| Warner’s
tax reform: two steps forward
Related
link:
- The Warner tax plan: better
on marketing than economics
by Mildred Wigfall Robinson
For Virginia Business
January 2004
Gov.
Mark Warner’s tax reform package is structured
to afford tax relief to Virginians most hard pressed
by the commonwealth’s principal taxes. Simultaneously,
it seeks to preserve the commonwealth’s economic
status quo and competitive position through critically
important continued investment in education and infrastructure.
This intertwined approach is its great strength.
Ideally,
the “tax burden,” to be realistically determined,
should be assessed in the context of the principal taxes
relied upon by the taxing authority. For the commonwealth,
the income tax, the retail sales tax and the car tax
have been financial mainstays. The tax burden borne
by Virginia’s “near poor” under its
income tax has been one of the highest in the country.
In fact, and perhaps ironically, an individual income
tax is potentially the most progressive piece of the
overall tax structure.
On the other hand, the retail sales tax and the myriad
of other excise taxes (including the car tax in its
diminished form) have been quite regressive, because
they were effectuated in a pure form — that is,
without exemption. Warner’s thoughtfully nuanced
approach combines retail sales tax relief with modest
income tax reform and the eventual elimination of the
car tax by 2008. This eliminates an undeniably regressive
tax — the car tax — reduces regressivity
somewhat in the retail sales tax by providing the reduced
levy on food — a necessity — and makes the
income tax slightly more progressive by lowering the
tax burden on those reporting the least amounts of taxable
income. Thus, the overall intended effect of the proposal
is to somewhat relax regressivity, because those on
the lower end of the socio-economic scales will literally
pay less in taxes.
At the same time, it is unavoidably the case that tax
relief imposes real costs on governmental units in the
form of revenue foregone. The economic difficulties
faced by this and other states in the face of the national
economic recession — namely attendant cuts in
spending — have been extensively reported. Further
cuts would quite likely have a long-term negative impact
on the lives and hopes of Virginia’s residents.
Though the national economy shows some signs of rebounding,
thoughtful stewardship on the state level counsels some
proaction. Through increased collections of retail sales
tax on non-food items, higher income tax rates on personal
incomes of more than $100,000 and a higher cigarette
tax, state spending at appropriate levels for education
and infrastructure investment would be assured. Finally,
the proposed local option for an additional levy under
the cigarette tax provides an additional possible resource
for hard-pressed local governments.
The proposal’s most controversial feature is the
increased cigarette tax. This tax is a chameleon. All
50 states and the District of Columbia have a cigarette
tax, but the tax remains disputatious. It is very regressive
because of socio-economic patterns of tobacco usage.
Simply put and relatively speaking, smokers tend to
be less affluent. Further, given the scientifically
established link between smoking and illness, anti-smoking
activists advocate cigarette tax increases as a disincentive
to smoking. Nevertheless, many states increase the levy
on tobacco primarily to increase tax revenues. The experience
of these states is instructive. Most have experienced
first increased and then decreased collections.
Generally,
after this period of adjustment, collections remain
higher overall though not necessarily as high as predicted.
In the final analysis, the best view of the proposed
increase may be a comparative one; an increase of 22.5
cents boosting the total to 25 cents a pack (plus an
additional 50 cents/pack if the local option is exercised)
would still leave Virginia below most of its neighboring
states with the exceptions of North Carolina (5 cents
per pack) and Tennessee (20 cents per pack). Indeed,
the same observation may be made with regard to the
other proposals. Virginia will suffer no comparative
disadvantage with its neighboring states. Finally, with
regard to the retail sales tax in particular, some part
of that tax burden will likely be exported as nonresidents
come into the state on a transient basis to shop and
to engage in leisure activities.
Overall, in my view the package’s underlying premise
is sound: tax reform and state economic objectives must
be considered in tandem. The commonwealth must continue
to invest in itself if it is to maintain its premiere
place among its sister states. I hope that the Virginia
legislature will accept this invitation to take a balanced
approach to the formulation of fiscal policy.
Mildred
Robinson is a professor of law at the University of
Virginia where she teaches federal income tax, federal
estate and gift tax, state and local tax and trusts
and estates.
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