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January 12, 2016

Room for Improvement

Governor McAuliffe’s budget proposal saves substantial money by closing the coverage gap, only to direct much of it to misguided tax cuts for large corporations and higher-income Virginians that won’t help the state economy.

A better idea is to spend the savings from closing the coverage gap in ways that promote the prosperity of all Virginians – not just a few.

Under the governor’s proposal, the largest portion of the $157 million net savings from closing the coverage gap – $64 million – would be used to lower the corporate income tax rate to 5.75 percent from 6 percent.

The theory that lowering the tax rate will encourage businesses to relocate to and expand in Virginia runs squarely up against evidence showing this won’t work as well as promised.

According to a 2010 report by JLARC, tax rates ranked low among factors that influence business relocation and expansion. Having the right workers and infrastructure, which require investments in schools and transportation, dominated the rankings. More money for tax cuts means less for teachers and trains.

What’s more, two-thirds of corporations don’t pay income taxes in Virginia. And 85 percent of the revenue generated from the corporate income tax comes from the tiny fraction of corporations that report Virginia profits in excess of $2 million.

Simply put, this tax cut does nothing to help small homegrown businesses and working families.

The second largest use of the savings, $42 million, would be spent to increase the personal/dependent exemption to $1,000 from $930 and aged/blind exemption to $900 from $800.

On the surface this sounds like a windfall for all Virginians – everybody gets a tax cut. But in reality the impact is negligible and limited to people with higher incomes. 

Virginia households with an average annual income of $59,000 would save an average of just $6.45 per year – less than the price of a movie ticket. And households making roughly $14,000 a year would save an average of only $1.32 per year per household. That’s barely enough to buy the local newspaper. In fact, less than a third of people making $24,000 or less would get any benefit from the enhanced exemptions. That’s in large part because in Virginia individual filers who make less than $11,950 and couples who make less than $23,900 don’t even have to file taxes because they make so little. 

Meanwhile, at the top end, households making $1.67 million would save an average of $14.32 per household per year, 10 times what low-income people get, but still barely enough for a 15-pack of golf balls.

Strengthening Virginia’s earned income tax credit is a much better way to help small businesses and hard-working Virginians.

The EITC increases take-home pay, boosts the economy, and encourages work. And it’s targeted, meaning the investment gets to working people who need it the most and where it can do the most overall good. But the EITC could do more to bridge the gap between hard work and low wages if people who make so little they owe no state income tax could get the credit too. For example, a single parent earning the minimum wage with two kids would get back more than $200 each year. That’s clothes and school supplies, a utility bill, or groceries for a month.  

And since Virginia’s economy falters when families can’t make ends meet, putting this money in the pockets of those struggling to meet essential household expenses boosts the economy. Furthermore, the EITC encourages work since a family has to earn income to get the credit, and the amount increases, up to a point, as more income is earned.

Closing the coverage gap is a common sense way to help up to 400,000 Virginians get quality, affordable health care while saving money. But it’s not enough to stop there. The savings need to be spent in ways that promote prosperity in the commonwealth.

–Aaron Williams, Research Assistant

The Commonwealth Institute

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