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Tar Heel State Tax Reform: Game‘s Now Afoot for Virginia


Pete Sepp
July 19, 2013

Virginia has arrived at a fiscal policy crossroads. Earlier this year, Commonwealth taxpayers suffered through enactment of a $6.1 billion tax increase. And although Virginia has normally enjoyed a competitive fiscal policy advantage over tax-and-spend bastions such as Maryland and the District of Columbia, there’s a new challenge from another neighbor: North Carolina. There Governor Pat McCrory (R) is expected to sign legislation (which NTU applauded) to substantially reduce personal and corporate income taxes, cap the gasoline tax, and eliminate the state’s death tax. 

With this kind of competition for jobs and business activity, Virginia’s leaders had best get serious about restructuring the Commonwealth’s tax system into a simpler and less burdensome alternative. One option that has many desirable elements is current Attorney General Ken Cuccinelli’s “Economic Growth and Virginia Jobs Plan.” The $1.4 billion package would:

  • Cut the top personal income tax rate (which touches most taxpaying households) to 5 percent from its current 5.75 percent level;
  • Lower the business income tax from 6 percent to 4 percent; and
  • Aim to phase out three harmful state-sanctioned, locally-operated levies on companies large and small (the Business Professional Occupational License (BPOL) Tax, the Machine and Tools Tax, and the Merchants’ Capital Tax).

The third component of Cuccinelli’s tax plan (ending the three business taxes) would be facilitated by a Small Business Tax Relief Commission, whose task would be to broaden the tax base by recommending elimination of distortionary exemptions and credits. 

On the spending side of the ledger, Cuccinelli proposes limiting the expansion of Commonwealth spending to increases in inflation and population, a formula that has proven highly successful in keeping government affordable for taxpayers in other states.

It’s no secret that states with lower taxes and less regulation (especially those with moderate or zero income taxes) tend to perform better on key economic indices such as personal income growth, employment, and business activity. The American Legislative Exchange Council’s Rich States, Poor States annual ranking put Virginia’s economic outlook at fifth-best in the nation. However, thanks to recent policies enacted in the state – and strong proposals for reform from its neighbor to the South – the Commonwealth risks losing this advantage. 

If Virginia is to remain economically competitive in the decade ahead, the Commonwealth’s tax laws must be swept clean of dusty relics such as the BPOL and the Machinery and Tools Taxes. Nor can Virginia afford to stand pat on its overall personal and corporate income tax system. There is no shortage of ideas to facilitate this process; as a recent analysis from the Tax Foundation noted, Libertarian gubernatorial candidate Robert Sarvis has gone so far as to state he’d “consider ending the income tax” in its entirety.

In any case, Cuccinelli’s proposal carries good prospects for the kind of economic growth and job creation the Commonwealth will need in coming years. State policymakers must concentrate on systemic tax reform to keep the promise of a brighter future for Virginians, and this blueprint offers one way to begin moving forward.


 

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