“It’s unfair, it’s inadequate and it’s obsolete,” said Jay Johnson, VOP Vice-Chairperson and a leader of the Hampton Roads VOP Chapter.

Johnson was describing the current tax system in Virginia. The final VOP plan for state tax reform is designed to address all three flaws.

“Everyone has already heard about the $2 billion budget shortfall in Virginia this year and some around the state have already felt the sting of the $858 million in cuts that Governor Warner announced in October 2002. The General Assembly will have to carve another $1.25 billion out of the budget in their 2003 session, that is, unless someone comes to their senses and proposes a workable tax reform plan,” Johnson said.

Not only is there a current shortfall, or “current service deficit,” there is also an abundance of long-term, unmet needs across the state. In a study produced for the business group called Virginia Forward, The Barent’s Group estimated these needs in the areas of transportation, Medicaid, K-12 education and higher education. They found that the deficit in unmet needs was double the current service deficit and growing.

Unmet Needs and Current Service Deficit

Furthermore, basic problems in the structure of Virginia taxes cause lower-income families to feel the tax bite worse than higher-income families. In Virginia the bottom 20 percent in income pay 10.4 percent of their income in state taxes, while the highest 1 percent pays only 6.9 percent.

Percent of Income Paid in State and Local Taxes in Virginia
Middle and Low Income Virginia Families Have a Higher Tax Rate Than Wealthy Families

Source: Institute on Taxation and Economic Policy, July 5, 2000.

The VOP plan would reduce taxes on those in the lowest 40 percent in income and generate $1.39 billion in new revenue to close the state’s current budget gap. The plan accomplishes this without resorting to the drastic cuts in basic state services, such as mental health services, currently being discussed among state legislators.

The first change proposed by the VOP plan would re-structure the personal income tax. It does this through several changes:

• Change tax brackets and rates. The VOP plan establishes a 5 percent tax bracket for those making up to $35,000 per year. (This is a tax cut for those between $17,000 and $35,000 in income.) The rate would be 5.75 percent on income between $35,000 and $60,000, 6.5 percent on income between $60,000 and $100,000 and 7 percent on income over $100,000 per year. This progressive income tax structure would replace the state’s virtually flat current income tax, in which the top rate kicks in at $17,000.
• Eliminate the age deduction for the higher income elderly.
• Raise the personal exemption to $2,500 per person.
• Raise standard deductions to $3,500 for a single person or $7,000 for a married couple.
• Create a refundable Earned Income Tax Credit set at 20 percent of the federal credit.
• Create a $100 per person sales tax credit to off-set the impact of sales taxes on those with lower incomes. The full credit could be claimed up to $20,000 in income and it would phase out between $20,000 and $30,000.

The net effect of these income tax changes would be a $10 million per year tax cut and increased fairness in the system. Additionally, the personal income tax would be cut for 80 percent of Virginia families.

Changes in State Income Tax Under the VOP Proposal

Source: Institute on Taxation and Economic Policy. October 2002.
Website: http://www.ctj.org/itep/

The second change proposed by the VOP plan impacts the state sales tax. While all sales taxes are regressive, Virginia’s is worse than most because it taxes items used by low-income families, but not many of those used by higher income families. While the state charges sales tax on a loaf of bread, it doesn’t charge the tax on the services of a lawyer or accountant or on tickets to a Brittany Spears concert.

To modernize the system and to make it more efficient, VOP would change the state sales tax to:

• Fully eliminate the sales tax on food.
• Expand the sales tax base by including services (excluding health care, insurance and utilities expenses).

The net effect of these changes in the sales tax is an increase of $1.3 billion in revenue for the state, more than the remaining gap in the budget.

Finally, the third major change proposed by the VOP plan focuses on the corporate income tax. Because the costs of government should be shared by all the governed, VOP believes Virginia should:

• Increase the corporate income tax from 6 percent to 8 percent.

The increase in the corporate income tax creates $100 million in new revenue, while allowing the state to remain competitive with surrounding states.

Overall, the VOP plan creates a level tax burden of 8.5 percent for all citizens. This results in dramatic improvements to the fairness of the tax system when compared to the old tax burden.

Percent of Income Paid in State and Local Taxes in Virginia Under VOP Tax Reform Package
The Virginia Organizing Project Tax Package Would Close the Budget Gap and Make Virginia Taxes Fairer

Source: Institute on Taxation and Economic Policy
Website: http://www.ctj.org/itep/

New revenue from the VOP plan covers much of the current budget shortfall. More importantly, the new structure prepares Virginia to capture new economic growth, much of which will come from the service industries.

Whats on the Menu?

Some Democratic and Republican state representatives propose that a cigarette tax hike can help Virginia. VOP does not oppose such a hike, but current bills would only raise about $100 million, far short of the current shortfall. In addition, like all sales taxes, the cigarette tax is regressive, meaning it disproportionately hurts lower-income smokers. In the absence of fundamental, comprehensive tax reform that corrects the inherent flaws in the system, raising taxes on cigarettes or gasoline is a Band-aide approach to the problem, which attempts to balance the budget on the backs of lower and middle-income families.

Another current proposal reverses the car tax cut from 70 percent back to 47.5 percent. Again, VOP would not oppose such a reversal, especially since it could generate $350 million in revenue. But the car tax cut represents spending in the Virginia budget, not revenue. Reversing the cut, in the absence of comprehensive tax reform, does not address the state’s structural deficit.

One current proposal that VOP would oppose is the proposal to repeal Virginia’s estate tax even faster than the federal repeal. VOP’s analysis of Virginia’s tax structure indicates that one of the major problems is that the people who would benefit from the estate tax repeal — the very wealthy — already enjoy too many tax breaks at the expense of the rest of the taxpayers.

The total effect of all the changes proposed by VOP would be a state tax system that is fairer, more modern and more capable of meeting the financial needs of the state.

If you or your organization would like to learn more about the VOP tax plan, or host a VOP tax reform workshop, contact us at ben@virginia-organizing.org or call (434) 984-4655, x225.