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July 31, 2014

Talk is Cheap, Tax Preferences Aren’t

Spending cuts are the go-to when it comes to closing a budget shortfall in Virginia. But there is another pathway: reforming or eliminating tax breaks that drain money from the budget but aren’t doing what they were set up to do.

The Joint Subcommittee to Evaluate Tax Preferences met last week to talk about just that and to get a handle on which of the state’s multitude of tax credits, deductions, exemptions, and preferential rates are actually achieving their intended goals. And which aren’t.

At the meeting, lawmakers gave sales tax exemptions significant attention, and for good reason. They account for over 45 percent of foregone revenue – about $1.3 billion – and include food, nonprofit organizations and prescription and non-prescription drugs.

But other tax preferences are also worthy of review, like the Virginia Coal Employment and Production Incentive tax credit. This credit was designed to encourage coal production and use, and indirectly create new jobs in the coal industry. During fiscal year 2013 it cost the state nearly $60 million, or 19 percent of total tax credits. Add in the Coalfield Employment Enhancement tax credit ($21.8 million) and 26 percent of tax credit costs rest with just two policy initiatives.

The General Assembly’s own auditing arm pointed out that these credits aren’t achieving their intended goals in a 2011 report.

What’s more, less than half a percent of jobs in the state had a connection to coal mining in 2013, and job growth in the industry has been a paltry 0.24 percent from 2007-2013. Even more surprising, less than 50 tax filers claimed these two credits in 2013.

By comparison, Virginia’s low-income tax credit benefits over 343,000 hard-working Virginians – roughly 6,000-times more Virginians than the coal credits – and costs just over twice as much.

Discussing these facts is a good start. But talk alone is not enough, as the credits keep racking up.

Since fiscal year 2008, lawmakers have passed 10 new tax credits potentially costing over $14 million, according to official estimates from the state Department of Taxation. Those new credits – and their cost – sit on top of at least $12.5 billion in money lost to existing tax credits identified by state auditors in their 2011 report that launched the joint subcommittee’s work.

The point here isn’t to just take aim at the expenditures that cost the most. Tax preferences can be a useful tool to advance state economic goals and social well-being. But as legislators slash funding for education, healthcare, and transportation, it begs the question: How can we get the most bang for the buck?

–Emily Uselton, Research Intern

The Commonwealth Institute

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