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From Governing’s
The vow was kept — but at the cost of opening a gaping hole in the state’s treasury. The option of cutting back on the reimbursements when revenues began shrinking was one the legislature found itself unable — or unwilling — to risk. “They said they’d stop adjusting the car taxes if the revenues weren’t there,” recalls one state official. “But when the time came, they just didn’t have the political will.”
The need to make major cuts in any revenue source in Virginia was debatable, because taxes here are relatively low to begin with. The top income tax rate — 5.75 percent — has been virtually untouched for more than 20 years. Corporate taxes have remained the same for even longer. The sales tax has gone up only half a percentage point over the same period. “I just don’t remember rates changing,” says Mark Van Deveer, co-chair of the tax resource group for the Virginia Society of CPAs. “I don’t think anybody on either side of the aisle is willing to propose a rate increase.” Last year, when the state had to come up with $3 billion to balance the budget, higher taxes still weren’t an option. Virginia has the lowest tobacco tax in the country, at 2.5 cents per pack, but nobody went after it. About the only change anywhere in the tax code was a requirement that sales taxes due in July had to be estimated and pre-paid in June. The additional paperwork outraged businesses. But the scheme helped the bottom line by effectively jamming 13 months of revenue into a single fiscal year: a neat trick, but one that cannot be repeated. Not only are Virginia’s rates low but there are dozens of deductions and exemptions, including a particularly generous income tax giveaway for the state’s older residents. Social Security income is left untouched, and anyone over 62 gets a $6,000 deduction. At age 65, that goes up to $12,000. So, a married couple can qualify for a prize of up to $24,000 — regardless of how much money they make. The cost to the state is $350 million a year. The sales tax exemptions go on for pages. “There are general exemptions, and there are very specific exemptions granted to just one or two taxpayers,” says Neil V. Birkhoff, chair of the Tax Section for the Virginia Bar Association. “This makes for an unwieldy hodgepodge of sales and use tax exemptions.” And it doesn’t even take into account the fact that Virginia taxes fewer services than all but four states in which a sales tax exists. The tax officials who work in Richmond get generally good marks for their electronic filing innovations. Governor Mark Warner has proposed adding a substantial number of positions to the tax department. One problem, however, stems from the Gilmore administration’s decision to centralize its tax collection structure, taking away authority from the local commissioners. Some businesses say this has deprived them of the ability to get a straightforward answer to questions about tax policy. Others complain that the central office hasn’t communicated effectively with the local commissioners. “In 1999, the roof of the building of the Department of Taxation in Richmond caved in as a result of Hurricane Floyd,” recalls Cynthia M. Jeanguenat, of the Virginia Society of Enrolled Agents. “But they didn’t notify the local offices that they were moving. So local offices were faxing information to an office that was probably under water.” Other managerial issues include the absence of an independent body to decide tax disputes outside the courts and the requirement that citizens continue to make payments even if a court case is pending. The state also needs some new technology. “The IT system is creaky and no longer serving needs,” concedes Ken Thorsen, commissioner of taxation. His department is moving to a brand-new tax information system that’s been in the works for four years. Until recently, it was expected to be completed this fall, but it’s been delayed until mid-2004. Unable to coax the money for this project out of the legislature, the department formed a partnership with AMS, a private contractor, using a procedure called “benefits funding.” Of any revenues that can be attributed to improved performance, 90 percent will go to the vendor and 10 percent to the state until AMS is paid in full. Many states were nervous about taking up tax reform last year because of the elections. Virginia is nervous this year. All 140 legislative seats are up for grabs in 2003, and the restiveness of the voters on tax issues — however modest their actual tax burden may be — is palpable. Last year, voters turned down two ballot initiatives that would have raised sales taxes in traffic-choked Northern Virginia and Hampton Roads in exchange for more transportation funding. As one prominent state senator said, “the people were the messenger and we heard the message.” The odds are it will be ringing in their ears this entire legislative season. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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irginia’s fiscal status could be described as a car crash — both literally and figuratively. The estimated shortfall for the current budget is upwards of $1 billion. And that’s about the same amount the state now sends cities and counties, thanks to the law passed by the previous Gilmore administration requiring the localities to phase out their property tax on automobiles. When this decision was first made, pursuant to a Gilmore campaign promise, it looked like the state could afford to reimburse the localities for the lost revenues, and it vowed to do so.