Challenges Facing Tax Policy in the Commonwealth

While the recession is clearly at the center of the Commonwealth’s continuing fiscal shortfalls, the downturn also has revealed some serious underlying challenges with the state’s revenue structure. This discussion provided an overview of the issues the state faces in raising the resources necessary to meet public needs and introduced some key reform ideas for strengthening Virginia’s path to economic recovery.

okos_111012Sara Okos is the Policy Director at the Commonwealth Institute for Fiscal Analysis, where she analyzes, conducts, and coordinates research on a wide array of tax policies, the overall budget process, labor and wage issues, and education. Prior to joining The Commonwealth Institute in 2007, Sara worked in the Executive Office of Governor Jennifer Granholm in Lansing, Michigan. Sara has a bachelor’s degree in Marketing and Economics from the University of Notre Dame, and a Master’s of Public Policy from the College of William and Mary’s Thomas Jefferson Program in Public Policy, where she was a Schroeder Fellow in Health Policy. She is a 2011 recipient of the Richmond Community Foundation’s Stettinius Award for Nonprofit Leadership and is a member of the 2011 class of the Political Leaders Program with the University of Virginia’s Sorensen Institute for Political Leadership.

Sara Okos spoke at the October 12, 2011 meeting of the Senior Statesmen of Virginia. The meeting was held at the Charlottesville Senior Center. Following the presentation, questions were taken from the audience. The program was moderated by SSV Vice President Bob McGrath.

Program Summary

Ms. Okos focused on the state’s general fund which is half of the overall budget and the dollars our legislators and governor have the most discretion over their use and where they come from. Ninety percent of these come from sales and income taxes. Half go to localities. Virginia is still 6% below in revenues since the great recession in 2007. Yet demands are up for food stamps, temporary assistance for needy families, and Medicaid all resulting in an $11 billion shortfall. Forty percent of this was made up through program cuts, 30% from the federal government in the form of relief funds in the Recovery Act, 7% from the rainy day fund, 6% from tax policy changes, and 22% from the Virginia Retirement System.

Three challenges: (1) over time, more income taxes are paid by individuals rather than corporations–now 90/10. Although the individual income tax is intended to be progressive, because no changes have been made in the tax code since 1987, in practice 60% pay the highest rate. While the corporate rate is intended to be flat, in actuality 60% of corporations have zero tax liabilities. (2) For the sales tax, the shift to the purchase of services vs. goods, and the increased buying on-line, are driving these revenues down. (3) “Tax code spending” (special rates, credits, deferrals, deductions for special references) result in a loss of over $2.5 billion (just the Land Preservation Tax Credit has gone from $2.2 million in 2002 to $200 million in 2008).

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