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July 30, 2013

Tax Policy Tightrope

Virginia’s gubernatorial candidates have floated tax policy proposals that offer some pretty dramatic changes. But the high cost of these efforts to revamp Virginia’s tax code – and the limitations of other proposals to make up for the lost revenue – may leave the commonwealth with fewer resources to meet residents’ current and future needs, risking the well-being of Virginia’s families, communities, and businesses.

One proposal to reduce the top individual income tax rate to 5 percent from 5.75 percent, overwhelmingly benefits the state’s wealthiest individuals at a substantial cost to the state. Under such a scheme households earning less than $21,000 would see no tax cut. Three-quarters of the benefits would go to households earning $108,000 and higher.

Similarly, the proposal to cut the corporate income tax to 4 percent from 6 percent is another big revenue loser. As the third-largest source of revenue for education, public safety, and other services Virginians use every day, the tax is a core piece of funding for the things that make the state’s economy strong.

Together, these two proposals would cost the state $1.4 billion per year. To put that in some perspective, the state budgeted $1.7 billion for public safety this year.

Proposals to make up for the loss of revenue focus on eliminating outdated and ineffective tax breaks. Doing so makes sense. But, we must be realistic about how much revenue that would generate.

For example, given the very small number of services Virginia currently taxes, there is substantial room to end outdated sales tax exemptions. But it doesn’t make sense to tax certain services, like education, health care, housing, and public transit. Much like groceries, which most states – including Virginia – either exempt totally or tax at a reduced rate, exempting certain services that are necessities helps ease the burden on middle class families and individuals. And there is substantial political opposition to closing or reforming other loopholes, as the continued failure of loophole closure bills shows.

When you exclude tax breaks that would disproportionately hit low-income and middle class families or those that are clearly not politically feasible, the rest would raise only about $850 million. That falls well short of offsetting the cost of the proposed tax cuts.

The fact is, Virginia has lacked enough revenue to pay for schools, public safety and other basic needs in 10 of the last 12 years, and legislators have relied on deep cuts, one time infusions of cash, and gimmicks to balance the budget. That’s a big problem and stems in large part from an outdated tax structure.

Finding the right kind of tax modernization solutions that raise needed support for good schools, safe streets and healthy neighborhoods, while resisting the pressure to give that money away in the form of other tax breaks is critical to making sure Virginia strikes the right balance.

–Sookyung Oh, Policy Analyst

The Commonwealth Institute

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