Taxes, Fees and the Virginia Budget Process

There is also the sticky situation where every four years the incoming Governor has to deal with the proposed biennium budget of his predecessor or generate his own budget. Rather than build his own budget, Governor McDonnell recommended a broad framework under which he would evaluate a budget. His February 21st press release stated:

I have laid out three major priorities for this budget: it must be done on time, not contain any general tax increases, and invest, even in a difficult fiscal environment, in job creation and economic development measures imperative to a successful recovery.

The Virginian Pilot also reported on March 5^th that the Governor suggested all fees pass a three-pronged litmus test: 1) The fee must not have been raised recently; 2) It must have a connection to the government process to which it’s being applied; and 3) It can’t exceed the cost of the service. These policy parameters are generally what many expected to be realized in the final budget from the General Assembly, right?

If you answered, “Yes,” I have a tunnel, Port and ABC store to sell you. For example, the budget and caboose bills (HB 29/HB 30) contain an income tax increase on industrial businesses valued at an estimated $10 million in 2010, $20 million in 2011 and 2012, $25 million in 2013 and $30 million each year after. Yes, a one year and two-year budget document contained a tax increase that stipulated policy into 2014! The income tax increase is a result of stripping the Section 199 Domestic Production Deduction (DPD) from businesses; a Virginia law since 2005 when Congress enacted the tax statute to remedy a World Trade Organization dispute regarding extraterritorial income taxation for domestic companies. The intent of the DPD is to keep domestic production activities in this country and make U.S. industry more competitive against OECD trading partners – U.S. companies pay the second highest income tax among the competing countries.

Businesses affected by this tax increase are in manufacturing, mining, energy, construction, engineering or architecture, software development, film production and similar industries. The income tax increase will apply to C corporations, S corporations, partnerships and individuals. The Virginia Manufacturers Association estimates that this income tax increase will cost 6,400 Virginia jobs over the next two years.

The public policy issue here is not just that major tax policies are being embedded in budget bills, but that the process itself allows little sunshine on such important decisions. Is this really how the “#1 State for Business” is going to operate? These are the very issues that are infuriating citizens today about Congress.

Another important budget consideration is the plethora of fees in the budget. Fees are part of any government’s source of revenue, and businesses have come to accept that reality. But, all the budget fees should have been (and some were) introduced as bills to be debated on their own merit. This is good public policy. Yet, some fees were included in the final budget despite their legislative failure as bills. For example, several environmental permit fees will be increased due to the budget language. Additionally, these “fee” increases will be delegated to a Citizen Board.

Here is where businesses will generally suggest that Governor McDonnell’s three-prong litmus test needs another prong – a fee is something voluntary. If the customer has a choice whether or not to use said government service, it is a fee. Otherwise, it is a tax on business to pay for a share of the government’s regulatory responsibilities. In the case of this budget, some language suggests that 100 percent of the direct costs, defined as everything from permit application to enforcement action, should be covered by regulated businesses. The practical application of this policy is that some Virginia businesses will have the privilege of paying the entire cost of their own government regulation twice. Let’s not forget that businesses still pay individual, sales, excise and income taxes to the Commonwealth. So, how is this good public policy?

The bigger picture here is not just the public policies represented by the current budget; it is the fact that major public policies are being shielded from debate through the budget process. We don’t like this at the Federal level and we certainly don’t expect it in the Commonwealth. So, what do we do about it?

One has to fix the process. I am still convinced that the people involved are well intentioned and the limitations of a part-time legislature drive these unintended consequences. Of course, no one is advocating for a full-time legislature, but is it possible that the legislature could benefit from a 30 day return to their districts before having to vote on the final budget? We afford the Executive this benefit and I would like to think that some of our smart forefathers contemplated the need for the Executive to be the cooling water poured over the red hot steel that is the budget in order to have a better final product. So, why not give the entire legislature the same benefit of time as well?

As we contemplate the next few years of complicated budgets, economic recovery and slow government revenues, maybe it is time for a new budget process that gives each member of the General Assembly 30 days to evaluate the budget before the final vote. Virginia cannot afford $105 million in unintended consequences as part of the budget process if it is going to retain its position as a preferred location for business formation, expansion and relocation.