The State of Taxaginia: Taxes Times Four

Posted on March 21, 2019 by matt ohern
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Wealth taxes are all the rage now in national discussions, with Democrats usually getting battered for proposing one. But as final versions of the income tax bill moved around the 2019 General Assembly, Democrats slipped in a provision to cap the amount of deductions wealthiest taxpayers can claim, raising their tax bills. Republicans agreed to it.
It is a wealth tax provision called the Pease Limitation which was long a part of the tax code at the federal level, and thus became part of Virginia’s taxes under the doctrine of conformity. The 2017 federal Tax Cuts and Jobs Act got rid of it. Had the legislature simply adopted conformity in its 2019 bill, the cap would have gone away in Virginia, as well.
It will be gone for the Tax Year 2018 returns now being filed, but it slams back into place for Tax Year 2019 and beyond, at the state level only. With that final amendment, the General Assembly guaranteed that less than half of the income tax revenue the state will harvest from federal conformity goes back to taxpayers.
My November 4, 2018 Commentary article identified the coming debate over income tax conformity and policy as one of four potential tax increases moving forward in Virginia, with the hope that at least that one might be headed off by prompt General Assembly action. That hope was not fully realized, not yet, although voters may be distracted from that fact by small one-time refund checks heading their way this summer.
The other three tax increases coming our way mentioned in that article are all on track, as well. The earlier rough estimate that they would cost citizens and businesses $1 billion per year is still reasonable, if not a bit low.
Virginia is now collecting the largest of the three, the hospital provider taxes being used to expand Medicaid coverage and increase Medicaid provider payments. Those alone are expected to collect $763 million in 2020 and $862 million in 2021.
In a matter of months, a far higher proportion of purchases you make through the internet will include the state sales and use tax, with a bill passing to bring Virginia in compliance with the U.S. Supreme Court’s Wayfair v. South Dakota decision. Most won’t notice the change since that net was closing anyway. That accounts for an additional $155 million in 2020 and $175 million in 2021.
And using language buried in the budget, not in a bill, the legislature cemented in place a coming carbon tax imposed by Virginia’s membership in the Regional Greenhouse Gas Initiative.
The smart play on RGGI would have been to direct the State Corporation Commission to give the carbon tax revenue back to ratepayers as a credit on their electric bills, probably through the monthly fuel cost rider. Almost every dollar the utilities paid for permission to emit carbon dioxide from their power plants would have returned to us. Wasn’t “Give it back!” the operative phrase all session? Couldn’t the RGGI carbon tax be given back, too?
Instead the budget conference report, now adopted but not yet signed, directed all the RGGI proceeds into the state general fund, not to be spent “without the express approval of the General Assembly as evidenced by an appropriation.” It makes official that the fees the utilities will pay are a carbon tax, ultimately collected from you. Just how much that will be is up to the future auction price on 28 million tons of CO2 emissions.
The legislature’s half-hearted response to the conformity income tax reform opportunity adds at least another half billion dollars or so to the state’s revenue flow. In effect, the legislature gave some back, kept some by resurrecting the Pease Limitation, and put the rest into the hopefully-named Taxpayer Relief Fund to accumulate with interest for future disposition.
The best step the General Assembly took was to increase the standard deduction for the taxpayers who use that tax approach, which is most of them. The $3,000 increase in the standard deduction for married taxpayers is at best half what could and should have been done. That change and the one-time rebate of $220 for that same couple represent their entire benefit. The $392.50 tax reduction over two years will be mentioned in the campaign rhetoric, but it drops back to $172.50 after the election.
The long-term impact also matters. The state’s own estimate of the revenue harvest from federal conformity is $4.6 billion over six years, 2019-2024. The revenue reduction from the now-signed tax law is $1.3 billion over that same six years, less than 30 percent of the take. Add in the one-time $420 million in cash payouts this summer and the money “returned” is still far less than half the money expected to be collected.
The state comes out ahead by up to $2.8 billion after six years, again using Governor Ralph Northam’s Tax Department’s figures. It was the late addition of the Pease Limitation wealth tax, $466 million in higher taxes over six years that tipped the balance in the state’s favor on the scale.
Yes, the remainder of the tax conformity boost is supposed to be accumulated and held in that Taxpayer Relief Fund. Yes, the bill signed by the Governor states the money “shall” be used “to effectuate permanent or temporary tax reform measures.” But there will be an election before that can happen. Seats will change parties. Control may change parties. What one General Assembly gives, the next may taketh away.

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Answering Populist Critiques of Tolling and P3s

Posted on March 21, 2019 by matt ohern
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(Editor’s Note: As Virginia increasingly turns to toll lanes to improve major transportation arteries, pushback has come from both the political right and left. Virginia is not alone in this, and here Mr. Feigenbaum reviews those critiques … and answers them.)
The rise of Donald Trump and Bernie Sanders shows the strength of populism, both left and right, in the United States. One thing these two political movements agree on is that tolling is somehow a bad policy. Unmoved by economic arguments, engineering studies, or common sense, these groups are trying (and in some case succeeding) to kill managed lane and P3 projects. Faced with unsupported claims from both extremes, most engineers and planners can relate to the Stealers Wheel song from the 1970s: “Stuck in the Middle With You.”
Texas is one of the centers of right-wing anti-toll populism. The past two legislative sessions have featured a flurry of anti-toll, anti-P3 bills. In 2017, the Texas House defeated Bill 2861 that would have allowed TxDOT to partner with the private sector to build, renovate or widen nearly 20 highways. In November 2017, Governor Abbott and Lieutenant Governor Patrick argued successfully for a freeze on new toll highways. Representatives have even authored bills that would remove tolls from every highway in the state. (TxDOT has calculated that removing tolls would cost $36.7 billion, to pay off existing toll revenue bonds, more than the agency’s entire budget for 3 years). A pending 2019 bill would require voter approval of all new toll projects. In response to the furor, the Texas Republican party switched from having a pro-toll platform to an anti-toll platform.
Maryland DOT’s plan to add variably-priced toll lanes, procured as P3s, to I-270 and I-495 outside the nation’s capital, has been opposed by left-wing anti-toll populists. The significant congestion and safety problems with these Interstates are irrelevant to project opponents. Thirteen bills have been introduced in the Maryland Legislature to hobble or kill the projects.
Despite being from opposite ends of the political spectrum, the anti-tolling arguments can be remarkably similar. One of the most common is that since motorists pay gas taxes, adding tolls is double taxation. Yet in many states, the gas tax does not pay the full cost to build, maintain and operate highways. Neither the Maryland nor the Texas gas taxes have been altered significantly in 25 years. Inflation and increased vehicle fuel efficiency have eroded the purchasing power of the tax, causing its revenue to decline in real terms by 50 percent.
A related argument is that tolling is not a “fair” way to pay for roadways. In fact, tolling is based on the same users-pay/users-benefit principle as the gas tax. But unlike in Texas where 25 percent of the gas tax is dedicated to education and Maryland where gas tax revenue has been diverted to the general fund, tolling is dedicated to transportation improvements. Additionally, unlike the gas tax, whose revenues are spent statewide, tolls are dedicated to specific projects. And variable tolling is a powerful tool for reducing congestion.
Some call toll lanes “Lexus lanes.” Yet the five most common vehicles using express toll lanes are the Ford F-150, Honda Accord, Honda Civic, Toyota Camry and Toyota Corolla. None are luxury cars. In fact, a recent study of Virginia toll lanes showed that there is a higher percentage of luxury vehicles in the general purpose lanes than in the toll lanes, meaning wealthy customers are less likely to use toll lanes than the general population. Motorists choose toll lanes for urgent trips, such as when running late for a business meeting, a plane flight, a doctor’s appointment, or picking up a child from daycare. Average monthly bills are less than $20. That same $20 buys only 6 gallons of gasoline, less than 1/3 of a tank for most vehicles.
Another common gripe is that tolls are state-imposed solutions and that local governments should have control over these highways. In reality, there are different types of roadways. Major highways–designed to move people and vehicles quickly across the state or throughout a large metro area–are the state DOT’s responsibility. Other roads that provide access to neighborhoods and local businesses are the local government’s responsibility. Local management of state roads would inhibit commerce, slow down travel, and increase freight costs.
Some residents oppose toll lanes or toll roads due to eminent domain concerns. No entity (public or private) wants to take residents’ property. It is expensive, legally challenging, and creates negative publicity. States are required to offer just compensation, although that may be cold consolation to those who have lived in that property their entire life. But the reality is that growing metro areas need additional roadway capacity and while a few people are displaced, thousands more benefit from the project.
Environmentalists’ main concern is increased greenhouse gas emissions. Yet emissions follow a U-shaped curve. They are greatest at low speeds and high speeds, but much lower in between. Increasing travel speeds in a congested corridor to 45-55 mph, as express toll lanes do, will actually reduce emissions compared with traffic operating in stop and go conditions.
Left populists complain that the express toll lanes are not a transit solution. But those lanes serve as an uncongested guideway offering reliable trip times for express buses, too. One reason people do not take transit is the travel speed. If commuters must sit in traffic, they would prefer to be stuck in their own vehicles. But transit on express toll lanes that runs largely at 55 mph has proven very popular in Los Angeles, Miami, Texas, and the Washington DC area. Transit agencies have added express bus service and some residents have switched from driving to riding the bus In the Washington region, the biggest transit gap is suburb to suburb. The express lanes could fill that gap far more effectively than a new rail line to downtown DC.
Other concerns relate specifically to P3s. Right populists complain about international companies investing and profiting from toll roads. In reality, these private concessionaires don’t own the roads; they lease them. All P3s operate under concession agreements that the state can cancel if the concessionaire fails to honor the agreement. The concessionaire takes the risk; if traffic fails to meet its forecast and toll revenue is below expectations, the concessionaire–not the taxpayers–loses money. P3 concessions that went bankrupt during the Great Recession were a victory for taxpayers. Taxpayers got a brand new highway without having to pay for it. The way to increase the number of American companies operating in this space is to build additional P3 projects, not restrict them.
This column originally appeared in the March 2019 edition of Surface Transportation Newsletter.
Baruch Feigenbaum Email this author

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Express Toll Lane Networks Proliferate

Posted on March 20, 2019 by matt ohern
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Networks of variably priced express toll lanes (ETLs) are being developed in more than a dozen large metro areas, and their impact is starting to be reflected in the congestion figures for those regions. Before reviewing what is going on, I want to call your attention to a new (not yet published) paper on the subject by researchers from Cornell University and McGill University. “A Comprehensive Welfare Impact Analysis for Road Expansion Projects” uses transportation data from the Dallas-Ft. Worth metro area to compare, quantitatively, the effects of four possible highway expansion options (in addition to doing nothing): adding a general purpose (GP) lane, adding a high-occupancy vehicle (HOV) lane, adding a priced ETL, or converting all lanes to conventional toll lanes. The priced ETL ranked highest in both regional economic impact and improving system-wide travel time, and was judged to produce the greatest increase in overall social welfare.
Those results are not yet widely known, which may be why ill-informed opposition still exists to some of the proposed projects. But overall, the picture is one of considerable progress toward entire ETL networks in some of America’s most-congested metro areas. Here is a brief recap as of first-quarter 2018.
California continues to make progress, with the largest set of projects under way in the greater Los Angeles metro area. The biggest project under construction is the I-405 ETLs in Orange County, and the county’s $43 billion long-range transportation plan includes adding ETLs to four additional freeways. Riverside and San Bernardino Counties are moving forward with ETLs for I-15 and I-10, respectively. LA County itself has plans for ETLs on a number of additional corridors, including I-105 and I-605. In the San Francisco Bay Area, the planned network keeps expanding, with projects getting under way on US 101 and I-680 adding important links to the network. A recent Bay Area competition selected the “Optimized Express Lane Network” as one of six transformative projects for the region.
Colorado DOT continues work on a Denver-area ETL network. By this summer, new ETLs will be in operation on C-470 (the east-west portion of the Denver ring road). Reconstruction of a 10-mile stretch of I-70 is under way, with the addition of ETLs in the median, and further projects will add ETL capacity to stretches of I-25 without such congestion-relief lanes CDOT is also considering whether to add a westbound ETL to the stretch of I-70 in the mountain area west of Denver, to complement the eastbound ETL already in operation on that segment.
Florida DOT has committed to ETL networks in the state’s four largest metro areas, with a growing number of corridors in operation in the Miami metro area (and more in the planning stage), the huge I-4 Ultimate project under construction in Orlando, the first ETLs due to open very soon on I-295 in Jacksonville, and plans under way for ETLs in the Tampa Bay area including on the Veterans Expressway, on I-75, and on the replacement of the Howard Frankland Bridge between Tampa and St. Petersburg. 
Georgia DOT is likewise under way on an ETL network for the Atlanta region. With corridors already in operation on portions of I-75 and I-85, the next major project will be ETLs on north-south Georgia 400 and on east-west I-285 (the northern portion of the I-285 ring road). The ETL network plan includes a number of additional corridors still to be designed.
Maryland, under the leadership of re-elected Gov. Larry Hogan, is proceeding with its $9 billion plan to add ETLs to highly congested I-270 and the Maryland portion of the Capital Beltway (I-495). To link these projects with the emerging ETL network across the Potomac in Virginia, Hogan recently committed to widen or replace the American Legion Bridge, which conveys I-495 across the Potomac (and is wholly owned by Maryland). In addition, the state has begun construction on a project to extend northward the existing ETLs on I-95. 
Texas DOT’s plans for additional ETLs in the Austin, Dallas-Ft. Worth, and Houston metro areas have been curtailed by the Legislature’s moratorium on tolling for projects that use TxDOT money and another moratorium on new P3 projects. Still, ETLs authorized previously keep getting built and opened, most recently the 28-mile Midtown Express that opened to traffic in October in the DFW area. In Houston, the $1 billion 10.3-mile ETL project on SH 288 should reach completion this year, and Austin’s first ETLs on the MoPac Expressway are now in operation. And with a $1 billion expansion announced by Apple in the Austin area’s Williamson County, local officials are considering upgrading Parmer Lane with ETLs.
Virginia continues as a leader in developing an ETL network in the DC suburbs. The $3.5 billion I-66 (outside the Beltway) ETL project is under construction. Early in 2019 Virginia DOT announced another $1 billion worth of projects on I-95 and I-495, including three P3 projects to extend I-495’s ETLs 3 miles northward to the Maryland border and I-95’s ETLs southward 10 more miles to Fredericksburg. There is growing support from the business community in the overall DC/MD/VA metro area for a regional ETL network.
Washington State DOT is moving forward with the ETL corridor that will encompass the existing HOT lanes on SR 167 and nearly the full length of I-405, the main north-south route east of Lake Washington. Under construction is a long-needed direct connector between the SR 167 HOT lanes and the existing HOV lanes on I-405 between Renton and Bellevue. Those HOV lanes will be converted to ETLs in a $1.2 million widening project, to match those already in operation between Bellevue and Bothell. Another project, subject to legislative approval this year, would add a second ETL each way on I-405 between Bothell and Lynnwood, eliminating a current bottleneck. 
Express bus service is an important complement to ETL corridors (and eventually networks). I’m aware of operational express-bus/ETL programs in Los Angeles, Miami, and northern Virginia, and planned for the I-405 corridor in the Seattle area. If readers know of others, I’ll be happy to note them in subsequent newsletters.
Long-term P3 concessions are a good fit for ETL mega-projects that involve adding lane capacity. Current users of P3s for such projects include Colorado, Florida, Texas, and Virginia, with Georgia and Maryland planning to use P3s for future ETL projects.
This column originally appeared in the March 2019 edition of Surface Transportation Newsletter.
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Participation Rate for People in Their Prime Working Years is Growing

Posted on March 19, 2019 by matt ohern
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In Federal Reserve Chairman Jerome Powell’s semiannual monetary report to Congress last month, he said he was encouraged by the “solid” increase in the labor force participation rate over the past year.
This rate represents the percentage of Americans 16 and older who are working or looking for work. Individuals in institutions such as prisons or active-duty military are not counted in this measure.
He also mentioned that the labor participation rate for people in their prime working years (ages 25 to 54) continues to rise.
Powell’s emphasis on the prime-age labor participation rate is interesting because economists and policymakers have long tracked labor force participation rates for all adults as a major indicator of the labor market. Rising labor force participation points to a strong economy.
The U.S. participation rate was 63.2 percent in January — up from 62.7 percent 12 months prior.
This is encouraging because it implies that as jobs have become more plentiful, people who dropped out of the workforce because they thought they couldn’t find jobs are now starting to search for work.
However, the retirement wave of baby boomers has muddied that relationship. The large population of individuals leaving the workforce via retirement pushes downward on the participation rate regardless of the state of the economy.
Since the end of the last recession, the economy has experienced close to 10 years of expansion.
But the labor force participation rates have been generally in decline. The current rate is below the 67.3 percent peak that occurred in the nation from January through April 2000.
By age group, the 25-54 population has the highest participation rate. Above age 55, the participation rate begins to decline, especially from age 60 to 70. The participation rate also is lower before age 25, as many are still in school.
The value of the prime-age labor participation rate can be illustrated by comparing Virginia and Florida.
The participation rate in Virginia is a bit higher than the nation at 65.1 percent in December, the latest data available. It is up only slightly from a year ago, but has increased significantly from the 64.5 percent low point reached in November 2015.
Florida’s labor force participation rate is lower than Virginia’s not only because it has a larger percentage of seniors but also because its prime-age labor force participation rate lags Virginia’s.
On the other side of the spectrum, having a lot of college students also may lower a region’s labor force participation rate. If a metro area has a higher population mix in the 16-to-25 age group because of a concentration of large universities or colleges, that could lead it to having a lower participation rate, because full-time students are not in the labor force.
Due to those limitations, labor force participation for all adults may not be the best metric to use.
If some of the states have especially large amounts of older or younger adults, those states will likely have lower participation rates that don’t necessarily reflect economic health.
Limiting the metric to prime-age workers (age 25-54) as Powell did may be a better choice for such comparisons and for tracking economic performance.
Richmond’s labor force participation was 66.2 percent for those 16 years and older and 83.4 percent for prime-age workers, according to the American Community Survey. That compares to 65.5 percent for the 16 and above group and 83.2 percent for prime-age workers in Virginia and 63.3 percent and 81.6 percent, respectively, in the nation for the same period.
The data suggest that both Richmond and Virginia were performing better than the nation from 2013 through 2017.
(This commentary first ran in the March 11, 2019 edition of The Richmond Times-Dispatch.)
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Solar Tax Exemption Adds Energy to Local Opposition

Posted on March 7, 2019 by matt ohern
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If the East Coast’s largest solar generation facility is rejected by the Spotsylvania Board of Supervisors, one of the reasons will be the major tax advantages sought by that industry and granted by the General Assembly. The supervisors held a nine-hour public hearing in late February without taking a vote.

The tax exemption is at the heart of a final written case put forward by one of the opponents in the February 24 Fredericksburg Free Lance-Star: “Put plainly: Future tax revenues are going down, not up, if the project goes forward. A current estimate is that this $600 million project will only generate some $8 million over its lifetime and, as shown below, our current incremental expenses greatly exceed that,” wrote Alfred King, who lives in a neighboring subdivision but carefully avoids any not-in-my-back-yard rhetoric.

Major Utah-based solar developer sPower has proposed three installations which total 6350 acres, 3500 acres of which will contain the 1.8 million panels. The county Zoning Commission supported the special use permit for only one of the smaller sections, covering 245 acres. The entire project if built will produce over 500 megawatts of power at peak production, and purchase agreements from Microsoft, Apple and the University of Richmond are financing it.

Opposition is fierce and got a national airing February 15 by conservative radio icon Sean Hannity, branding it as Governor Ralph Northam’s own Green New Deal. Virginia conservative activists are taking up the theme. The fact this is a private land owner putting land to the use of their choice, normally a sacred right to conservatives, hasn’t cooled their ardor. The company has paid for a poll that found county-wide support and hired Richmond economist Fletcher Mangum to make the economic case. It shows more economic benefit than opponents will admit, and substantially more than leaving the land as the source of occasional timber cuts. But the impact of a state-mandated local tax break is obvious in his report. Mangum puts his estimate of the direct county revenue over 40 years at $17 million (current dollars), and then adjusts it for another issue important in these discussions, the impact of all the new property value on the county’s standing in the state’s school funding formula. Using the present values and formulas, Mangum shows a potential $5 million in lost county school revenue.

The issue of the property tax exemption and the school funding “ability to pay” composite index are linked. In previous cases, the full property value was plugged into the funding formula, not the discounted value. That problem seems to have been fixed and the property value used by Mangum to judge impact on the funding formula is the same discounted value used to calculate property taxes.

Now to that. This project qualifies for an 80 percent discount on its local property tax. The land is taxed at full value, but not the equipment, which a few years ago was lumped into a state statute exempting pollution control equipment for manufacturers. Mangum assumes a taxable value of $553 million for the facility, which then immediately gets discounted to $86 million by the exemption and State Corporation Commission rules.

That’s another point many don’t grasp. The assessment value for solar generation equipment is set by the SCC, not the locality. That is the case with all utilities and public service corporations, who find it highly beneficial to escape the jungle of local variations and assessors they otherwise would face. The SCC uses a depreciation schedule that will reduce that $86 million taxable value down to less than $10 million well before the end of the facility’s useful life, Mangum reports.

Even with the $5 million potential impact on state school allotments, the county appears to come out $12 million ahead under Mangum’s figures. There is some spinoff from the 20 jobs, which will pay very well. That is higher than the number opponents are throwing around, but over 40 years that a best a revenue trickle for the local government. A half-billion dollars invested at a traditional manufacturer would produce a bonanza in comparison.

Working backwards from Mangum’s figures, absent the exemption the county might collect $40-50 million more over the decades. Tax it the same as manufacturing equipment, with no depreciation, and it might be yet more. Of course, do that and project would likely go elsewhere.

The exemption sunsets for projects not under construction by 2024. A 2019 bill seeking to roll that back to 2020 was defeated. More recent projects above 150 megawatts of power production do not get an automatic 80 percent exemption, but those below 20 megawatts get 100 percent exemption. It’s a source of irritation to many rural local governments.

Localities also pushed the General Assembly for tighter financial protection on the back end, with bonding up front to ensure proper retirement of the plants and restoration of the property when the time comes. They got legislation laying some groundwork for that, now on the Governor’s desk, but it is far weaker than a failed version seeking a bond of $10,000 per acre. Translated to a project comparable to sPower’s, that’s a expensive surety for $35 million or more.

The pushback from local governments is probably just starting.

“Solar developers know this clock is ticking and are rushing to act accordingly,” a supervisor in another county told me in an email. “Local Boards of Supervisors are faced with thousands of acres of farm and forestland now transformed into a use we see as quasi-industrial with no meaningful revenue attached.”

A bit more from that email from the unnamed county supervisor. “I have never had ONE constituent ask me to approve a solar project. I have had many ask me to keep the county from being covered in them. It’s a philosophical/political mindset that an increasingly blue Commonwealth fails to grasp. Many of my constituents are perfectly content with dependable, affordable power generated by nuclear, coal, and natural gas.

“The incongruity and irony that thousands of acres of trees will be lost to solar panels isn’t lost on them. The fact that an environmentalist will chain themselves to a tree to keep it out of a sawmill but smile joyfully while great swaths are denuded – much of it in the Bay watershed to boot – to pave the way for panels is more than a little hypocritical.”

A version of this commentary first appeared in the February 25, 2019 edition of the online Bacon’s Rebellion.

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