Virginia’s tax code is an opaque two-century accumulation of nonsensical hodgepodge. With Virginia’s one-term governorship and offset budget cycle, much has been made about this year being Governor Bob McDonnell’s main chance to leave his stamp on the Commonwealth. If he really wants to leave his mark, he should throw his full weight and energy behind a comprehensive revamp of Virginia’s tax code.
Whether you call yourself a conservative, a liberal, or something in between, there’s plenty in Virginia’s tax code to make you scratch your head. The machinery and tools tax forces businesses to pay taxes on equipment even if it hasn’t yet generated revenue. The business professional occupational licenses tax requires businesses to pay taxes based on gross receipts rather than net revenue, so struggling, unprofitable businesses must pay taxes despite making no money. In the state that lauds the Dillon Rule as the bulwark against a patchwork of varying rules, a patchwork of varying tax rules apply to local governments because of a 19th century notion that counties are rural, cities are urban, and never the twain shall meet. A cashier pays the same tax rate on income over $20,000 per year as a hedge fund manager pays on income over $20 million per year, whose children get his fortune when he dies, with nothing going to the state for kids born into less opportunity. Groceries, cars, and real estate are taxed, but services are not. The gas tax is a fixed number of pennies instead of a percent of price, and we have some of the lowest taxes on cigarettes in America.
The madness only gets madder when we look at the accumulation of 187 tax preferences, which, according to a recent report by the General Assembly’s auditing arm, cost Virginia $12.5 billion in lost revenue in 2008, the most recent year of available data. Those same taxes brought in $14.3 billion that same year. That means, in theory, we could eliminate all of the preferences, credits, loopholes, and giveaways, cut taxes, and still end up with more revenue for transportation, education, public safety, human services, and other critical areas. The real kicker is that only 20 of those 187 tax preference include reporting and evaluation of what they cost and whether they achieve their intended purpose. For 131 of the tax preferences, there’s no oversight at all. In other words, Virginians lose billions of dollars of revenue because of policies that, once on the books, remain so forever with little transparency, little accountability, and, therefore little effort or opportunity to change course.
Over the years, I’ve done my part by proposing reforms like eliminating the sales tax on groceries, raising the income tax rate for millionaires, and giving localities new revenue tools so they can cut real estate taxes. Understandably, given the General Assembly’s ideological makeup, my ideas have received mixed reviews. (Killing the grocery tax gets bipartisan support, but coming up with other revenue sources to balance it out has been more problematic.) That said, conservatives and liberals share a strong desire for transparency and accountability, which is where individuals legislators have the power to move us in the right direction. This year, I have proposed legislation requiring that any new tax preferences sunset after five years, so they will not remain on the books draining revenue forever. I have also made a personal commitment that I will only vote for tax preferences — including ones I have proposed — that include a sunset date and a requirement that the Department of Taxation report the intent of the policy and how much revenue it cost. This “transparency and accountability clause” will enable legislators to weigh the costs and benefits of each tax preference. Preferential tax policies that prove to be effective and efficient and whose purpose remains necessary will survive our scrutiny and be renewed, while others will not.
Institutionalizing these kinds of transparency and accountability requirements would be a big step forward. But only the governor, using the weight of his office and his bully pulpit, is in a position to deliver the kind of encompassing, transformative reform Virginia needs. If Governor McDonnell — or any future governor — is truly interested in making Virginia’s government more effective and efficient for its citizens, then he should seize the opportunity to leave Virginia with a transparent, accountable tax code that makes sense.
– David
(Originally published in the Richmond Times Dispatch, January 19, 2012)