase in the state’s minimum wage, from $7.25 to $9.50 per hour, will have the broadest impact. House Bill 395 and Senate Bill 7 also raised the minimum wage to $11 per hour eight months later, on January 1, 2022, and to $12 per hour a year later on January 1, 2023.

The bills outline two further increases, which only go into effect if the Assembly votes for them again: To $13.50 per hour in 2025 and then the often-touted $15 per hour in 2026 (by which time that will be considered inadequate.) From there the rate will automatically adjust upward annually for inflation, a consideration never offered to taxpayers when inflation raises their taxes.

Public Employee Unions. House Bill 582 and Senate Bill 939 permit cities, counties and towns to enter into collective bargaining agreements with their employees. The first step in each local governing unit will be adoption of its own ordinance governing the process, with almost no limitations or guidance provided under the 2020 legislation.

The Thomas Jefferson Institute published a report on Alexandria’s proposed ordinance and local legal advice to seek to limit the scope of the coming agreements. You can read the draft ordinance here. Mainstream media so far is clueless and silent on all this, but an education is coming. This is going to be a major political issue over the next few months and years, with the labor organizers probably far more prepared behind the scenes than the local government officials are at this point.

An increase in the minimum wage is just about money. Unionizing local workforces will be about politics, power, and accountability along with piles and piles of money. It is a true sea change for Virginia. The next step will be similar bargaining agreements with state employees, not yet legal.

Prevailing Wages. House Bill 833 and Senate Bill 8, which require payment of “prevailing wages” as defined by the federal Davis-Bacon Act by contractors doing business with certain government bodies, unless the contracts are for less than $250,000. The Department of Labor and Industry will be responsible for setting and reviewing prevailing wage rates, in coordination with the federal authorities.

An employer found to have violated this faces a potential criminal penalty with jail time. This is a mandatory rule for state-related work. Local governing bodies have the option to impose this by ordinance, setting up another Herculean political struggle in various cities and counties.

Project Labor Agreements. House Bill 358 and Senate Bill 182 allow (but do not require) state and local bodies to require project labor agreements with organized labor when contracting for construction, manufacture, maintenance, or operation of public works projects. The legislation reversed a prohibition on writing this requirement into state bids.

Most of these changes would already be in effect but for the 2020 COVID recession. Nobody expects these changes to lower the cost of government services or government contracts, for either construction projects or services. How much costs will go up, time will tell.

Whatever political clout organized labor now enjoys in the Commonwealth these will greatly add to it, especially in all local elections (with their lower turnout). With that added influence, other elements of the labor agenda will become within reach. Congress may impose some of them on Virginia before the General Assembly meets again.

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Renewable Energy? Here’s the Transmission Bottleneck!

Posted on March 31, 2021 by Jim Bacon
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You want more renewable energy? You’re going to need more high-voltage transmission lines to move intermittent wind and solar power around the country to balance fluctuating supply and demand. And you’d better get started. Transmission planning and construction involves long lead times, typically between seven and ten years.

“The window may be closing to develop the needed transmission expansion to enable the optimization of clean energy, meet state clean energy objectives, and other ‘voluntary’ demand for low-cost renewable energy,” summarizes a new study, “How Transmission Planning & Cost Allocation Processes Are Inhibiting Wind & Solar Development in SPP, MISO, & PJM.”

That’s not coming from some fossil fuel-funded global warming skeptic. The report was underwritten by the American Council on Renewable Energy (ACORE) in coordination with the American Clean Power Association and the Solar Energy Industries Association.

Those groups are sending up a warning flare to alert Americans to a critical bottleneck to renewable development. There is a major disconnect between the goals of numerous states, such as Virginia, to achieve zero-carbon electric grids by 2050 and the ability of the entities overseeing the electric transmission grid.

“The availability of backbone transmission capacity (generally 345 kV and above) is essential to the efficient and least cost deployment of U.S. solar and wind resources,” states the study. Better planning is needed at the Regional Transmission Organization (RTO) level — Virginia belongs to the PJM regional organization — “to identify the geographic areas where untapped renewable energy resources exist and develop optimal and cost-efficient paths for transmission infrastructure development to deliver low-cost renewable resources to load centers.”

Solar and wind power are coming, the report states. Fifteen states and territories have adopted mandates to achieve 100% carbon-free renewable energy. Electric utilities and corporate buyers are making their own commitments as well. Combined with continued cost declines for wind and solar, renewable energy “will be the principle source of electric generation in the future.”

Here’s the catch: “Yet, existing transmission planning processes have been insufficient in preparing the electric grid for this future resource mix.”

PJM and other regional transmission organizations have focused on meeting the current reliability and economic needs of the electric grid. “These processes were not designed to identify the necessary transmission expansion to enable future renewable energy development.” asserts the report. “The needed backbone transmission development has been essentially stalled.”

Prospective renewable-power generators are confronted with high network-upgrade costs to connect with the transmission system — sometimes in the hundreds of millions of dollars. Bottlenecks and delays as long as four years have prevented hundreds of renewable energy projects from reaching commercial operation, states the report. “There were 834 GW of proposed generators waiting in interconnection queues nationwide at the end of 2019, almost 90 percent of which were renewable and storage resources.”

Bacon’s bottom line: Governor Ralph Northam and the General Assembly have mandated a 100% zero-carbon energy grid by 2050. Little attention has been given ensuring the reliability of an electric grid 100% built upon intermittent power sources, especially during extreme weather events like the one Texas experienced earlier this year. Massive deployment of battery storage might be one potential solution, albeit an incredibly expensive one. Another alternative is importing electricity from other states and regions where different weather patterns prevail. But that, as the study makes clear, will require significant upgrades to the transmission grid.

Building and upgrading transmission lines is invariably unpopular. The planning and approval process can drag on for years. Will that capacity exist when Virginia needs it? Does anyone even know what transmission-grid upgrades will be needed on Virginia soil and be subject to Virginia regulatory approvals?

The electric generating and transmission system has been described as the world’s most complicated machine. Right now, the stooges in the General Assembly are in charge of maintaining important pieces of that machine. Unlike the Three Stooges in this clip, who knew they were lame brains, Virginia legislators see themselves as all knowing, all wise and all competent. What could go wrong?

A version of this commentary originally appeared on March 26, 2021 in the online Bacon’s Rebellion.

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