VIRGINIA NEEDS REVENUE MORE THAN TAX RESTRUCTURING

The need for tax restructuring in Virginia is overstated. Emphasison reform diverts attention from a much larger issue, the adequacy ofthe state's tax system to address basic needs. Currently, there istalk of a revenue shortfall of at least $1 billion for the generalfund in the next biennium.

Virginia's current tax code is the embodiment of many alterationsthrough the years that have occurred because of changes inleadership, ideology, demographic and economic circumstances, and thestrength of political interest groups.

A brief history of the three taxes that account for more thanthree-fourths of Virginia's state and local tax collections shows howVirginia's tax system evolved.

In the 19th century, the local property tax took its current form,which emphasizes uniform assessments based on the market value ofreal property. Over the years, many changes have been made inadministration of the tax.

Virginia's modern-day individual income tax was born in 1926 aspart of a reform program led by then-Gov. Harry Byrd. Since then,there have been a number of changes in its major features.

The general sales and use tax is relatively new. It was adopted in1966 with the endorsement of then-Gov. Mills Godwin as part of anambitious program to establish the community college system and toprovide additional support for all levels of education.

Today's property tax is well-administered in Virginia,particularly in the urban areas where full-time professionalassessors employ modern techniques. In major urban areas, propertiesare reassessed annually or biennially to ensure that assessed valuesare close to market values.

The state's local governments are less dependent on the propertytax than the national average, and although the tax has never been afavorite, it has the great advantage of being a local source ofrevenue closely tied to the benefits that taxpayers receive.

The Virginia individual income tax needs to be updated. The valuesof the personal exemption, single individual and married couplestandard deductions, and the tax brackets have not been changed since1988, 1989 and 1990, respectively. A huge hole in revenue yield wascreated by excessively generous concessions made in 1996 for elderly,affluent taxpayers.

The sales tax has been eroded by the exclusion of nonprescriptiondrugs, the granting of tax relief for food consumed at home and theprovision of exemptions to many nonprofit organizations. However, itshould be noted that such erosion has been experienced in most sales-tax states because of similar political pressure.

The sales tax base does not include much of the service economy.Furthermore, the tax evasion accompanying remote purchases fromcatalog and Internet sellers is a growing problem.

Nonetheless, these problems are not unique to Virginia. All of the45 states with sales taxes face them. Virginia is likely toparticipate in the streamlined sales tax project that, with theassistance of federal government legislation, will help statescollect taxes from remote sales.

Many services are not taxed because it would be politicallyunpalatable to do so. States have shunned applying sales taxes tosignificant service sectors such as medical services, rent andeducation. A modest expansion of the sales tax base to includepersonal services such as haircuts and dry cleaning, repair servicesand amusement services might be acceptable to the electorate, but itis unrealistic to think that Virginia is missing huge amounts ofrevenue from not taxing services.

The truth is that Virginia has a fairly good tax system by thestandard of what exists in the 50 states.

Governing, a monthly magazine published by Congressional QuarterlyInc., recently rated state tax systems. The study found that 11states, including California, Florida and Texas, "have tax codes sooutmoded and inefficient that they need to be redesigned from thebottom up." Although the study found that Virginia's system requiresa substantive overhaul, this finding was also applied to 34 otherstates.

There's no doubt that Virginia would benefit from an updating ofits tax system. However, even the best of reforms, if combined with arevenue-neutrality straitjacket that calls for no increase in taxrevenue, will fail to address the main issue - revenue adequacy. Infact, there is a danger that under the guise of tax reform, changeswill be made that result in less total revenue.

Decision-makers should focus on the ability of the financialsystem to raise sufficient revenue from taxes, fees, charges andfederal aid to meet core needs in education, transportation, medicalassistance to the needy and other important programs. That's thechallenge for Gov. Mark Warner, the tax code commission, the businesscommunity and everyone concerned about the future of thecommonwealth. u=BBC817CE

The need for tax restructuring in Virginia is overstated. Emphasison reform diverts attention from a much larger issue, the adequacy ofthe state's tax system to address basic needs. Currently, there istalk of a revenue shortfall of at least $1 billion for the generalfund in the next biennium.

Virginia's current tax code is the embodiment of many alterationsthrough the years that have occurred because of changes inleadership, ideology, demographic and economic circumstances, and thestrength of political interest groups.

A brief history of the three taxes that account for more thanthree-fourths of Virginia's state and local tax collections shows howVirginia's tax system evolved.

In the 19th century, the local property tax took its current form,which emphasizes uniform assessments based on the market value ofreal property. Over the years, many changes have been made inadministration of the tax.

Virginia's modern-day individual income tax was born in 1926 aspart of a reform program led by then-Gov. Harry Byrd. Since then,there have been a number of changes in its major features.

The general sales and use tax is relatively new. It was adopted in1966 with the endorsement of then-Gov. Mills Godwin as part of anambitious program to establish the community college system and toprovide additional support for all levels of education.

Today's property tax is well-administered in Virginia,particularly in the urban areas where full-time professionalassessors employ modern techniques. In major urban areas, propertiesare reassessed annually or biennially to ensure that assessed valuesare close to market values.

The state's local governments are less dependent on the propertytax than the national average, and although the tax has never been afavorite, it has the great advantage of being a local source ofrevenue closely tied to the benefits that taxpayers receive.

The Virginia individual income tax needs to be updated. The valuesof the personal exemption, single individual and married couplestandard deductions, and the tax brackets have not been changed since1988, 1989 and 1990, respectively. A huge hole in revenue yield wascreated by excessively generous concessions made in 1996 for elderly,affluent taxpayers.

The sales tax has been eroded by the exclusion of nonprescriptiondrugs, the granting of tax relief for food consumed at home and theprovision of exemptions to many nonprofit organizations. However, itshould be noted that such erosion has been experienced in most sales-tax states because of similar political pressure.

The sales tax base does not include much of the service economy.Furthermore, the tax evasion accompanying remote purchases fromcatalog and Internet sellers is a growing problem.

Nonetheless, these problems are not unique to Virginia. All of the45 states with sales taxes face them. Virginia is likely toparticipate in the streamlined sales tax project that, with theassistance of federal government legislation, will help statescollect taxes from remote sales.

Many services are not taxed because it would be politicallyunpalatable to do so. States have shunned applying sales taxes tosignificant service sectors such as medical services, rent andeducation. A modest expansion of the sales tax base to includepersonal services such as haircuts and dry cleaning, repair servicesand amusement services might be acceptable to the electorate, but itis unrealistic to think that Virginia is missing huge amounts ofrevenue from not taxing services.

The truth is that Virginia has a fairly good tax system by thestandard of what exists in the 50 states.

Governing, a monthly magazine published by Congressional QuarterlyInc., recently rated state tax systems. The study found that 11states, including California, Florida and Texas, "have tax codes sooutmoded and inefficient that they need to be redesigned from thebottom up." Although the study found that Virginia's system requiresa substantive overhaul, this finding was also applied to 34 otherstates.

There's no doubt that Virginia would benefit from an updating ofits tax system. However, even the best of reforms, if combined with arevenue-neutrality straitjacket that calls for no increase in taxrevenue, will fail to address the main issue - revenue adequacy. Infact, there is a danger that under the guise of tax reform, changeswill be made that result in less total revenue.

Decision-makers should focus on the ability of the financialsystem to raise sufficient revenue from taxes, fees, charges andfederal aid to meet core needs in education, transportation, medicalassistance to the needy and other important programs. That's thechallenge for Gov. Mark Warner, the tax code commission, the businesscommunity and everyone concerned about the future of thecommonwealth.

Knapp is a research economist at the University of Virginia'sWeldon Cooper Center for Public Service. This first appeared in The(Norfolk) Virginian-Pilot.