Commentary

The Warner Tax Plan: Better on Marketing than Economics

This article was published in Virginia Business magazine, January 2004.

Gov. Mark Warner has proposed a major overhaul of Virginia’s tax structure promising “modernization,” “fairness” and a tax cut for most families. Unfortunately, Warner appears to have spent more time designing the marketing of the plan than thinking about the actual economics of tax reform.

Indeed, it seems that the main goal is simply to raise another $1 billion from Virginians with the minimum of political pain. To that end, the governor put so many moving parts into his package that people will have a tough time figuring out whether their taxes would go up or down. His plan would raise the top income tax rate, cut taxes for those with modest incomes, increase corporate taxes, raise the general sales tax, cut the sales tax on food and hike cigarette taxes.

One theme in Warner’s plan is to sock it to the rich, corporations and smokers because that makes for good public relations. Indeed, smokers are considered such second-class citizens these days that the governor excludes the cigarette tax increase in his analysis showing that most people would get tax cuts. If you add back in the cigarette tax hike, most Virginians wouldn’t find the plan fair at all.

The tax plan’s marketing is at odds with its actual impact in other ways. The governor says that his plan would “strengthen Virginia’s economic competitiveness and ability to create jobs.” But the governor’s plan would suck an additional $1 billion out of the private sector through higher taxes — out of the hands of workers, savers, businesses and entrepreneurs. Those are the folks that create jobs and growth, and they would have $1 billion less to do so.

Warner’s claim that his plan would “modernize” the state’s tax system is also just marketing spin. A key factor ignored in his plan is the heightened mobility of capital and labor in the modern economy. When state tax rates rise, state tax bases and economies shrink. Worse, Warner’s plan would increase taxes on the most mobile bases — corporations and individuals with higher incomes. Why tarnish Virginia’s reputation as a great place for new businesses and high-income technology workers?

Raising state taxes on corporations is particular counterproductive. Warner says that corporations “increasingly exploit our tax system through loopholes.” It is true those corporate profits are more mobile than ever, and that firms invest much effort into cutting their state tax burdens. But raising taxes and adding more complex rules would just aggravate the high compliance costs of the corporate tax, which raises less than 5 percent of Virginia’s tax revenue. Rather than raising corporate taxes, Virginia ought to eliminate its corporate tax, which after all is just a hidden burden on individuals by way of reduced wages, higher prices and lower investment returns. To balance the modest revenue losses, business subsidies could be cut. That way, Virginia would spur growth in all industries rather than dishing out subsidies and tax loopholes just to favored businesses.

Perhaps some Warner supporters might concede some of the troublesome economics of the tax plan, but would support it nonetheless because they agree with the governor that the current system puts “an unfair burden on low- and middle-income families.” However, if one reads between the lines in the Warner administration’s analysis of “typical” families released with the tax plan, it is higher-income families that pay a disproportionate tax burden. A married couple at $30,000 currently pays 2.9 percent of income in Virginia income taxes; a married couple at $60,000 pays 3.4 percent; and a married couple at $175,000 pays 4.6 percent. Yet Warner’s plan would hike income taxes on the group that already pays the most. That’s unfair.

Warner’s justification for a large tax increase is that he has done all he can on spending restraint to close the budget deficit. He says that he has “eliminated more than 50 agencies, boards, and commissions.” But I’d bet most Virginians didn’t notice the disappearance of a single one of those agencies, suggesting that there is still more fat to cut in Richmond.

Chris Edwards is director of fiscal policy at the Cato Institute.