What happened to tax reform?

Special Report by Chris Graham
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The push toward tax reform that caught up in its inner workings the sitting governor and a future governor among its bipartisan leaders fell surprisingly silent after 2004, much like the tree in the woods with no one there to witness if it actually makes a sound.

After the much ado about making Virginia’s tax system fairer by taking the burden off local real-estate taxes and putting it more into state income taxes, we’re still sitting pretty much where we were when tax-reform proponent Mark Warner took office as governor in 2002, if we haven’t actually done some backsliding.

“There has been a tendency particularly in light of the no-tax pledge in shifting away from general-fund taxes to fees. And that’s had a significant impact in that a lot of the fee structure that we have in place tends to be a bit more regressive, if you will, than just general-fund taxes. And now the expert gurus who have been so adamant in their opposition to tax increases are broadening their focus to include fees, too. So now people who sign the no-tax pledge have to get permission from Grover Norquist and others before they can do a fee now and make sure that they’re not going to be chastised. Which is sort of silly, but it’s where we’re at right now,” said Emmett Hanger, an Augusta County Republican state senator who joined with Warner and then-State Del. Bob McDonnell and others in 2003 and 2004 on the Virginia tax-reform effort that can claim some victories in the 2004 budget passed by the General Assembly and signed into law by Warner, now a United States senator.

The tradeoff included raising the state sales tax a half-cent to balance a cut in taxes on food, but the effort fell far short of the original goal of having the state take the burden off local property taxes. If anything, the $950 million cap on reimbursements to localities included in the state budget beginning in 2004 to account for an inflating bottom line associated with the ill-conceived personal-property tax relief that Jim Gilmore rode to victory in the 1997 gubernatorial race has made things that much tougher for local governments.

“The car tax is just terrible policy the way it’s being administered, with that $950 million credit in the state budget that’s parceled out to the most affluent localities in the state at the expense of the less affluent localities. It’s a reverse Robin Hood principle, in a way,” Hanger said. “We would be better off in terms of the bottom line to individual taxpayers if we hadn’t done that. if that $950 million were taken and just distributed through the funding formulas to the local governments, instead of just rewarding Fairfax County, which gets about 30 percent of that money by itself, we would all be much better off.”

So where are we in terms of anything that could be coming anytime soon in the area of meaningful tax reform? Start with nowhere, and you’re starting at the right place. The no-tax wing of the Republican Party is no more willing to stand idly by as legislators considering increasing income taxes as part of a tradeoff allowing local governments to enact deep cuts in local property taxes today as it was six years ago.

The end result: “The tax system in Virginia is not meeting its basic purpose, which is to provide adequate revenue for the public sector to be able to provide the services that people expect the public sector to provide, like education and health care,” said Michael Cassidy, the executive director of The Commonwealth Institute for Fiscal Analysis, a Richmond-based progressive think tank.

“We’ve seen significant revenue shortfalls as a result of the very deep and prolonged national recession, and we’ve essentially taken a cuts-only approach toward addressing those shortfalls. But when you look forward, the fundamental purpose of a tax system is to provide adequate revenue for the core services that the public expects, and we see that that really is not happening in Virginia, and that we need to look at the core issue, which is the tax system itself,” Cassidy said.

Looking back to 2004, the momentum toward substantive tax reform in Virginia was derailed first by the mini-boom of the middle of the decade, which took pressure off policymakers from a revenue perspective, then by the recession that began in December 2007 that has been answered with the supposed conventional wisdom that “you don’t raise taxes in a recession” even as part of a tax-reform quid pro quo.

“How do engage in a constructive dialogue on this core issue when people on one side have dug in their heels and taken a very strong antitax posture that says any kind of an increase of any sort is verboten? Even if it’s part of a greater package that lowers taxes for most people, makes the overall system more equitable, more fair, and in doing so raises relative taxes on just a segment of the population, it’s hard to reach a consensus on the kind of reform packages that do those things when you have participants drawing lines in the sand,” Cassidy said.

The lines being drawn, not surprisingly, benefit the wealthy at the expense of the working class. According to data from The Commonwealth Institute for Fiscal Anaylsis, Virginians earning $19,000 a year or less pay 50 percent more of their income in state taxes on a proportional basis than do those making a half-million dollars a year or more.

“When we’re taxing a larger share of the income of low-income folks, we’re not only making life that much more difficult for folks who are struggling to make ends meet to begin with, but also they don’t have much income, and so we’re orienting our tax system in a way that’s not going to be able to meet the demands and growth of our population and our economy,” Cassidy said.

And we get the added bonus of keeping the pressure on local property taxes and on the state’s gas tax, which hasn’t been adjusted since 1986 even in the face of myriad funding shortfalls that have cut to the core ability of the Virginia Department of Transportation to be able to maintain state roadways.

“What we think all Americans ought to recognize is that since all tax originates with income, and as Adam Smith opined many, many years ago, when he wrote The Wealth of Nations, that the best tax system is one that is geared toward the ability to pay, and we still think that’s true, the income tax is still the one that works the best, and it’s the one through which you can actually generate the most revenue with the lowest rates for the most people. So if you truly want low rates, and you want low rates that are diffused as widely as possible through the population, then you really have to have a progressive income tax as a principal component of your structure. The antitax movement focuses on the income tax specifically, and it doesn’t deliver low taxes as a result. It simply shifts them to other forms,” said David Shreve, an economist with the Charlottesville-based Virginia Organizing Project.

“What we argue, I think persuasively, is that those other forms are less productive, they’re less fair, they do the exact opposite of an income tax, in that you’re almost guaranteeing that you have to have higher rates for more people because those revenue forms aren’t as productive, they’re not geared to the modern economy, either its needs or the income it generates, and you’re always on a treadmill. You’re just sticking your finger in the dike year after year, and you’re engaging in what Russell Long, the late, great senator from Louisiana, once decried as the tax policy of don’t tax you, don’t tax me, tax the man behind the tree,” Shreve said.