July 13, 2012
Virginia’s Revenue System Can’t Pull Its Weight
Virginia’s taxes were designed for yesterday’s economy, and the system is not capable of generating sufficient resources today to keep Virginia moving forward, according to a new report released today by The Commonwealth Institute for Fiscal Analysis. The report, Frozen in Time, shows that Virginia has grappled with budget shortfalls in 10 of the last 12 years and while reliance on deep cuts, one time budget-balancing tools, and gimmicks got the state through the worst of the recession, structural problems still exist and will resurface.
“When it comes to raising revenue to fund the core functions of our public structures, Virginia is frozen in time,” says Commonwealth Institute President Michael Cassidy. “In fact, most of Virginia’s tax code dates back to the early 1900s when a car cost less than $900 and a dozen eggs were only 23 cents. The problem is we’ve changed the way we earn money and buy stuff as well as the way businesses are structured and operate, but our revenue system hasn’t kept up with those changes.”
The report points to specific ways in which the largest sources of general fund revenue — the individual income tax, the corporate income tax, and the sales and use tax — are insufficient because they are outdated, narrow, and inadequate in the context of Virginia’s modern economy:
- Virginia’s basic income tax structure has not been touched since 1987; a quarter of a century ago. Since then, however, the income distribution has shifted with income growth heavily concentrated among higher income households.
- Key changes in business models and practices, as well as the creation of numerous special tax breaks, have outstripped the ability of the corporate tax to adequately account for today’s business activity. Over 60 percent of Virginia corporations paid no corporate tax in 2008.
- Sales tax revenue as a share of total general fund revenue has steadily fallen since 1977, largely driven by changes in what Virginians are buying and how they are buying it. For example, consumer spending has shifted from buying goods to buying services. Between 1980 and 2010, the rate of spending on services increased almost 23 percent.
“Opportunities exist to set Virginia’s revenue system on a more sustainable path,” says Cassidy. “Meeting today’s needs as well as the future’s by modernizing Virginia’s revenue system will help the Commonwealth maintain its competitive edge and maximize future prosperity.”
Frozen in Time is the first of three reports dealing with Virginia’s revenue system to be released by The Commonwealth Institute. Subsequent reports will address the ways in which Virginia has avoided dealing with the problem of an outdated revenue system, and specific proposals for reform.