Must Meet Crucial Revenue Needs As It Overhauls Tax System
October 24, 2003 --
soon as Virginia's Nov. 4 elections are over, the state’s
political and economic focus will turn to taxes. Virginia faces
a possible $1 billion revenue shortfall. And the tax code, like
that of most states, is a patchwork that isn’t as efficient
as it could be. On Nov. 6, two days after the election, the Commission
on Revision of Virginia’s Tax Code will meet again at the
Capitol. And Gov. Mark Warner is expected to announce his own restructuring
ideas some time after the elections.
L. Knapp, director of economic research at the University of
Cooper Center for Public Service and a longtime expert
on the state economy, can offer authoritative
comment and perspective for news stories on tax issues. A former
member of the Governor’s Advisory Board of Economists under
several administrations, he may be reached at (434) 982-5604
says it’s clear that Virginia
would benefit from updating its tax system. But, he argues,
the bigger need by far is finding
ways to increase revenue. “Decision makers should focus
on the ability of the financial system to raise a sufficient
of revenue from taxes, fees, charges, and federal aid to meet
core needs in education, transportation, medical assistance
to the needy,
and other important programs,” he says. “That’s
the challenge for Gov. Warner, the tax code commission, the
business community and everyone who is concerned about the
future of the
Commonwealth.” Even the best of reforms won’t help
if they don’t provide crucial funding.
attached op-ed article from the Norfolk Virginian-Pilot may provide
background material on tax issues.
Op-ed Column, The Virginian-Pilot
Tuesday, October 14, 2003
Revenue Adequacy, Not Just Restructuring, Should Be Goal
by John L. Knapp
need for tax restructuring in Virginia is overstated. Emphasis
on reform diverts attention from a much
larger issue, the adequacy
of the state’s tax system to address basic needs. Currently,
there is talk of a revenue shortfall of at least $1 billion for
the General Fund in the next biennium.
current tax code is the embodiment of many alterations through
that have occurred because of changes in leadership,
ideology, demographic and economic circumstances, and the strength
of political interest groups.
brief history of the three taxes that account for more than
three-fourths of Virginia’s
state and local tax collections shows how Virginia’s
tax system evolved.
the 19th Century the local property tax took its current form,
which emphasizes uniform assessments
based on the market
of real property. Over the years, many changes have been
made in administration of the tax.
modern-day individual income tax was born in 1926 as part of
program led by Governor Harry Byrd.
there have been a number of changes in its major features.
general sales and use tax is relatively new. It was adopted
in 1966 with the endorsement of Governor Mills
part of an ambitious program to establish the community
and to provide additional support for all levels of
property tax is well administered in Virginia, particularly
in the urban areas where full-time professional
modern techniques. In major urban areas properties
are reassessed annually or biennially to ensure that assessed
values are close
to market values. The state’s local governments
are less dependent on the property tax than the national
although the tax has never been a favorite, it has
the great advantage of
being a local source of revenue closely tied to the
benefits that taxpayers receive.
Virginia individual income tax needs to be updated. The values
personal exemption, single individual
standard deductions, and the tax brackets have
not been changed since 1988, 1989, and 1990, respectively.
revenue yield was created by overly generous concessions
made in 1996
for elderly, affluent taxpayers.
sales tax has been eroded by the exclusion of nonprescription
granting of tax relief
for food consumed
at home, and the provision of exemptions to many
it should be noted that such erosion has been
experienced in most sales-tax states because of similar political
sales tax base does not include much of the service economy.
Furthermore, the tax evasion
accompanying remote purchases
from catalog and internet sellers is a growing
these problems are not unique to Virginia. All of the 45 states
participate in the streamline sales tax project
that, with the assistance of federal government
collect taxes from remote sales.
services are not taxed because it would be politically unpalatable
do so. States
sales taxes to significant
service sectors such as medical services,
rent, and education. A modest expansion
of the sales
to include personal
services such as haircuts and dry cleaning,
repair services, and amusement
services might be acceptable to the electorate,
but it is unrealistic to think that Virginia
amounts of revenue from
not taxing services.
truth is that Virginia has a fairly good tax system by the
standard of what
in the 50
magazine published by Congressional Quarterly,
Inc., recently rated state tax systems.
The study found
that 11 states,
Florida, and Texas, “…have
tax codes so outmoded and inefficient
that they need to be redesigned from
the study found that Virginia’s
system requires a substantive overhaul,
was also applied to 34 other states.
no doubt that Virginia would benefit
from an updating of its tax system.
However, even the best of reforms, if combined
with a revenue neutrality straightjacket
that calls for no increase
in tax revenue, will fail to address
the main issue - revenue adequacy.
In fact, there is a danger that under the
changes will be made that result in
less total revenue.
makers should focus on the ability of the financial system
raise a sufficient
revenue from taxes,
and federal aid to meet core needs
in education, transportation, medical
needy, and other important
programs. That’s the challenge
for Gov. Warner, the tax code commission,
the business community, and everyone
who is concerned about the future of
Bob Brickhouse, (434) 924-6856