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February 25, 2015

Ineffective Tax Giveaways Live On

Now that state revenues are on a slight rebound, lawmakers have lost their appetite for reforming costly and ineffective tax breaks.

The General Assembly had a host of proposals before it this year to reform costly tax giveaways and raise revenue to pay for things we can all agree on, like schools and public safety. The few proposals that have made it through – and those that haven’t – say a lot about legislators’ priorities.

The legislature’s own watchdog agency, the Joint Legislative Audit and Review Commission (JLARC), reported in 2012 that there are over 200 tax breaks on the books in Virginia. Some were found to be clearly ineffective or inefficient. Others weren’t evaluated to judge their effectiveness one way or another.

In response, state lawmakers established a special subcommittee to further scrutinize tax preferences. But despite solid analysis on some of the problems posed by these costly tax breaks, and posturing to actually do something about them, lawmakers did next to nothing.

In the end, only proposals to put a lower limit on the land preservation tax credit, consolidate the sales tax holidays, and eliminate the preference for selling land to preserve open space were accepted by the legislature.

Meanwhile, lawmakers rejected proposals to reform the two costly coal industry tax credits, close the online hotel sales tax loophole, and reduce the deduction for long-term care insurance premiums.

Looking at the two largest tax breaks that were on the menu shows the contrast in high relief.

JLARC found the land preservation tax credit, which encourages the conservation of land, to be effective in its 2012 report. But lawmakers have noted its high cost and determined that it could be reformed. As a result, they worked out some modifications to the credit, including lowering the total annual statewide cap on the credit and limiting the amount that each credit holder can claim annually. Together those reforms are set to save $22.4 million next budget year, which begins on July 1.

By contrast, a set of tax credits intended to prop up Virginia’s flagging coal industry have fallen short of their goal and were deemed ineffective by JLARC. Changes to the credits proposed by the governor in December were slated to generate almost $20 million in new revenue. But the House and Senate budget committees watered down the reforms to generate only $5.2 million. And the final reform that lawmakers agreed on is so watered down it will generate nothing, which means these credits will continue costing the state millions in lost revenue every year.

The debate on reforming the state’s tax breaks has been fueled by the need to deal with the state’s sluggish economic recovery from the recession and, most recently, a $2.4 billion budget shortfall from lower-than-anticipated tax revenues. But now that revenues have rebounded slightly, the pressure is off and lawmakers are again refusing to reign in costly and ineffective tax breaks.

–Massey Whorley, Senior Policy Analyst

The Commonwealth Institute

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