Calling It What It Is: A $450 Million Windfall Tax Hike!

Posted on August 27, 2019 by matt ohern
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Virginia state government ended Fiscal Year 2019 awash in cash largely for one reason: A $466 million tax increase that fell on about 30 percent of individual taxpayers, caused by conforming to the new federal tax law without any corresponding tax reform.
That represents almost 60 percent of the $797 million end-of-year cash balance announced by Governor Ralph Northam on August 20. The $466 million in higher individual taxes was offset by an $11 million reduction in business income taxes as a result of the federal Tax Cuts and Jobs Act, leaving a net tax hike of $455 million. The 2019 General Assembly took steps to blunt the 2018 tax hike on business, but not on individuals.
The tax conformity windfall amount was calculated by outside consultant Ernst & Young LLP, Secretary of Finance Aubrey Layne told a meeting of the combined legislative money committees Tuesday. That is not the same firm hired last year to project the state tax impact of the federal TCJA. Layne said he wanted an independent look at the results.
The E&Y report is the final 23 pages of Layne’s slide presentation to the committees, here.
The first company, Chainbridge Software, LLC, estimated (here) the first-year tax hike from Virginia adopting the new federal rules – with no policy changes to compensate – would be $594 million, 28 percent higher than E&Y found. The 2019 General Assembly made no tax policy changes for individual taxpayers for 2018 and during the session Layne continued to express confidence in those estimates.
The smaller result measured by Ernst & Young is based on an actual comparison of 2017 and 2018 tax returns, with an effort to tease out the higher revenue due to the tax changes from the higher revenue due to income growth or asset sales. It only looked at returns filed by July 1, so individual and business returns delayed or extended for later filing are not included. Any windfall taxes paid by them will show up in fiscal year 2020.
The report indicates individuals overall paid $466 million more, which was reduced by an $11 million drop in corporate income tax revenue. But E&Y had only 155 tax returns from corporate income tax entities to analyze, compared to 1,284 returns from 2017. That indicates how many corporations take advantage of the opportunity to extend filing. Individual taxpayers who extend also tend to be higher income.
The gap between Chainbridge and E&Y might shrink with full data. The 200,000 late individual returns and 1,100 late corporate returns need to be wrapped in to draw firm conclusions, and those conclusions will matter because this windfall is not just a one-time thing. The General Assembly has promised to track and segregate the on-going higher taxes caused by conformity into future years in a Taxpayer Relief Fund and use it for future tax reform efforts.
As predicted by Chainbridge, the additional state revenue mainly resulted from almost 800,000 tax returns switching to the standard deduction at the federal level, and thus making the same switch at the state level. Far more people made that change than predicted by Chainbridge, Layne reported. While the federal standard deduction rose, the state’s stayed the same, resulting in higher tax.

The net effect of all those decisions to switch was an additional $7.5 billion subjected to state tax (E&Y Table 7). That accounted for almost $400 million of the tax hike revenue. The rest came from other tax changes people couldn’t avoid, including limits on business loss deductions and a change in the inflation index being used. Another change with a big impact was the new $10,000 deduction cap on state and local taxes for those who continued to itemize.
The General Assembly did make tax policy changes for individuals for tax year 2019, now underway. It increased the standard deduction starting this year, from $6,000 to $9,000 for a couple. For 2019, unlike in 2018, if you do take the itemized deductions at the state level you are not limited by the $10,000 deduction cap on state and local taxes. Those two steps will give back much, but not all, of the ongoing windfall revenue.
The General Assembly also restored a wealth tax provision for 2019, the Pease Limitation, which had been a part of federal law, but which was eliminated by the TCJA. The details on how the state will impose that with the IRS no longer doing so need to be worked out. It is possible the Northam Administration will count that revenue against the TCJA windfall, reducing future relief.
For this year, an election year of course, all Virginia taxpayers get a check. Most will get $110 per individual or $220 per couple. It will deplete $431 million of the $466 million in higher individual taxes for that year. It has no relationship to the actual TCJA impact. Many taxpayers saw no change from conformity, some saw taxes go down, and most who did pay more paid far more than $220.
More than 1.9 million of the 3.4 million resident returns examined showed no tax change due to TCJA. Of the rest, 417,000 showed that their state tax was reduced and only slightly over one million paid all the higher taxes. (E&Y Table A-3) In no single income category of that group, from negative taxable income to taxable income over $1 million, does the $220 check cancel the tax increase.
E&Y found that for 3,000 returns above $1 million the tax hike averaged $12,316 and for 12,000 returns between $500,000 and $1 million it averaged $3,082. The Chainbridge report had also predicted that the impact of conformity to TCJA would fall on only a small percentage of total taxpayers, and many would see state tax reductions or no change. The General Assembly knew that.
For most Virginians the election eve check is neither refund nor rebate, but an income transfer payment from the one million or so paying the entire windfall.
The E&Y report, at least the portion released, does not include any forward-looking estimates for the out years based on this new review of the results. Chainbridge had looked out six years and estimated $4.6 billion in higher taxes over that period. Other than in the first two years, the legislative action had not counteracted most of that. The E&Y report would point to a lower estimate.
If, as expected, the 2019 taxpayer checks total $431 million, that will leave only about $25 million to be held in the Taxpayer Relief Fund established by the 2019 conformity legislation and the state budget. The state budget revenue estimates consciously excluded any conformity windfall projection for either year, but rule one in Richmond is that no General Assembly can bind the actions of the next one. The survival of the Taxpayer Relief Fund is not guaranteed.
A version of this commentary originally appeared in the August 21 edition of the online Bacon’s Rebellion.

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For Prepared Citizenship, Civics Education is a Must

Posted on August 27, 2019 by matt ohern
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By George Nethercutt and James Dillard
Education is usually at the top of the list of national priorities, especially for American
Presidential candidates. If one looks at the mission statement for many schools and school districts, it usually includes statements about producing or preparing students for active citizenship. The U.S. should make civics education a priority.
Civics education encompasses the study of U.S. history, government, economics and foreign policy. It can include other basic topics as well, but civic learning has been largely absent from educational discussions for years, though it’s now staging a “comeback.” Some state legislatures have passed state laws requiring high school graduates to pass the U.S. Immigration test (The one that applicants for American citizenship must pass.) This rote memory test, however is no substitute for a class in Civics. While naturalized citizens must pass a civics test, natural born citizens need not do so. Other state requirements for the study of Civics have passed, too. Virginia offers a course in Civics and Economics at the middle school level. Virginia and US Government is required in high school and a passing grade is required to receive a diploma.
One Millennial recently stated, “Why must I learn about Civics? It won’t help me get a job.”
That’s why STEM subjects (science, technology, economics and math) have received such attention in our schools, as they’re the focus of most high school education efforts: job possibilities. While the Millennial may be correct, there are plenty of CEOs and other employers though, who are of a generation that believes civic learning is important to every citizen. How
America was established is not well understood by many Americans—only 26 percent of Americans in a recent national poll could name the three branches of government, let alone know what they do. Nor can most Americans understand how to navigate the federal government. Of the 1,000 Americans who took the Immigration test via Newsweek a few years ago, most flunked.
Even though the Internet is prominent and one can find answers to most fundamental questions through Google, civic learning, including a basic understanding of the Declaration of Independence and the U.S. Constitution, is increasingly important since it’s essential to good citizenship. America has the longest surviving constitution in history—only amended 27 times.
While many countries change their constitutions when leaders change, America has not. Instead we made the Constitution sacrosanct and a part of all legislation passed by Congress. The law requires that each bill expressly assert it is constitutionality, affirming the importance of the Constitution.
Neither the Declaration nor the Constitution are lengthy and can be read quickly. Every American citizen should read them, and should also attend the swearing-in ceremony of new citizens in a U.S. District Court held periodically. Observers will see how important American citizenship is to successful applicants.
Knowing about Civics makes us all better Americans. As state legislatures focus more on civic learning, Virginia has been a leader. The General Assembly established the legislative Commission on Civic Education whose mission is to prepare students to be successful participants in the democratic process. The State Board of Education has recognized the importance of civic education in their “Profile of a Virginia Graduate” which includes civic learning and critical thinking skills. In addition, the Board has added the third “C”, civic readiness to their goals of college and career readiness.
How the three branches of government operate at the three levels of government is essential knowledge required to become an effective citizen. Understanding how our system operates can empower the individual to make a significant difference in the decision-making process of governing. This is particularly true at the state and local level.
A quality education encompasses civic learning as well as other specialties, such as a STEM education. A truly educated citizen will know America’s roots. A knowledge of our history and its application to today’s national problems is essential to avoid making the mistakes of the past.
Our education system should have as a primary obligations instruction in what the U.S. Government does and how government at all levels works, with an emphasis on how to be active and successful participants in our democratic system. America’s education system is stronger if civic learning for all is a priority.

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George Nethercutt is a former Member of Congress from Washington state, serving for ten years on the House Appropriations Committee.  He is Founder and Chair of the Nethercutt Civics Foundation, which fosters an understanding of government and public policies in young adults.

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James H. Dillard is a former member of the Virginia House of Delegates, where he chaired the House Education Committee, and a former member of the Virginia State Board of Education. He is Founder and member of the Virginia Commission on Civics Education
 
 

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Crash and Burn: How Misguided Policies Ruin Lives

Posted on August 27, 2019 by matt ohern
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Give Richmond educators credit for brutal honesty. A presentation of the school system’s five-year plan surfaced some devastating data: Only one in ten Richmond high school students is ready for college and a career, according to College Board criteria. If it’s any comfort, that number is up from 9% in the 2017-18 school year.
“Finally we can demonstrate with empirical evidence that RPS has failed our students and our families and our city,” said Board member Jonathan Young, as quoted by the Richmond Times-Dispatch. That sentiment was echoed by Superintendent Jason Kamras. “It’s devastating. We, the adults, have failed our kids for years.”
Indeed, the educational system has not only failed Richmond’s predominantly African-American students, it has shepherded many young people into college programs from which they subsequently dropped out. Left unsaid in the analysis is that college drop-outs are typically saddled with thousands of dollars in student debt, which many cannot repay. In other words, the coupling of high expectations (every student has a right to attend college) with abysmal performance is ruining thousands of lives.
Statewide, 44% of students meet the benchmarks:

For 10th-grade students, the college and career readiness benchmark for reading and writing is 430 and 480 for math. It’s 30 points higher in both subjects for 11-graders. Students who meet those standards have a 75% chance of earning a C or better in an introductory college class, according to the College Board’s description of the benchmark.

Only three in four Richmond students who start 9th grade end up graduating — 16 percentage points below the state average, the RTD reminds us. This data has been widely reported.
Here is what is not well known. While only 10% of Richmond high school students are college ready, 52% from the graduating class (or about 40%) end up going to college anyway. Once they get to college, many never finish. Reports the RTD:

Roughly 2 in 5 of the RPS alumni who go on to college earned a year’s worth of college credit within two years of their high school graduation, according to federal data for the graduating class of 2015 for the city’s five comprehensive high schools.
Only 14% of that year’s total class earned at least 30 college credits, the National Student Clearinghouse reported.

Not surprisingly, most academically ill-prepared students crash and burn. Statistics don’t convey the personal tragedy. Some 25 years ago, I used to live next door to a guy who dropped out of college (I don’t know whether it was due to lack of academic preparation or the difficulty of paying the bills.) He worked as a check-out clerk at Blockbuster. I judge that his life really sucked by the fact that he frequently took out his frustrations on his girlfriend. One time her screams were so bad I nearly called the police. (Looking back, I probably should have. But that was long before the #metoo era, and I was more worried then about being tagged a racist busybody than a misogynist.) I felt bad for him. He was a decent enough fellow most of the time, whose life had hit a dead end. I’m sure he felt like a failure. I’m sure he felt tormented.
The fact is, not everybody is cut out for college. But some are equipped for manual trades and occupations, from brick masonry to nursing home aides, that pay a living wage. I don’t have the numbers, but my sense is that public schools have systematically under-invested in education of the trades — out of a misguided sense that is “racist” to shunt minorities off the college-prep track. Well, this isn’t the 1950s anymore. It’s time to acknowledge the damage done by funneling students onto college/career paths where they have little hope of succeeding. Surely we can encourage those who have the potential to succeed in college while providing career alternatives for those who don’t.
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On Immigration, Following the Data Where It Leads

Posted on August 27, 2019 by matt ohern
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By Don Rippert
Debate: The debate on immigration in America continues to rage. People who hold right-of-center political beliefs seem to think that the U.S. immigration laws should be vigorously enforced. There may be some “wiggle room” on the right. For example, some conservatives believe there should be exceptions to deportation for those illegally in the United States so long as they have been here a fairly long time, paid taxes, stayed out of legal trouble, etc. Without commenting on the reasonableness of the conservative position, it is understandable.
The position held by Americans with left-of-center political beliefs is hard to fathom. While few liberals will openly say they are in favor of “open borders” the sum total of their beliefs seems to indicate that “open borders” is exactly what they seek.
This issue is important for Virginia because some areas of Virginia have very low numbers of foreign born residents, while other areas have very high numbers of foreign-born residents. For example, the 2010 Census found that 12.9% of people living in America were foreign born. Virginia had 11.4% of its residents recorded as being foreign born. However, Arlington County (Virginia’s 6th most populous county) had a foreign born percentage of 28% in 2000. Social services are affected by immigration. The cost of teaching English as a second language in public schools is directly impacted by the percentage of residents born in foreign (non English speaking) countries.
Author’s apology in advance – this is a long post. By far the longest I have ever published. However, this is a complex topic with both liberals and conservatives more than willing to misrepresent the data. I saw no way to properly handle the topic with brevity.
Just the facts, ma’am. The discussion about immigration is bedeviled by accidentally erroneous and willfully inaccurate “facts.” Unfortunately, some of the best information still comes from the 2010 Census making that data almost a decade out of date. But facts are facts, and even nine-year-old facts provide insight. For the purposes of this discussion, foreign-born residents of the United States shall include naturalized U.S. citizens, legal permanent residents, temporary migrants, humanitarian migrants and unauthorized migrants.
The percentage of foreign born residents of the U.S. has been skyrocketing in recent decades. Going back to 1850 the percentage of foreign born residents had roughly equal twin peaks in 1890 and 1910 (at 14.75%). Starting in 1920 the percentage of foreign-born residents declined precipitously. That percentage went down every decade until it hit a low point of 4.7% in 1970. Since 1970 the percentage has increased every decade reaching 12.9% in 2010. The trend has apparently continued through the 2010s with Pew Research estimating 13.6% foreign born residents as of 2017. The notion that the United States has been “shutting its doors to immigrants” is quite simply preposterous.
Most immigrants are in the country legally. Pew Research estimates that 77% of foreign born residents are in the country legally: 45% (20.7 million) naturalized citizens, 27% (12.3 million) lawful permanent residents, 5% (2.2 million) temporary lawful residents and 23% (10.5 million) unauthorized immigrants. No reasonable person believes we should deport naturalized citizens or lawful permanent residents. The discussion needs to be about the number of temporary visas to issue, the number of legal immigrants to allow and what to do with those here illegally.
The distribution of foreign born residents varies widely by geography. California checks in with 27.2% foreign born while West Virginia records a low of 1.2%. The variation is extreme throughout Virginia as well. Manassas Park City recorded 31.6% between 2009 – 2013 while Highland County showed just 0.3% over the same period. Ninety-seven of Virginia’s municipalities had 5% or fewer foreign born, 25 had between 5.1% and 10%, five between 10.1% and 20%, seven between 20.1% and 30% and 1 over 30%. Every jurisdiction over 20% is in Northern Virginia. Richmond averages about 10%.
The economic impact of foreign born residents in the United States is hard to measure and politically contentious. Generally, direct social benefits are provided only to lawful permanent residents or naturalized citizens. However, children born to unauthorized immigrants in the U.S. automatically become US citizens. Should the social costs associated with these children count as a cost of immigration? Before you answer, remember that the vast majority of countries in the world, including all of Europe, do not grant birthright citizenship. One thing seems true – more immigrant-headed households (51%) use some form of welfare than native-born households (30%). Even this seemingly straightforward statistic is the subject of endless debate. I am using the Politifact analysis as a “referee.”
One thing seems sure – educating foreign-born children is more expensive than educating native born children. Under U.S. law, all students, regardless of immigration status, are entitled to a free, public education. However the cost of providing this education to foreign-born students is somewhat debated. Left-leaning organizations tend to address the matter on a qualitative / humanitarian basis. For example: “We’re one of the wealthiest countries in the world,” said Jorge Baron, of the Northwest Immigrant Rights Project. “We should be able to handle this if we focus our energy and some resources and we make sure that kids are treated well, and treated the way we, in America, believe kids should be treated.” Right-wing organizations are more quantitative. Fox News (in 2014) estimated the cost of educating unauthorized / undocumented immigrant children was $760 million. Anti-immigration organization FAIR estimates the total costs of Limited English Proficiency (LEP) programs at $59.8 billion with Virginia recording a $1.3B cost. While I am suspicious of these FAIR numbers, I am equally convinced that educating the children of immigrants (especially including the citizenship birthright children) is expensive.
The influx of migrant children is increasing. EdWeek published some interesting statistics on migrant children:

  • Historically, most undocumented immigrants entering the U.S. were adult males in search of employment.  More recently, most people crossing the U.S.-Mexico border are “unaccompanied minors” and families with children, many of them who turn themselves into officials to make asylum claims.
  • In fiscal year 2018, 107,000 families with children and 50,000 unaccompanied minors crossed the border, a 42% and 22% increase respectively, over the previous year.
  • The federal Office of Refugee Resettlement served fewer than 8,000 children annually from fiscal year 2003 to fiscal year 2012, the first nine years they tracked the numbers. In fiscal 2018 alone, the agency served nearly 50,000 children.

In fiscal year 2018, 107,000 families with children and 50,000 unaccompanied minors crossed the border, a 42% and 22% increase respectively, over the previous year.
The federal Office of Refugee Resettlement served fewer than 8,000 children annually from fiscal year 2003 to fiscal year 2012, the first nine years they tracked the numbers. In fiscal 2018 alone, the agency served nearly 50,000 children.
“So far in fiscal year 2019, we’ve had four record-breaking months of apprehensions of family units at the southern border,” says Sarah Pierce, a policy analyst with the Migration Policy Institute.
The wrap: Leftists and “Never Trump” Republicans seem tireless in criticizing Donald Trump’s efforts to control immigration. Terms like “know-nothing” and “nativist” are tossed with impunity. These same people seem to forget that Barack Obama was once known as “the deporter in chief” and, as of 2016, had deported more people than any other president. Trump, on the other hand, has slowed the level of deportations from his predecessor. Meanwhile, against the backdrop of continually escalating immigration, sanctuary cities and anti-ICE protests continue to gain momentum. What is it that the left and Never Trumpers want (other than to criticize Trump)? If it’s open borders then say so! Just remember to explain how you intend to pay for those open borders.
A version of this Commentary was originally published in the August 23, 2019 edition of the online Bacon’s Rebellion.
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Real Medicare Doesn’t Match Political Promises

Posted on August 13, 2019 by matt ohern
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We had been on Medicare exactly two days when our first premium increase notice arrived, a nice healthy 5% jump.
This isn’t the Medicare Heaven that I keep hearing about from the presidential contenders. I want that Medicare, the idyllic one described by Sens. Bernie Sanders and Elizabeth Warren. Surely their “Medicare for All” wouldn’t raise my premiums on Day Two.
Technically, the price increase is for the Medicare supplemental policy provided by Anthem, not the government-run Part B. But those price increases will come, as well. The transition process from the family coverage provided by my wife’s former employer to Medicare has been highly instructive. It is a transition we are going through simultaneously because we share a birthday.
The “Medicare for All” I’ve heard discussed in recent Democratic presidential debates shows little relationship to what we’ve observed so far. Clearly the promises they are making are for an entirely different health care payment process, simply using the Medicare brand name because of its popularity.
The real Medicare is not free, not at all. The real Medicare has plenty of deductibles and co-pays, unless you go out and spend even more money for a supplemental policy to cover most (but not all) of those. In fact, you pay for three things in most cases — Part B medical coverage, Part D prescription coverage plus that supplemental.
And while we’ve had no claims yet, we understand there are plenty of quirks and some things that are not covered, often making Medicare just as frustrating as the private insurance world.
There was another rude shock of reality. My primary care physician is moving to a high-cost concierge practice, so I’m considering options. My wife’s current provider was quick to say “no” to taking me on, because that practice is not taking any new Medicare patients. Other insurance plans are welcome, however.
Providers are rejecting Medicare? Again, that flies in the face of claims that once all Americans move to that same government-directed system, all will be well. It will not.
Not long after somebody said, “You can keep your plan, you can keep your doctor,” my wife learned she would not be keeping her plan. Suddenly we faced a $5,600 annual deductible and needed to start a health savings account. Health “insurance” only kicked in for the big things. Even a trip to the emergency room was suddenly “out of pocket.”
The problem is not how we pay for health care. The problem is how much we pay, and how much gets siphoned off in nonproductive ways. The Democratic complaints about the drug and insurance company profits, protected by top-gun lobbyists and compromised politicians, hit a chord with me. President Donald Trump, sensing the same public anger, is pushing back hard on prescription prices.
Unlike with private insurance, Medicare is means-tested, and a higher retirement income triggers a higher premium for the same coverage. This follows years of paying taxes into the system based on income level, more than 40 years of taxes for most of us.
In my case, the Medicare taxes paid by me or my employers total $88,618, according to Social Security’s accounting. Imagine the balance had it been invested starting in the 1970s. What did that quarter-million in present value dollars pay for? The answer, of course, is for previous beneficiaries, which included (to be honest) our own parents. But it doesn’t appear we were paying in for our own future needs, as the underlying trust fund won’t be fully solvent after 2026.
The big advantage for Medicare for us is that annual spending hurdle of a $2,800 deductible each is now gone. Maybe “Medicare for All” would end the annoying robocalls.
But it still is going to cost us hundreds of dollars per months, with three monthly payments each to keep track of, three payment sources to coordinate, and no human resources department to call when things get dicey. We already have made three trips in person to a Social Security office, taking our number and waiting our turn, to get our current lower incomes recognized to avoid those higher-income premium levels. One visit was wasted after the paperwork submitted was lost.
Those crowded offices will need to be as big as Walmarts when “Medicare for All” covers all Americans cradle to grave.
A single-choice, government-managed “Medicare for All” is no answer. Those candidates promising it, most of them members of Congress, are confusing the health care coverage they enjoy on Capitol Hill — and the obsequious service they receive if they have any problem — with the real world all the rest of us face.
This Commentary originally appeared in the August 12 issue of The Richmond Times-Dispatch. Reprinted with permission.

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