Reform for Virginia's Antiquated Tax Code
On August 1, 2003 Al Eisenberg spoke to the Northern Virginia Democratic Business Council. He gave the following speech.
Thank you for inviting me to be your speaker this morning. This is the moment when you really pay for your breakfast. The subject is tax restructuring. Here we are in August, the sleepiest of months, and Dan Steen gives me the topic of tax restructuring. So, I'm giving you fair warning. When I finish and you wake up, there will be a quiz.
Actually, tax reform is the right issue at the right time in the state's history, and for all the pitfalls that lie in its path, Governor Warner has demonstrated both courage and vision in taking it on as the General Assembly's key theme next year-and none too soon. After all, the last statewide tax increase was in 1986. With almost four hundred of settled history behind us, we see no reason to hurry things up. But now, the issue is thrust upon us. We cannot avoid it, and we must not, for it is truly the most important issue before us. All that we hope for the future of this state rests upon it.
For Democrats, tax debates are typically the third rail of politics. If we touch it we die. Yet if we ignore the issue we die. It's a Hobson's choice to be sure. As Woody Allen observed, "We stand at a crossroads; one path leads to utter ruin, the other leads to total despair, and may G-d give us the wisdom to make the right choice." Believe it or not, we can. There is a third way-we can blaze a new trail, lit by a new message that can resonate among the people if we but own that message, articulate it in a way that people can understand as important to them, and use it to help point the way toward a new Dominion. The debate that we must engender must not be about taxes. It must be about what kind of Virginia do we want for our children and for generations to come.
Why take on this fight now? Aren't we drilling a hole in the bottom of our own boat? I don't think so, because the new Republican majority has already drilled that hole. The ship of state is taking on water, its rudder jammed hard to the right and sailing in circles because a new crew of General Assembly Republican ideological government haters has usurped command. They care nothing for how many people they throw overboard, and if the ship sinks, so be it.
Tax reform is tied directly to the state's budget, and the budget is a clear statement of our future. The Gilmore Administration engineered massive tax cuts, based on the shakiest of economic assumptions, which they knew were wrong. It wasted and abused almost four hundred million dollars in 2000 alone--from computers that couldn't talk to one another to significant cost overruns in transportation projects whose books were deliberately cooked, and such ineptness in enrolling poor families in health insurance that it had to give back 60 million dollars in unused funds to the federal government. This smoke and mirrors budget that even some Republican legislators couldn't support was ripe for failure when 9-11 and George Bush's recession hit us. States and localities have been left holding the empty bag. And as a result, we have endured $6 billion plus in budget cuts alone to balance the state budget.
When all the smoke has cleared we see a landscape littered with those who have been left behind and mountains to climb to get to where we were have to go just to meet core needs of our citizens. There are bright spots. Because of homeland security and defense spending, particularly in Northern Virginia, unemployment in the state is generally lower than in many other states. Yet, we cannot ignore the fact that many counties to our west and south endure double-digit unemployment because their manufacturing base has greatly eroded under foreign competition. In those counties, census indicators of the quality of life look like those of Mississippi and Alabama. We have, in effect, two states-the Golden Crescent from Northern Virginia through Richmond to Tidewater, and everything else. Some 20,000 households, approximately 40,000 people, are either without access to clean water or need improved access because of inadequate water systems. According to the State's own Joint Legislative And Review Committee, Virginia is falling $648 million short of what our k-12 schools need to meet the standards of quality, another $350 for funding inadequacies for public colleges and universities, and we're some $1.3 billion short in meeting health care needs.
The state has grossly underestimated by tens of thousands the number of our young people who will seek access to Virginia's public colleges and universities over the next two decades, ensuring that the door to higher education in Virginia will be closed to many of our children. According to General Assembly guidelines, community colleges should receive $6250 per year per full-time equivalent student from all sources-tuition, fees, state general fund. This coming school year, that number will be about $4700. In 2002, when state funding was higher, Virginia community colleges ranked 12th among 15th Southeastern states, just behind Mississippi.
Our transportation system was failing prior to the defeat of last year's proposed sales tax referendum; since then, it's only gotten worse. In Arlington County, we have four bridges waiting for the funding to provide for their replacement. One of them, the bridge at the intersection of Columbia Pike and Washington Boulevard suffered 252 accidents and 157 injuries in one five year period, which in transportation statistics is just huge. While it's on the state's six year plan, it is way overdue for replacement. And if analysts are correct, and state budget woes continue, it is highly likely that the state will not be able to raise sufficient matching funds required by Federal law, forcing the state to forego Federal funding that would otherwise be available. Working families are desperate for housing that's reasonably close to their jobs. In Arlington County, the median sales price for a detached home is now half a million dollars. And when it comes to funding for environmental protection, Virginia is dead last among all the states.
Is this the state of affairs that defines the future of our state? Is this the kind of state we want for our children?
Enter tax reform.
Governor Warner has launched the first initiative. He has recognized that we cannot count on a tax structure that dates back to 1910-based on an agrarian society that relies for revenue on personal property, not personal income, is older than more than almost everybody in this country and predates the discovery of penicillin, and the invention of scotch tape, the band aid, the parking meter, and the crossword puzzle.
Rather, we need a tax system suited to today's service and information-based economy. The Governor's tax reform program rests on four principles. They are principles that both Democrats and Republicans can and should embrace:
- Fairness
- Simple to understand and administer
- In tune with a modern economy, and
- Proper alignment of service delivery responsibilities with state and local revenue sources.
A tax restructuring commission has been established, consisting of legislators from both the Senate and the House of Delegates. Most are Republicans.
The tax system is terribly regressive. The top bracket is $17,000, taxed at the top rate of 5.75 percent. As a result, those earning at that level or below pay a far larger share of their income in taxes than multi-millionaires. A man earning $100,000 a year pays less than a woman with a child earning only $35,000 annually. If you earn $22,000 a year, and are contemplating starting a family, you pay more income taxes in Virginia than someone living in 37 of the 42 states that have a broad-based income tax. Corporations find ways to shelter their taxes by funneling sales and profits to other states to avoid paying taxes. While we have to be careful about loading taxes on corporations during a recession, while discouraging relocation to other states, and recognizing the special problems of businesses with historically low profit margins, such as grocery stores and restaurants, we should make sure that everyone pays a fair share.
Whole sectors of the economy are minimally taxed or not taxed at all. Goods, like baby diapers and bandages are taxed, but not pedicures and dry cleaning. Cigarettes are taxed at the lowest rate in the country, 2.5 cents a pack. We pay less taxes for tobacco than for food. The state also loses about $300 million a year from internet and catalogue purchases from consumers out of state. Technically, such taxes are not new. They're not enforced because they are self-reporting.
Gas taxes have not kept pace with inflation. On a national basis, state gas taxes would have to rise 11 cents to equal their 1957 buying power. At 17.5 percent per gallon, Virginia has a lower gas tax than all but 11 other states. The overall tax system is riddled with exemptions that cost the Commonwealth $600 million a year, many of which haven't been examined in years if at all.
And counties do not have the same taxing authorities as cities. In fact, counties are not even defined in the state code. I guess 300 years ago, everybody knew what they were-rural places without people and no need for revenue. As several study commissions have already recommended if counties had greater fiscal autonomy, tax burdens could be broadened, thus lowering taxes for many.
Clearly, a tax system that's almost a hundred years old cannot serve this state needs today or tomorrow. Reform is in order, but it's not simple. A solid core of Republicans-many of them new to the responsibility of elected leadership, have chained themselves to a no tax pledge. As Winston Churchill once remarked of a colleague, "He stumbled over the facts, picked himself up, and hurried on as if nothing had happened." This group has contributed to an atmosphere of cynicism and distrust of government, convincing the public that the money is there; that no additional funds need be provided for the growing needs of the state; that taxes are inherently evil-although as Oliver Wendell Holmes pointed out, they are the price we pay for a decent society.
There are some legitimate issues that we've got to face. Widespread tax increases during a recession can place some drag on a weak economy. The "trust issue" continues to underlie any discussion about tax policy. Many people believe that taxpayers' money is wasted and abused, and it was. As I noted, certain segments of the economy cannot easily bear higher burdens because their profit margins are so narrow. Any restructuring at the city/county level will also engender some opposition because local governments, particularly counties will have their authority expanded to levy new taxes or increase others that are now capped. And of course, the tax pledges have locked many legislators into predetermined positions.
As I have noted above, we are not a high tax state---ranking 14th in personal income, and near the bottom in tax burdens. And statewide tax increases are few and far between. The last income tax increase was 1926. The last sales tax increase was 1965. The last gas tax increase was 1986.
Yet again, having spent all this time talking about the state's tax situation, ultimately the debate must be about Virginia's future. The failure to invest in our basic needs indeed imposes a tax. There are tangible, quantifiable, very real costs to neglect. Overcrowded classrooms exact a cost in terms of inadequate learning experiences and diminished attention to each child-which together carry through the system and into adult life. Failure to address health care needs cost us dearly in terms of both lives and dollars. Transportation gridlock in Northern Virginia alone costs each motoring household some $1500 a year in wasted gas, otherwise unplanned car maintenance, and the value of time spent sitting in traffic. One Virginia businessperson I know had to spend three million dollars on a new warehousing and distribution facility in Maryland because his delivery trucks couldn't get through the traffic in timely fashion if dispatched from Virginia. There is a cost to an inadequate housing supply because demand forces up prices; which in turn creates another cost-communities with a child deficit.
A recent Virginian Pilot editorial frames the issue in stark terms. It said, "Conservatism means restraint and responsibility, not salvation at a discount. You want good schools? Fine. Then you have to have good teachers. Want good teachers? Terrific. You actually have to pay them and give them the materials to do their job.
"Want your kid to have access to a fairly priced state college or university. Wonderful. Then give these schools the support they need.
"You want to get to and from work without spending a lifetime doing it? Then find a reasonable means for paying for the roads (up here we might substitute 'transit') that will make transportation efficient.
The Pilot says, "See how this works? Good because there are miles to go before we sleep. Virginia has dug itself into a fat, inglorious hole of bad public policy. Foremost of urgencies is an effort to straighten out the state's tax system."
So, what should we do? Unfortunately, the choices are neither easy nor necessarily new.
For starters we have to elect more Democrats. That will go a long way. No disagreement there. And we have to work across party lines on an issue by issue basis to find common ground among the few Republicans who understand that we do now face a crossroads and that we must blaze some new trails.
We have to adjust the income tax brackets to make the system more progressive. Yes, that may mean increased taxes for those at the upper end of the income scale, but the thumb is so heavy on the scale for lower income Virginians, that outcome is only fair.
We should examine the hundreds of tax exemptions to determine the value and the necessity of each one.
We should grant counties equal taxing authority in recognition of their needs that are no longer those of the 1600's. .
We should raise tobacco taxes broadly; it's good for the physical and well as the fiscal health of the state.
We should sort out the anomalies that exist between taxes on services and taxes on products, such as food.
Are these goals readily achievable? Probably not now; probably not for some time to come. But we have to begin now to make it clear that the state must invest in itself, that it must invest in its people, to ensure Virginia's place in the forefront of this nation, for the good of generations to come.