Prior to the Senate elections in the fall of 2003, I had worked extensively on a “tax modernization” plan for Virginia that had as one of its primary goals to restore equity to our state tax system. A plan that was essentially “revenue-neutral” was the goal, but I had always insisted that the state would need sufficient revenue to meet its funding obligations back to the local governments and that as long as the increased funding at the state level was being returned to local governments, off-setting the need to raise that money from local sources, then that would be acceptable. In other words, I supported putting more emphasis on state generated sales tax and income tax and less dependence on real estate. When the state budget is balanced by not meeting the full funding obligations to the local governments, the less affluent rural areas of the state and the inner cities are generally the losers.
For the overwhelming majority of the families that I represent, the net impact of the tax package was a tax reduction rather than a tax increase. The implication that it was the “largest tax increase in Virginia’s history” is totally bogus.
The major changes that figure into this are:
- Income tax was decreased slightly for everyone, no matter what income level by increasing the personal exemption amount from $800 to $900
- Sales tax was increased by one half of a percent (this was the major component of the tax increase), but two percent was taken off of food
- The estate tax was eliminated
- Cigarette taxes were increased and the proceeds directed to health costs
- Recordation fees were increased for real estate transactions
These changes produced approximately $700 million per year in additional revenue to the state, but roughly $500 million per year of that amount was returned to the localities to pay for existing programs, primarily education and public safety. The remaining additional revenue was allocated to higher education costs (reducing the need for increased tuition) and mandated Chesapeake Bay cleanup costs.
The statement that the additional revenue was used to “create new liberal social programs” is totally bogus.
In 1999, after having served on a commission charged with the responsibility of reviewing the status of and providing planning for the future of Virginia’s local governments, I co-patroned a measure to create a citizen commission to make recommendations on modernizing Virginia’s antiquated tax structure and to also look at the division of responsibilities for services that are provided by state and local governments. In 2001 when this Commission completed it’s work, I introduced legislation along with Delegate Bob McDonnell, to create a legislative work group to review and implement the findings of the citizen commission. The task force was created and worked over a period of two years. A number of initiatives were introduced and passed by the General Assembly as a result of this work. Most of the initiatives focused on taxpayer relief measures. There was not the political will to enact some of the major reforms, so I introduced an additional resolution in 2003 to create a work group of key legislative leaders to move forward with the needed tax reform agenda. I served as the Co-chair of this group along with Delegate Harry Parrish, the Chairman of the House Finance Committee.
We developed an agenda and in July of 2003, presented our basic agenda to Governor Warner and invited him to participate. The resulting debate was nothing short of monumental, but eventually a number of the elements of reform that we had suggested from our work were adopted. It needs to be an ongoing process but following is essentially a summary of actions that I suggested and filed legislation to accomplish as a result of our work.
I was very aggressive in promoting the tax reform package, and repeatedly was quoted in news accounts in support of increasing state revenues in order for the state to meet its obligations back to the localities and to reduce the burden on locally generated property taxes and fees. I had an anti-tax Democrat opponent in 2003 who took full advantage of my public statements at that time. The statement in ads that I “misrepresented my position” until after the 2003 election is bogus.
TAX REFORM - Presented by Senator Hanger 2003
General Principles
In general, more emphasis should be placed on consumption taxes and personal income tax with the state assuming a larger share of funding for services and a resulting reduced emphasis on real property and other locally generated taxes and fees.
While everyone should contribute to the cost of required services as their means allow, the overall tax system, both state and local should be slightly progressive and the lowest levels of income should be sheltered from income tax.
The primary work of tax reform shall be to restore equity to the tax system as well as predictability and simplicity. Adequacy of revenue should be addressed separately in the context of total identified obligations and the necessary exercise of reducing or constraining expenditures versus the ability and will of the taxpaying public to provide funds for desired services.
Income Tax
(1) Standard deduction should be increased to $3,500 single and $7,000 joint returns
(2) The personal exemption should be increased to $2,500 with no additional exemption amounts allowed for age or disability
(3) The brackets which currently are mostly irrelevant, should be changed to make the rates slightly progressive as it was intended 75 years ago
(4) The current age deduction should be subjected to means testing and perhaps a portion of the increased revenue used for additional health related benefits
Sales Tax
(1) Virginia should adopt streamlined standards and definitions and continue to work with a coalition of states to gain authority to collect sales tax on remote sales (catalog and internet)
(2) Accelerated payments of sales tax to the state by retailers should be discontinued
(3) Sales tax should not be extended to services
(4) Sales tax should be removed from food. This should be done by a credit program rather than point of sale. The credit will be reconciled back against income tax returns and in cases where there is no income tax liability, a simple postcard filing would be necessary for a refundable credit. This should apply to the entire state and local portion.
(5) The state portion of sales tax should be increased if needed to offset the elimination of other taxes and also to fund additional payments to localities to offset the need for more local real estate tax
Estate Tax
The estate tax is an unfair impediment to the generational transfer of family owned business and farm properties. This should be repealed.
Personal Property Tax
(1) The phase-out of the property tax on personal use vehicles should be completed. The tax should be removed from the full value of all qualifying vehicles, not just the first $20,000 in assessed value
(2) A constitutional amendment should be offered to end taxation of personal use vehicles
(3) Localities will be reimbursed per current formulas at 100% and that amount shall serve as a benchmark for future payments to localities either through block grants or assumption of services by the state. Personal use vehicles will no longer be assessed.
Cigarette Tax
The current system of a state excise tax (currently 2.5 cents per pack) and local option cigarette taxes should be abolished and replaced by a single statewide tax at .30 per pack. This tax shall be returned to the localities on a per capita basis with a “no-loss” provision for localities that currently impose a local cigarette tax.
Tele-communication Tax
A companion study, reporting to this committee, of tele-communication taxes in Virginia has yielded an innovative proposal that will replace several taxes with a single excise tax at a lower rate (same as sales tax rate) and will derive roughly the same revenue by broadening the base.
Real Estate Tax
While state revenues have not increased as a result of rate changes for many years, pressures have been placed on localities which have resulted, in many localities, in higher rates of increase in local real estate tax than is tolerable. While other initiatives are being put in place to provide more revenue to the localities by the state and/or assumption of more service responsibility by the state, there needs to be an affirmative action to control the effective growth in levies from residential and agricultural properties.
Taxable value of residential and agricultural properties shall be assessed at cost plus an annual growth factor (2% suggested). Sale, transfer, rezoning at the owner’s request, or change in use may trigger a market value assessment.
A constitutional amendment shall be proposed to allow this modification.
Transportation Funding
There is no question that there is not an adequate revenue flow to deal with transportation funding needs. Efficiencies must be created and better strategies for mass transit created before taxes are increased in this area. A combination of tolls and increased fuel tax should be considered.
Dedicated Funding Source-Conservation
We are fortunate to have growth, but we must create a funding source that has a nexus to growth in order to fund adequate protections for air, water and other natural and historic resources.
Other Taxes & Fees
All local and state tax should be reviewed over a period of time and Title 58.1(state tax code) subjected to a complete revision.
Fees imposed throughout all of the various titles should be reviewed for possible elimination or adjustment up or down.
Rather than continuing the current commission, a resolution should be introduced to request a joint subcommittee of the House and Senate Finance Committees to be appointed by the Chairs of the Finance Committees, with the charge of continuing the work of reforming Virginia’s tax system
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