Higher taxes, please

Published October 30, 2014 by Bernie Niemeier

Gov. Terry McAuliffe’s administration has made diversifying Virginia’s economy a major initiative and rightfully so.
Imagine a giant vortex, the whirling sound of Virginia’s economy dancing around the drainpipe.  After decades of over-reliance on the public sector, is this the nightmarish endgame?  If so, it’s enough to make one wake up in a cold sweat.

Public sector or public-sector contractors account for 13 of Virginia’s top 20 employers.  Overall, the commonwealth ranks fourth behind the District of Columbia, Maryland and Alaska with 22.4 percent of its employed residents working for federal, state or local government.  That’s more than one in five Virginia workers.

For some time the public sector’s been getting hit by a double whammy:  Most of the focus tends to be on federal sequestration — remember the political deal that was supposed to be so bad that neither party would let it happen?  Well, it’s been happening for some time now.

The second part of this disaster scenario is largely self-created. Long before sequestration began, Virginia’s state government dialed back its own revenue growth.  For three successive governorships — under the leadership of both Democrats and Republicans — the commonwealth has largely avoided all tax increases.  When’s the last time that our General Assembly did not have to spend an inordinate amount of time breaking a self-inflicted budget crisis?

Roughly 70 percent of Virginia’s general fund revenue comes from income taxes, and another 20 percent arises from sales taxes.  That’s 90 percent of the general fund.  Without increasing either of these taxes, the commonwealth has no choice but to make cuts in other areas, notably higher education, as well as perennially underfunding transportation and other infrastructure needs.  This problem is particularly acute during periods of economic contraction.

The unfixed potholes in our highways ultimately become a tax, requiring front-end work on our automobiles. For well over a decade, Virginia’s governors have been forced to call for all state departments to produce plans reducing their spending. Metaphorically speaking, these reductions are creating potholes that need filling in many areas other than roads.

The citizens of the commonwealth have witnessed a variety of gimmicks employed by elected officials to supposedly close budget gaps: a rainy day fund that will ultimately run dry, borrowing from state pension contributions, as well as imaginary revenues dependent on federal action, such as still-non-existent offshore oil leases and a yet-to-be passed Internet sales tax.

Recently, Virginia’s unemployment rate has been rising at a time when national rates are falling.  Looking backward, we’ve seen Virginia go from being above average on nearly all measures to having less favorable ratings. In 2013, Virginia ranked 48th in the U.S. for GDP growth with just one-tenth of one percent, barely positive. The two states behind us, Maryland and Alaska, not coincidentally, are also highly dependent on government employment.

Diversifying Virginia’s economy is certainly important, but what about the existing businesses that have long counted the public sector as their best — and in some instances their only — customers?  We’re already experiencing some consolidation among government contractors in Northern Virginia and Hampton Roads.  Building a new Virginia economy will undoubtedly take money.  We say we need it, we say we want it, but are we willing to pay for it?

Economists and economic developers often cite monetary multipliers that result from government spending or business recruitment.  These multipliers arise from income and retail sales taxes generated by job growth.

Using a conservative multiplier of 1.5 to 1.6, it can be inferred that a billion dollar expenditure would generate indirect economic growth of $500 million to $600 million.   That makes public spending look like a pretty good deal.

Conversely, when expenditures are reduced, there is a similar reduction in indirect spending, meaning that the economy loses a lot more than just the nominal amount of the budget cut.  We can leave it to economists to argue the specific multiples and how they differ for expansion and contraction, but you get the general idea.

No one likes taxes, but at some point we’ve got to restore effectiveness and public trust in government.  It is not reasonable to expect the business community to pay for all economic development.

As a businessperson, I’d gladly pay slightly higher personal taxes if it meant that my business had a better chance.  The benefits of greater commercial success would far outweigh the personal cost and also serve the greater good of the commonwealth’s overall productivity.

Instead, it seems that our legislative and executive branches are in a permanent fight.  Separation of powers is intended to help rather than hinder good governance.  It’s time to realize that being a low-tax state may be a cause of underperformance.