Commentary

Warner’s Wrong Way On Tax Reform …

This article originally appeared in The Washington Post on August 17, 2003.
Virginia Gov. Mark Warner has launched an initiative to reform the “outdated” Virginia tax system to make it simpler, fairer and more efficient [Metro, July 13]. R.H. Melton says that “finance experts agree” that the tax system “has not kept pace with a modern Virginia.”

But many finance experts don’t agree with the governor regarding the key tax problems or possible solutions. For example, Warner complains that the tax system is “antiquated,” suggesting that it doesn’t raise enough money. Yet the state’s annual financial report shows that state tax revenue rose at an annual average rate of 6.1 percent from 1992 to 2002, or slightly faster than state personal income growth of 5.5 percent.

The Warner administration says that the sales tax needs to be “modernized” to cover services and the Internet. But does the state need to tax everything? Sales tax revenue has grown at 5.3 percent a year during the past decade, indicating no shortage of funds.

As for the Internet, U.S. Department of Commerce data show that Internet sales represent less than 2 percent of all retail sales. Thus, it makes little sense for the Silicon Dominion to risk the complexity and anti-growth effect of Internet taxation for the little revenue that it would raise.

State revenue has stagnated during the economic slowdown, but that raises the question of why Warner would want to increase the state’s reliance on the volatile corporate income tax. Corporate tax revenue hit a peak of $566 million in 2000, then plunged to $236 million by 2002. More reliance on this tax would encourage more overspending when profits boom and would create bigger budget deficits when profits dry up.

Besides, corporate tax increases are the last thing to do to “modernize” a tax system because corporations will shift profits to lower-tax states. Indeed, many tax experts support repeal of state corporate income taxes because they raise little revenue for the amount of complexity and economic damage they create. Warner’s simplistic notion that corporations should pay more because “individual taxpayers carry too much of the tax burden” [front page, July 11] doesn’t pass scrutiny. Corporations just pass along their tax burden to individuals as workers, consumers and investors.

Good reform ideas are being floated that Warner and his tax reform commission should consider. For example, a revenue-neutral package could be crafted to eliminate special interest breaks, such as Virginia’s large deduction for the elderly, in exchange for lower income tax rates for all taxpayers. That kind of reform would make Virginia’s tax system simpler, fairer and more efficient.

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