By Kathryn Watson | Watchdog.org Virginia Bureau
ALEXANDRIA — Virginia gives tax breaks in amounts that are just about equal to what it collects in tax revenue.
In 2008, the state granted roughly $12.5 billion in tax breaks — known as tax preferences — of all sorts, while it raked in roughly $14.3 billion in total tax revenue, as a November 2011 report by the Joint Legislative Audit and Review Commission found. And, as the JLARC study pointed out, the Old Dominion has virtually no way of knowing how effective those tax breaks are to the state.
But it’s hard to say what’s more staggering — how much taxpayers have to cough up to make up for taxes lost in preferences, or the fact that 10 individual and corporate income tax credits on the books weren’t claimed by a single taxpayer in fiscal year 2012, according to the Virginia Department of Taxation.
Suffice it to say, state lawmakers in a new legislative subcommittee have their hands full as they figure out how to evaluate the value of Virginia’s plethora of tax breaks — and in the process, Virginia’s antiquated and complicated tax structure as a whole.
“Anytime you give any preferences, no matter how good they sound, they destroy the economy,” said Mike Thompson, chairman and president of the nonpartisan Thomas Jefferson Institute for Public Policy.
Thompson has a few ideas on evaluating tax preferences, which include things like credits, deductions and personal exemptions. In an April 2012 study, the institute mapped out a new state tax structure that eliminates all tax credits except for health-care credits, and nixes a few taxes like the Business Professional Occupation Licensing tax. The plan also broadens the state sales tax to services that aren’t now subject to it, using that added revenue to lower personal income taxes.
“Our economic model shows just impressive numbers of new jobs,” Thompson said, adding that the plan is gaining ground as the basis for serious tax reform in Richmond.
The General Assembly’s Joint Subcommittee to Evaluate Tax Preferences was sparked by 2012 legislation from Delegate Steven Landes, R-Verona, to, “oversee the evaluation of Virginia’s tax preferences, including but not limited to tax credits, deductions, subtractions, exemptions, and exclusions.”
But it’s yet to be seen whether subcommittee members — further divided into a sales tax subcommittee and an income tax subcommittee — will reform the system from the ground up, like Thompson’s plan, or merely tinker with tax preferences.
House and Senate subcommittee members in their first substantive meeting Wednesday in Richmond tossed around ideas from nixing the corporate income tax, which generates just about $700 million a year, to requiring the General Assembly to re-evaluate or let expire some preferences every few years.
Delegate Bob Purkey, R-Virginia Beach, said fellow lawmakers should take the idea of nixing the corporate income tax seriously. Bills to eliminate — and even to study eliminating — the corporate income tax died in the 2013 session.
“It may also behoove us to see what other states are doing, because … there seems to be a revolution coming,” Purkey said, mentioning states that have already done away with their corporate income taxes.
Delegate Mark Keam, a Democrat from Vienna who has filed unsuccessful bills in the past requiring the General Assembly to re-evaluate tax credits every few years, focused on the fact that 10 individual and corporate tax credits in 2012, and five credits in 2011, were claimed by no one.
The General Assembly did pass a bill in the 2013 session to classify as “obsolete” any credit that goes unclaimed for five consecutive years.
If legislators and state agencies are publicizing a tax credit and no one is claiming it, “then maybe it’s worth repealing,” Keam said, calling for “some type of criteria” for keeping, killing and tweaking tax credits.
“What would really be interesting to know is, why did they put them there in the first place if nobody’s interested?” Thompson said. “Who walked into somebody’s office and said, ‘Cousin, I want this done!’”
If lawmakers eliminate the 37 credits to the corporate and individual income taxes, they’d have the flexibility to reform the tax laws, Thompson said.
Thanks to an archaic tax code, Virginians earning $17,000 a year pay the same maximum state income tax rate that applies to millionaires and billionaires. That $17,000 figure has remained flat since tax tables were revised more than two decades ago, and equates to $34,452 in today’s dollars after being adjusted for inflation, according to the Bureau of Labor Statistics.
Lawmakers like Delegate Barbara Comstock, a Republican from McLean, have proposed indexing the income tax rate to inflation.
“This is bracket creep,” Scott Drenkard, an economist at the Washington, D.C.-based Tax Foundation, said in a January interview. “Taxpayers have slowly become subject to higher tax brackets because those brackets have not been inflation adjusted.”
Virginia tax code is a complicated “puzzle,” as Thompson put it. But, dealing with tax preferences is a good start, he said.
The subcommittee plans to have some bills and recommendations ready for the 2014 session.
Contact Kathryn Watson at firstname.lastname@example.org, or (571) 385-0773.