Jefferson Policy Journal

As a result of recent federal tax changes, Virginia taxpayers will pay an additional $1.2 billion in state income taxes this year and next, rising to $4.5 billion in additional taxes by 2024.

In late December, the Thomas Jefferson Institute released the results of a poll it commissioned asking voters to choose between having the added tax money returned to them by doubling the standard state deduction, or by using the funds to expand existing state programs.

Virginia voters made it clear by a margin of two to one in a recent poll:  They want the added tax money returned, as opposed to expanding existing state programs.

The poll was conducted by Mason-Dixon Polling & Strategy, using a question posed by the Thomas Jefferson Institute for Public Policy.  Returning the increased state taxes to taxpayers by doubling the state’s standard deduction was preferred by 59 percent of the 625 respondents.  Only 29 percent preferred the state spending the money.  Thirteen percent were not sure.

 Support for returning the money cut across all voter categories:  68 percent of Republicans, 59 percent of Democrats, 48 percent of Independents, 61 percent of white voters, 52 percent of black voters, 68 percent of men, and 51 percent of women.   Support was also geographically diverse, with support ranging from 53 percent in Richmond Metro area to 65 percent in Lynchburg/Southside region.

A complete copy of the polling results, with cross-tabs, may be found by clicking here.

A recent poll by the Wason Center for Public Policy at Christopher Newport University also found strong support for returning the funds to taxpayers, but that poll had not contrasted it with the idea of the state keeping the funds for programs.

The General Assembly has begun debating what to do with the added tax revenue, and whether tax policy changes are warranted.  Governor Ralph Northam on December 18 proposed using the added taxes to expand existing state programs and listed specific programs he wants to get the funds.

Steve Haner, Senior Fellow for State and Local Tax Policy for the Thomas Jefferson Institute noted doubling the standard deduction was a key recommendation of the Institute.  “It’s popularity with Virginia voters, across all demographics and in all regions, should reinforce our recommendation to the General Assembly.  This is an easy, popular, and long-overdue reform of Virginia taxes and we hope it is rapidly approved.

 “Of all the policy choices available, our alternative of doubling the standard deduction benefits the largest number of taxpayers.  It also mirrors a key element of the tax reform at the federal level, where the standard deduction was also doubled.

 “This question correctly describes the choice facing the 2019 General Assembly.  On December 18, the Governor confirmed that he intends to use the $1.2 billion to expand programs, and he was honest enough to list the specific programs where he was earmarking this tax-reform generated revenue to be spent.

 “While the Governor is asking to expand the existing Earned income Tax Credit, it represents only about twenty percent of the tax money available.  The other eighty percent would be used under his plan to expand other programs.  He did not propose to return any of the money to taxpayers by any method.

 “We urge the General Assembly to give the increased tax revenue back to the largest number of taxpayers,” Haner concluded.

Background:  The current standard deduction on state tax returns is $3,000 for an individual and $6,000 for a couple.   The Thomas Jefferson Institute has proposed making it $6,000 for an individual and $12,000 for a couple, starting immediately with the current tax year 2018.

Making that change would return about $440 million per year of the additional taxes generated by federal tax reform, most of the new taxes coming from individuals.   The Thomas Jefferson Institute has also recommended a reduction in the state corporate income tax rate to return the business tax increases, and that Virginia should begin to adjust its tax brackets and other provisions to account for annual inflation. 

Recent federal tax cuts put more money into the pockets of most Virginia families to the tune of some $1200 to $1400.  But a good part of that could soon be taken away by our elected officials when the General Assembly meets in January.
When the General Assembly votes to conform our state tax code to the new federal tax code, because of the unique way our state tax code is written, our taxes will increase by $1.2 billion over the next two years and $4.5 billion over the next five years!  Most of that — $3 billion — will fall on individuals but the corporate taxes will also increase by about 40% if no action is taken by our elected officials.
This “windfall of new taxes” is not factored into the current General Fund budget, so significant tax cuts can take place without reducing any of today’s government programs.  
Virginia must do more to improve our economy.  More people continue to move out of Virginia than are moving in. And a survey earlier this year rates Virginia as the 8th worst state for the middle class.  So increasing taxes will not help our state compete in today’s world. And our families that have more money in their paychecks today thanks to the federal tax cut, certainly don’t want to see a large part of that disappear to the state in increased taxes.
This is why the Thomas Jefferson Institute organized a working group of business associations and citizen groups to come up with a tax cut plan that will return the windfall from conforming our state tax code to the federal tax code to our taxpayers.  If Virginia is to return to being one of the best states for business and for families, then tax relief is critically important.
Our tax plan, released just before Thanksgiving, is focused on two major elements.
First, the personal standard deduction – a portion of income not subject to tax – should be doubled from $3,000 to $6,000 for individuals and $6,000 to $12,000 for couples.  Today’s standard deduction has not changed since 1989 and inflation has dramatically devalued these amounts over 30 years. Doubling the standard deduction will help more than 70% of Virginians with the most impact on the middle class.  But it will also remove tens of thousands of lower income families from paying incoming taxes – folks who will use these funds for the basics such as shoes for their kids.
Second, the corporate income tax should be reduced over two years from the current 6% to 5% by reducing it a half point each year. This is a 16% cut in the corporate taxes and will help make our businesses more competitive to our surrounding states.
And these tax cuts could be just the beginning.  If the projected windfall from conforming our state tax code to the federal tax code continues as the state suggests it will after two years, additional tax cuts of $3 billion for our individuals and our business can take place without impacting the current General Fund budget.
In addition to conforming our tax code, doubling the standard deduction for individuals and couples, and reducing the corporate income tax by 16%, the General Assembly should also index our taxes to inflation as the federal tax code did more than 30 years ago.  Finally, the General Assembly should create a method to track, segregate and capture the additional windfall revenue that will be generated by conforming our state tax code to the federal code. It should not spend these windfall monies, but earmark them for future tax relief.
Without the General Assembly taking actions to reduce our taxes, and do so when it meets in January, our taxes are going to increase by more than $4.5 billion over the next six years.  That means and our middle class status vis-à-vis other states will not improve, and our businesses will find their taxes increase by close to 40% and those at the bottom of the income ladder will not be helped.
This tax plan has been endorsed by the National Federation of Independent Business and its 6,000 Virginia members, the Family Foundation, Americans for Prosperity, and Americans for Tax Reform. More are expected to endorse. The Virginia Chamber recently said, “The Virginia Chamber appreciates the work that the Thomas Jefferson Institute put into this plan. A state’s tax climate is important to its ability to be economically competitive and create jobs.  To be the number one state for business, the Chamber supports comprehensive tax reform.”
Tax relief is needed and should be the top priority for the incoming General Assembly.
(This column was first published in the Fredericksburg Free Lance Star on December 2, 2018.)
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On Friday, after skirting the topic in a major address to a business conference in Williamsburg, Governor Ralph Northam told a reporter that “he’s planning to ask the General Assembly to tackle business tax reform,” adding it would be “comprehensive.”

The reporter asked about it because of other comments made by Secretary of Finance Aubrey Layne and the President of the Virginia Economic Development Partnership, Stephen Moret.  Since his arrival in Virginia, Moret has from time to time mentioned local business taxes as a hindrance to economic recruitment and business start-ups. He did that again Friday in his own presentation to the Virginia Chamber of Commerce.

For more than a decade local business taxes, especially two of them, have been the focus of the Thomas Jefferson Institute for Public Policy, among others.  The taxes are generally despised by the business community, but local governments are highly attached to them, because they are a revenue source other than residential real estate taxes.

One is the Business, Professional and Occupational License Tax (BPOL), a tax on business gross receipts, and the other is the Machinery and Tools Tax, imposed on all forms of equipment and paid annually as long as you use it (such as a WWII era lathe I could tell you about). Efforts in the past to eliminate and replace them, or reform them in other ways, have been shot down in the conflict with local governments. The Virginia Manufacturers Association is constantly complaining about the M&T tax, with good reason.

Michael Thompson, president of the Thomas Jefferson Institute, pointed to one approach it has suggested: “Localities can be protected by allowing them to collect these taxes and then the businesses can deduct them from their state tax filings the following year. This is clean, easy and doable and will eliminate the impact of these job-destroying taxes.”

The recent federal tax reform effort has sparked discussion about changing Virginia’s tax system, in part because an influx of related revenue provides some flexibility. But none of that lagniappe drops into local government coffers, so using the additional business tax dollars flowing to the state to solve a local funding problem gets challenging. Using the individual income tax dollars to address business tax reform would be even more problematic.

It is hard to know whether the Governor, Layne and Moret are really working on something or just responded favorably to a suggestion from the reporter. They have been dead silent on the Thomas Jefferson Institute’s proposal to lower the corporate income tax rate as the corrective move to prevent a conformity tax increase on Virginia businesses.

No question, Virginia is long overdue for a conversation on tax policy, with state and local business taxes high on the agenda. It will be difficult (impossible) to accomplish in the coming short session, which is followed by a bitter election season, without bipartisan consensus upfront. To date, we haven’t seen that. Those are the reasons the Thomas Jefferson Institute did not go straight to those idea when considering the response to conformity.

But thanks to that group there is a body of work on a possible approach, expanding the reach of the sales tax to more services to replace those local business taxes. It has developed a tax modeling tool around that idea. And Virginia is taking baby steps in that direction. A few years back it adopted a sales tax on various communication services which is statewide in scope and which eliminated local taxes.

They haven’t been framed that way, but the new hospital assessments that will be paying for Medicaid expansion represent a new gross receipts tax on medical services and could be expanded to pick up more of the Medicaid program. That breached tax a wall and the idea can now spread elsewhere in the medical industry. It’s not much different than a straight sales tax on those services.

Then again, discussion of comprehensive tax reform might also be a brilliant delaying tactic. It drives a wedge into the business community. Many businesses would much prefer to lower or eliminate those taxes, paid for with the higher state corporate income tax imposed by conformity with the new federal system. The problem is, other businesses don’t care at all about BPOL and M&T.

How bad can those local taxes be if the vaunted Amazon is locating its new headquarters in the heart of local-tax heavy Arlington and Alexandria? Well, we haven’t seen all the details of the deal, have we? Arlington has a very attractive local incentive for technology firms, which will greatly lower Amazon’s BPOL tax for ten years. The incentive grows higher with the number of employees, but it is not clear yet that Amazon’s location fits the map.

Which brings up a final point. There are pernicious reasons local governments won’t part with these taxes. They will negotiate them down or totally away, but only in exchange for something they want. They have become a reverse proffer, a powerful economic incentive ploy that will disappear if the state replaces them.

Which means, of course, some favored businesses escape them, their competitors are stuck, and once again government is picking the winners and losers in the economy. If Governor Northam is serious about business tax reform, great, but the timing is going to be a problem and an easy opportunity may slip away.

(This article first ran in Bacons Rebellion on December 11, 2018.)

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