Where Did the Money Go?

Like most states, Virginia is facing a severe budget deficit over the next several years.  Because of the declining economy.  Because we cannot sustain current levels of spending.  And because our tax system has too many loopholes.

Everyone knows about #1.  Some people know about #2.  Very few people know about #3.

So let’s talk about tax cuts …

They’re a lot of fun.  No politician (including me) can resist the urge to tell his listeners:  “Hey we cut your taxes this year.”  It’s a guaranteed applause line before any crowd.  Trust me.

But tax cuts are only good if they benefit the general welfare.  If they only benefit a special interest, they’re not good.  In fact, they weaken the tax system by making it less universal in aplication and less fair in perception.  

Having said that, let’s take a look at what’s happened in Virginia over the past couple decades.  During that time, we passed tax cuts that took $2.4 billion (or almost 18%) out of our annual General Fund budget.   

Let’s take a look in order of importance:

1.  Personal Property Tax Relief Act ($950 million).  This tax break for local car owners up to 70% of the car value is actually a state expenditure since we reimburse localities for the lost property tax revenues under the 1998 law.  Currently this relief is capped at $950 million annually in the state budget.  That money is then distributed to localities based on historic collections.  Ironically, the program benefits northern Virginia because of the higher property tax rates and car values.  It’s one of the few state programs that actually sends money to NoVA, which is why I’ve historically supported it.  However, it is a massive burden on the state budget. 

2.  Reductions to the Income Tax ($791 million).  This reduction is actually split into several pieces, including the “age deduction” credit ($273 million), the Land Preservation Credit deduction ($120 million), the Earned Income tax credit ($65 million), the Coalfield Employment credit ($44 million) and a host of others.  The “age deduction” is being gradually phased out under our 2004 tax reform bill.   The others are here to stay.  At least for now. 

3.  Reductions to the sales tax ($377 milllion).  The main driver here is the discount on sales tax for groceries and medicine ($250 million), which we enacted in 2004.  I supported that and still do.  The other main program is the “dealer discount” for retailers that collect the tax for the state ($64.3 million).  That exemption was modified in 2009, so that figure may actually drop.  Of course, every year there are no requests for sales tax exemptions.  But no one wants to get rid of old exemptions. 

4.  Estate Tax Repeal ($140 million).  This elimination of taxes on multi-million dollar inheritances occurred in 2006, three years after Mark Warner vetoed this anti-democratic albatross.  Besides the fact that the elimination of estate tax served the interests of large campaign donors and not the general public, the action made a mockery of tax reform by eliminating a revenue source without any corresponding cut in spending.  Of course, the economy took off after this “job creation” bill, so all is well.  Or not.

So there are the pieces of our missing revenue.

Again, that’s not to say I don’t support some of these programs.  I do.  However, the net effect is that our state misses (or spends) over $2.4 billion a year in tax breaks.  These breaks are not equally allocated.  We’re not even certain they work.  We do know that losing revenue — without a corresponding cut in spending — will always leave our budget out of balance.

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