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Federal Tax Cuts Should Spur Real Tax Reform in VA

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A new battle is brewing here in Virginia. Most Virginians aren’t aware of this, but we need to be because it affects our taxes, our income and the ability of our economy to grow and put more money in our pockets.
The Governor recently announced that he expects $500 million is “new” monies coming into the state treasury thanks to the tax cuts. The implication being that the economy is getting a real boost.
But hidden from public view at this point is that most of these “new monies” being projected for the next year are coming straight out of our wallets unless the state legislature acts to stop it.
For administrative simplicity, most states conform to the federal code in some way for defining taxable income. These states tie their state tax code into the federal code so that changes enacted by Congress are “leveled out” automatically in the states. But that is not the case in Virginia and hasn’t been for a long time.
In our case, the General Assembly normally votes to pretty much conform our tax code to the fed’s code. No controversy. Our elected officials just do it and we move on with our lives. But, this year the General Assembly did not act during its regular session.
While Virginia has usually “conformed” in the past, the feds made major changes of the kind that haven’t been seen for 30 years. This means significant new revenue for the state if no action is taken.
If lawmakers do nothing, the state will collect about $500 million in additional revenue, but not necessarily in ways that policymakers want. Legislators could make tweaks to Virginia’s current code to reverse certain changes to hold taxpayers harmless.
In the legislative session earlier this year, the General Assembly postponed the incorporation of most of the provisions in the new federal law. Some state tax impacts will be felt immediately, while others require legislative action. On the whole, the definition of taxable income in Virginia (the tax base) will now be larger, while rates are unchanged. Without legislative action we will be paying more to the state – and it could be as much as 20% of our new federal tax cuts will be gone.
And already the Governor is talking about what to do with this new money – which is, in reality, our money given back to us by Congress and the President.
However, this new tax discussion gives us the opportunity to review the Virginia Tax Code and see how to re-designed it for the economy of the 21st century. Our current tax code is almost 50 years old, crafted when our economy was dominated by tobacco, textile manufacturing and coal.
Ideally, lawmakers will identify rate cuts or tax reforms intended to improve the Commonwealth’s tax competitiveness while avoiding an unlegislated tax increase. They should look at the “Big Picture,” and not nibble around the edges to satisfy one constituency or another.
We have the opportunity to ask some important questions and make some important long-term decisions to help grow our state economy. For instance we should ask: “If we re-crafted the Tax Code from scratch, what would it look like?” And, “What changes would most stimulate economic growth in a diverse economy like Virginia’s?” Additionally, “What do the federal tax changes enable us to do that we could not do in the past?”
This issue of “new tax revenue” can open up a political debate about what to do with the “new money” which, in reality, is money siphoned off of our own new money provided by the federal tax changes earlier this year. Or, we can look at this as an opportunity to begin a serious discussion about rewriting the tax code to help more people by growing the economy.
As Jared Walczak, Senior Policy Analyst at the Tax Foundation and author of a new paper on this issue co-published with the Thomas Jefferson Institute, said,
“Virginia is thought of as a business-friendly state, and in many respects this is true, but there’s a broad bipartisan consensus that the Commonwealth’s tax structure is outdated. There is significant room for improvement in how Virginia collects taxes. The new federal law gives the state the revenue flexibility it needs to make some potentially beneficial changes.”
We have a real opportunity to reform and update our antiquated tax code to better reflect the realities of 21st century Virginia. We have a rare chance to modernize our tax code. Properly crafted tax reform can encourage economic growth and put more money into the hands of Virginia’s citizens.
Our Governor and our General Assembly are up to this challenge if they choose to be.
(This column first ran in the Richmond Times Dispatch on August 19, 2018.)
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