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Recommended Blueprint for Virginia's Response to the 2008-2010 Revenue Shortfall
by
Virginia Organizing Project
It has already been projected that the Commonwealth of Virginia will face a budget deficit of an estimated $973.6 million in fiscal year 2009 and $1.54 billion in fiscal year 2010. New estimates suggest that the biennial revenue shortfall may be $3.2 billion or higher ($686 million greater than the October estimate).
In the face of these expected deficits, the Virginia Organizing Project (VOP) applauds Governor Tim Kaine’s efforts to limit the number of state employee layoffs and the reduction of state services as he and the Virginia General Assembly move to close these anticipated shortfalls. The Governor’s October recommendations to use $250 million in bond proceeds in place of cash capital outlay appropriations, to withdraw $400 million from the Revenue Stabilization Fund, to replace approximately $57 million in state general funds with other sources (including federal funds), and to reduce expenditures in his own office are to be commended as wise and expedient measures in the current fiscal crisis.
We do urge the Governor and the General Assembly, however, to go much further in this regard, since any reduction in state services and any increase in state government layoffs at this time will actually postpone economic recovery and delay the return of fiscal stability. Recognized by economists for nearly a century, the paradox of thrift is a reality. Cuts in spending and increases in savings will depress economic activity and revenue, especially during a recession. State government “belt-tightening” during a fiscal crisis actually worsens its impact. In this light, VOP regards cuts to public schools, public safety, transportation, and reduction of aid to local governments as measures of last resort, to be kept to an absolute minimum.
The Virginia Organizing Project also recognizes that the Commonwealth has at its disposal the means to address this crisis in a much more positive way to prevent a deeper crisis. By doing so, we can also avoid customary repercussions, such as higher college tuition and higher property taxes. To offset part of or the entire projected revenue shortfall, VOP urges the Commonwealth to abide by three principles:
1. Use the legal maximum amount from the Revenue Stabilization Fund (50 percent of the expected shortfall or fund total, whichever is less) for fiscal years 2009 and 2010. Under current deficit projections for 2009 this would be $86.8 million greater than the total currently recommended by the governor (for a new total withdrawal of $486.8 million). To stave off further shortfalls and economic decline, it is wise to withdraw the maximum amount from this fund at the earliest possible moment in any economic and fiscal recession. Setting aside more for later will only force larger deficits at that later date.
2. Propose reductions in planned expenditures so that they will match but not exceed the estimated shortfall. Under current projections, the cuts already recommended exceed the anticipated deficit by $151 million. While deficit forecasts may soon be adjusted upward by no small amount, there is no compelling economic reason for the state to recommend cuts that exceed the projected deficit by any amount. The likelihood of significant federal aid to state Medicaid and infrastructure programs makes it even less wise to recommend cuts greater than the expected shortfall. While it may seem prudent to leave a larger cushion in the event of further, as yet unseen deterioration, the larger this amount, the greater will be the reductions in economic activity and revenue affected by this fiscal contraction.
3. For larger deficits, very likely to appear in FY 2010, use modest progressive tax reform to raise additional revenue. VOP has in recent years identified at least three distinct ways that this could be accomplished. Because all three are based upon the taxpayer’s “ability-to-pay” and represent changes that would increase revenue, promote economic activity and stability, and result in the lowest possible rates for the greatest number of Virginians, they ought to be considered closely at any time. In a fiscal crisis such as the one we are now facing, they are even more appropriate and beneficial. Our recommended tax reform options are:
Option A: Eliminate State Income Tax Deduction for Federal Excess Itemized Deductions, for Virginia taxpayers with over 50K adjusted gross income (single) or $100K adjusted gross income (married, filing jointly) (Virginia Resident Form 760, Line 10)
All taxpayers permitted to use existing standard deduction ($6,000 for joint returns; $3,000 for single taxpayers)
Introduces a progressive change that flattens the regressive slant at the top of the state’s income tax structure
Raises an estimated $876 million annually (approx. $230 million of which would be returned to Virginia taxpayers due to increased federal tax deductions)
Option B: Modernize State Income Tax Brackets (rates for the bottom two tax brackets haven’t been modified since 1919)
Current Brackets:
$0-3,000: 2%*
$3,001-5,000: 3%
$5,001-17,000: 5%
$17,001 and up: 5.75%
* Had this bracket been adjusted for inflation, the upper limit would be approximately $33,000
Modernized Brackets
$0-4,999: 2%
$5,000-29,999: 4%
$30,000-49,999: 6%
$50,000-99,999: 7%
$100,000 and up: 7.5%
Total Change:
Revenue Change
-$68,977
-$114,935,848
-$190,077,550
-$78,230,140
+$770,506,366
+$387,193,851
Option C: Add Two New Upper Brackets (Personal Income Tax)
New Bracket
6.75% (all taxable income > $100,000 <= $200,000
7.75% (all taxable income > $200,000
Total:
Estimated New Revenue
$350 million
$422 million
$722 million
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Implications of VOP Tax Reform Proposals
Option A: Eliminate State Income Tax Deduction for Federal Excess Itemized Deductions (Above 50K, single returns; above 100K, married-joint returns)
For tax returns with over $100K in adjusted gross income (single and married, filing jointly), this change would affect 13.7 percent of Virginia tax returns. For tax returns with over $50K in adjusted gross income (single only), this change would affect another 6.9 percent of Virginia tax returns.
With a standard deduction set for $11,400 (married, filing jointly), plus $1,000 for new property tax standard deduction in 2009, it is very likely that many fewer Virginians, at that point and beyond, would be affected by this change (since greater numbers would then elect to take the federal standard deduction).
Example of Joint Return, with 2 dependent children, 80K Adjusted Gross Income, and $16,000 in itemized deductions on federal return. Additional Virginia income tax under reformed structure = $0
Example of Joint Return, with 2 dependent children, 105K Adjusted Gross Income, and $18,000 in itemized deductions on federal return. Additional Virginia income tax under reformed structure = $356. Reduction in federal taxable income due to this (federally deductible) state tax increase = $89. Aggregate additional tax = $267
Example of Joint Return, with 2 dependent children, 125K Adjusted Gross Income, and $20,000 in itemized deductions on federal return. Additional Virginia income tax under reformed structure = $460. Reduction in federal taxable income due to this (federally deductible) state tax increase = $115. Aggregate additional tax = $345
Example of Joint Return, with 2 dependent children, 150K Adjusted Gross Income, and $25,000 in itemized deductions on federal return. Additional Virginia income tax under reformed structure = $684. Reduction in federal taxable income due to this (federally deductible) state tax increase = $171. Aggregate additional tax = $513
Option B: Modernize State Income Tax Brackets
Hypothetical returns, all married, filing jointly, with 2 dependent children:
$20K Adjusted Gross Income
Current Tax = $390
New Tax = $316 (Income tax reduction of $74)
$60K Adjusted Gross Income (Slightly Above Virginia Family Median)
Current Tax = $2,640
New Tax = $2,328 (Income tax reduction of $312)
$100K Adjusted Gross Income
Current Tax = $4,894
New Tax = $5,128 (+$234)
Federal Tax Reduction = -$59
Aggregate additional tax = $175
$150K Adjusted Gross Income
Current Tax = $7,815
New Tax = $8,830 (+$1,015)
Federal Tax Reduction = -$254
Aggregate additional tax = $761
Option C: Add Two New Upper Brackets (Personal Income Tax)
Hypothetical returns, all married, filing jointly, with 2 dependent children, added tax:
$150K Adjusted Gross Income:
Current Tax = $7,815
New Tax = $8,219 (+$404)
Federal Tax Reduction = -$101
Aggregate additional tax = $303
$250K Adjusted Gross Income:
Current Tax = $13,566
New Tax = $15,373 (+$1,807)
Federal Tax Reduction = -$506
Aggregate additional tax = $1301
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The Virginia Organizing Project (VOP) is a statewide grassroots organization dedicated to challenging injustice by empowering people in local communities to address issues that affect the quality of their lives. As a non-partisan organization, VOP especially encourages the participation of those who have traditionally had little or no voice in our society. By building relationships with diverse individuals and groups throughout the state, VOP strives to get them to work together, democratically and non-violently, for change.
Created in 1998, the VOP Tax Reform Committee is a non-partisan body of citizens, advocates, and scholars who work to create a sound and fair tax system for the Commonwealth of Virginia.
Comments? Email us at letters@thevalleyamerican.com.
© 2008 The Valley American
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