According to the Richmond Times-Dispatch, Governor Glenn Youngkin’s administration had its first formal discussion with Virginia’s local governments about eliminating their car tax collections two days after he announced it publicly.
The General Assembly convenes Wednesday and if there is a plan to replace the $2.8 billion in local government revenue raised by that tax source, it has not surfaced. Voters truly detest the local levy, mainly because it is one of the few taxes everybody pays by check or with a credit card, but at this point, it is safe to assume the idea is dead in the water.
The Republican governor and his staff also did little or no advance work before he made his other big announcements in December, two tax policy changes that he used as revenue assumptions for his proposed two-year budget. He wants to cut income tax rates across the board, but in partial compensation, he proposed to both raise the state sales and use tax rate and expand that tax to cover more digital services.
By including them in the budget, he gave Democrats the opportunity to kill them and increase spending on popular government programs, programs with strong constituencies. The dilemma the governor will face in the final budget showdown in March is obvious to everybody who has a cursory understanding of how the budget process works.
If there is a white paper explaining the details or rationale behind the effort to shift the burden from income to consumption taxes, it has not surfaced. If the governor assembled a political coalition of stakeholders willing to join him in selling the idea to the public and to legislators, there is no sign of that either.
Youngkin’s more extensive tax cut package for the 2023 General Assembly also lacked a public sales pitch in the months before the session or an organized campaign of support from outside groups to pressure the Assembly. For the most part it failed. It is discouraging that no lessons were learned.
The ostensible reason for seeking to lower individual income tax rates is to improve Virginia’s competitive position, and many surrounding states do have a lower top individual rate than Virginia’s. Others have no income tax at all. If there is objective evidence or testimony that Virginia’s 5.75% top rate is an impediment and reducing that to 5.1% would make a measurable difference, now is the time to make the case.
Does the Virginia Chamber of Commerce agree this would boost our economy? How about the Virginia Manufacturing Association or the Virginia Economic Developers Association? They were not recruited as active allies in 2023 either even though a cut in the corporation income tax was also on the table that session. The heavy lift of tax reform must be a team effort.
In the absence of that political messaging push, a common tactic when prior governors tackled major tax changes, the media coverage of Youngkin’s ideas is being dominated by critics. The Commonwealth Institute for Fiscal Analysis, with its liberal bent, immediately pointed out that the income tax cut for lower-income households might be wiped out by the higher sales taxes they would pay. The annoying thing about that is they are probably correct.
The plan drew praise from the Wall Street Journal’s editorial page. Nice, but that will not move a single vote in any of the key legislative committees about to carve this proposal into carrion.
For the past few years, the focus of the Thomas Jefferson Institute has been on broad-based state tax reform efforts that avoided conflict between economic classes. Increasing the standard deduction, for example, has a uniform utility. Every $1,000 increase saves most households the same $58. In a similar manner, indexing the various exemptions and tax brackets to inflation does not have much impact on whether the tax code is progressive or regressive.
As a tax policy goal, reducing reliance on income taxes and shifting the burden to consumption taxes has credibility. It is a common recommendation from groups like the Tax Foundation, which reportedly had at least some advance notice this idea might be coming. Expanding Virginia’s sales tax to cover more digital activity (your Netflix or Fitbit subscription for example) is also logical in this changing economy. Given it produces more money for the government, this is one element of the plan likely to pass, but on its own.
The income tax reduction could just as easily be achieved by moving the brackets up from the bottom or even removing the tax on the under-$3,000 and under-$5,000 brackets. With that approach, again, every taxpayer, rich, middle-class, or minimum-wage earner, sees the same reduction. The class warfare whining dissipates. But that leaves the top rate of 5.75% in place.
And increasing Virginia’s basic sales tax rate is also problematic. In many parts of the state, it is already 6%, 6.3% or even 7%. In some places there are regional sales tax components dedicated to transportation. More and more counties add a penny for local-option school construction. Many localities also add major sales taxes on restaurant food and hotel bills. To promote Youngkin’s idea as merely an increase from 4.3 to 5.2% is misleading.
As to eliminating the car tax, it was a pipe dream in 1997 and the result then – even when an election result had endorsed it — was that the tax remained in place. Some of our state tax dollars were shifted to localities to merely pretend taxes had been reduced. Nothing more substantive than that is likely to happen as this movie plays again 27 years later.
STEPHEN HANER is Senior Fellow for State and Local Tax Policy at the Thomas Jefferson Institute for Public Policy. He may be reached at [email protected].