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.

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General Assembly Fills SCC Vacancies but Doubles Down on Bad Energy Laws

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The General Assembly has now filled the two open seats at the State Corporation Commission (SCC), ending two years of gridlock. Unfortunately, the same legislators, on both sides of the aisle, are still working overtime to dictate and micromanage the state’s energy policy, reducing the discretion and authority of the independent, non-partisan regulators. Samuel T. Towell, elected to the SCC last week, fits the expected mold for such positions.  His legal career has been inside and outside the Virginia government, with his term as the civil litigation deputy under Attorney General Mark Herring (D) as the highlight of his resume.  In that role he supervised the consumer counsel functions under Herring, participating in SCC matters. Since then, he has been working for Smithfield Foods. Breaking the mold is Kelsey Bagot, only a decade out of Harvard Law and with no real Virginia-specific experience. She spent much of her career so far at the Federal Energy Regulatory Commission (FERC), working part of that time for former SCC Chairman Mark Christie.  Christie’s expressed enthusiasm for her qualifications makes her about as close to a bipartisan choice as was possible. They join current Commissioner Jehmal Hudson, also a veteran of FERC, who has been serving by himself for more than a year. Towell and Hudson, less than 20 years out of law school, and the younger Bagot form a trio that could be in office together for decades. That had to be on the minds of the legislators (all Democrats) who made these choices. Fully qualified and engaged judges are still bound to follow the law. Virginia’s headlong rush into an economically foolish war on fossil fuels is being directed by the bills flowing from the General Assembly, not rogue judges. If the last two sessions controlled by Democrats, 2020 and 2021, were a two-alarm EV battery fire, the 2024 session could be the equivalent of the Maui apocalypse. Throw a dart at the list of bills dealing with the public utilities and you are likely to hit something that impedes generation or transportation of coal or natural gas or promotes or even mandates expansion of solar and wind developments. February 13 is the deadline for bills to pass in their houses of introduction, and at that point we’ll have a better idea of what is advancing toward the governor. House Bill 638 and Senate Bill 230 both amend the 2020 Virginia Clean Economy Act to accelerate the retirements of fossil fuel generation and to greatly expand top-down energy efficiency requirements. The law currently gives the SCC multiple paths to evaluating the cost-benefit ratios used to measure efficiency efforts, but these bills would mandate a single standard. They strip out, for example, the ratepayer impact test which can reject a program based solely on its high cost to customers. Both also require the SCC to fully enforce the aspirational green energy goals the earlier Democratic majorities enshrined in law. As you can read for yourself, they require reaching no electricity from fossil fuels on a schedule more aggressive than the VCEA. The policy also reaches into transportation and building construction policies, agriculture and industry, to remove fossil fuel use. The revitalized SCC could become the Clean Energy Policy Police. The solar and wind projects already mandated in that VCEA are often subject to major opposition from neighboring landowners, who sometimes succeed in getting local governments to deny permits. House Bill 636 and Senate Bill 567 fix that by empowering the SCC to override that local authority and approve them anyway. The shortage of charging facilities is one reason electric vehicles sales aren’t as high as some hoped. House Bill 118 will give the utilities the job of building more and let them charge all their customers for the capital costs, with profit of course. Then the utilities would create lower rates for those engaged in such vehicle charging, shifting costs to the scofflaws still using gasoline. House Bill 524 is clearly aimed at interfering with existing plans to expand natural gas service into the Hampton Roads region and would greatly complicate any other similar project in the future.  If not under construction by July 1, the Hampton Roads project would face an entirely new round of expensive and time-consuming reviews. The Southside Virginia expansion serving Hampton Roads is also targeted by Senate Bill 486, prohibiting its current plan to expand the compressor station in that region. That change would also force the project into a redesign and then a new time-consuming battle for permits. Permitting would be eased, however, for a small modular nuclear facility in Southwest Virginia under House Bill 741. It extends the fast track “permit by rule” open to small renewable projects to a nuclear plant which would be much larger, but still too small to be considered a major energy asset.  Such a stand-alone plant will never be built (a connected series of SMRs is more likely) but the law is still a bad idea. Senate Bill 591 would greatly expand the ability of customers to escape from the monopoly power companies and use a third-party supplier, if that supplier claims it provides “renewable energy”.  It gives choice to residential and larger industrial customers, but there is another big benefit in the bill for industrial customers. The 2007 revisions to the state’s electricity regulations allowed those large industrials to leave the monopoly suppliers, but if they did so they would have to give five years notice to come back. That effectively prevented departures. This bill reduces that from five years to six months. Another bill makes the notice only 90 days. A key small consumer protection element of the 2007 compromise would die. The impact of allowing customers to leave for competitive suppliers is that the overhead costs of those who remain with the monopoly will rise.  The more customers who leave, the larger the load they no longer take from the utility, the more those costs go up for everybody else. For this bill, and for so many others, it seems the authors are looking for ways to make the energy in your home or business more expensive.  Actually, just delete “it seems.”
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Don’t Let Partisanship Stop Serious Tax Reform

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Governor Youngkin Joins the “No Car Tax” Movement

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

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

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

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

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

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

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

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

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

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

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Successful Tax Reform Requires Allies and a Path Through the Mines

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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