roanoke.com Real Politics / Preston Bryant

NOV. 18, 2002

Tax reform is overdue

Preston Bryant is a Republican who has represented Lynchburg and part of Amherst County in the Virginia House of Delgates since 1996.

Virginia’s local governments are upset. And they have a right to be. But some are politically clumsy in expressing their frustrations.

For years, the General Assembly and local governments have been talking about the need to overhaul Virginia’s antiquated tax structure – to reconcile the way in which the state treasury takes in tax dollars and then shares that revenue with counties, towns, and cities. When the economy was booming in the mid- to late-1990s – remember those days? – it was not uncommon to see the state running billion-dollar surpluses while local governments struggled to pay for basic services they’re charged to deliver. There was clear and convincing evidence that our tax structure is out of whack.

Virginia’s tax code as we generally know it today was conceived early in the 20th century. The individual income tax was put in place nearly 80 years ago, and the first two income tax brackets haven’t been adjusted since 1926. Those were the days when our state economy was largely agrarian and land was the main measure of one’s wealth for tax purposes.

But today, Virginia�s economy is driven less by agricultural enterprises and more by sophisticated manufacturing, high-tech R&D and financial services. The nature of our economy has changed dramatically since the early part of last century, but our tax code has not. While agriculture and agribusiness still account for more than 11 percent of the state’s gross product – and that’s scores of billions of dollars in our economic base – it must be admitted that fewer people are farmers and real estate taxes are no longer the most accurate measure of wealth.

Individual income taxes have now become the greatest generator of revenue for the state, while local governments remain reliant on yesteryear’s use of real estate taxes as their primary revenue source. So the state does well while counties, towns and cities, relatively speaking, suck wind.

There have been three tax reform study panels over the past few years. The first two have finished their work; the third is still plugging along.

The first of these was the Commission on Virginia’s State and Local Tax Structure for the 21st Century. This was the so-called Morris Commission, named for its chairman, Tom Morris, who is president of Emory & Henry College. This 15-member study panel was launched in early 1999 and worked for nearly two years. It offered up comprehensive reforms to the legislature and the governor in December 2000, and among its recommendations was giving local governments up to six percent of what the state collects from individual income taxes.

Then along came a commission put together by then-Gov. Jim Gilmore. It was chaired by one of Gilmore’s chief allies, former Rep. Tom Bliley. This group worked for the better part of a year. While it was more partisan in flavor and make-up than the Morris Commission, it did good work and came to many of the same conclusions. It, too, confirmed that our tax code is outdated and that major changes are needed, and Gilmore himself proposed amending the state constitution to allow local governments to gain a fair share of the individual income tax beginning in January 2005.

And now we have a General Assembly commission looking at overhauling the tax structure. It’s co-chaired by Del. Bob McDonnell, a Republican from Virginia Beach, and Sen. Emmett Hanger, an Augusta County Republican. This 19-person commission, which was established in 2001 and has been working steadily since then, had hoped to have its worked wrapped up right about now, but given its inability to achieve any kind of consensus on major reforms, it’s extending its work for another year.

Many decry Virginia’s apparent need to study issues ad nauseam before it acts. The legislature has been known to conduct studies to assess the validity of previous studies on the same subject.

But overhauling the state tax code is no small matter of public policy, and it is quite right for there to be an independent study, an executive branch study, and a legislative study. That makes for a more complete buy-in – at least in theory – when it comes time to enact reforms.

What does not necessarily help the process, however, is local governments calling for an uprising against the legislature. Recall, if you will, the Virginia Association of Counties’ meeting last week at the Homestead, where about 500 elected county officials from around the state stopped just short of calling for legislators’ heads on pikes.

Their big beef – expressed as they bathed in the luxurious spas at the tony mountain resort – is the recent cuts in state revenues that normally are passed on to them to help pay for local government services. When those funds are cut, county supervisors and city and town councilors have to make cuts themselves or raise local taxes in order to fill the gap.

The assembled mass passed a resolution demanding the public hold delegates and senators accountable for the state budget cuts that are hitting them at the local level. These cuts, of course, are due to the nearly $2 billion shortfall in state revenues, which is on top of the $3.8 billion budget hole filled by the legislature – also mostly through cuts – just eight months ago.

What these county officials really want is for the General Assembly to raise state taxes – so they won’t have to raise local taxes – and then give them a bigger slice of Richmond’s budget pie.

That’s politically naive, especially after proposed regional referendums on increases in the state sales tax to fund transportation initiatives in Hampton Roads and Northern Virginia went down in flames a couple weeks ago.

Local government officials’ outrage is understood, albeit misplaced. If it is to be directed at the legislature for anything, it should be for its failure to move more quickly on tax reform, not for the budget cuts being passed on to them. Tax reform enacted long ago could’ve made today’s cuts more manageable.

When Mark Warner, a Democrat, was running for governor last year, he said that comprehensive tax reform would be one of his top priorities, and he even talked about calling a special session of the Republican-controlled legislature to tackle it. But that was before the economy hit the skids and state revenues fell flat.

The conventional wisdom for not moving ahead with tax reform is the inability to do so when revenue streams are so unstable. But establishing a baseline for what revenues are like under normal economic conditions is not difficult. After all, we have decades of economic data at our fingertips.

Virginia is facing tough times ahead. The state government and her local governments are going to take it on the chin. It’ll all get worse before it gets better. There will be budget cuts. There will not be increases in state taxes. Those are the facts.

But this economic downturn is no reason not to go forward with tax reform. Restructuring our tax code could be in the long term a part of the solution – especially for local governments.

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