Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, January 13, 1992 TAG: 9201130215
SECTION: EDITORIAL PAGE: A-9 EDITION: METRO
SOURCE: JOHN H. BOWMAN
DATELINE: LENGTH: Medium
BUDGET DEBATE
WITH GOV. Wilder recently signalling a willingness to support a tax increase if it has bipartisan support in the state legislature, one major question arises. How do Virginia's taxes compare with those of other states?The context of this question is well known. Spending in Virginia has been reduced significantly due to the unexpectedly sharp downturn in the economy and revenues in what may be a "double-dip" recession. State agencies are preparing for a further round of cuts - perhaps as much as 9 percent, bringing cumulative reductions over the past two years to 25 percent.
Understandably, tax increases are seldom popular. Some, tending to see government as inherently wasteful, may believe that any taxation is too much taxation.
Clearly, however, people depend on government to provide certain valued services. Others may feel that Virginia taxes already are too high in some sense, perhaps in relation to those in other states with which Virginia competes for economic activity.
The focus here is on the level of Virginia taxes. Better understanding of how Virginia stacks up in this regard is important to informed public debate on the budget.
It is important to note, however, that at any time - not just the current tight economic situation - sound budget policy requires weighing against the costs of higher taxes the merits of the public services that those taxes would finance.
With regard to economic-development concerns, the best evidence is that, while tax levels do matter in some situations, (a) the magnitude of their importance seems to be small and (b) public services matter as much as taxes.
One common basis for evaluating taxes is the amount paid per capita. On this basis, Virginia state and local taxes are 97 percent of the national average. While Virginia ranks below the national average, taxes per capita here are higher than in any surrounding states, except Maryland, and in the District of Columbia.
The picture is incomplete, however. Per capita numbers ignore other differences in ability to raise revenue. Thus, another common measure expresses taxes as a percentage of state personal income.
From this perspective, Virginia state and local taxes are only 91 percent of the average for all states (10.56 percent of personal income vs. the 11.56 percent average). Perhaps more important, on this basis Virginia taxes are below the level in all surrounding states other than Tennessee. This change in rankings reflects the fact that income in Virginia is somewhat above the national average, and substantially above the levels in several surrounding states.
Not all taxes within a state, however, are borne by the residents of that state. For example, many of the taxes on hotel rooms and restaurant meals are borne by visitors from outside the state, and manufacturers' taxes often are borne by customers and shareholders in other states.
To account for this reality, the Advisory Commission on Intergovernmental Relations, a small, independent U.S. government agency specializing in the study of state and local governments affairs, developed the representative tax system to study comparative tax-bearing capacities and levels of tax effort.
Its tax-capacity measures take into account the nature of the bases of each of many separate taxes and the extent to which those bases exist in each state. Tax effort is the amount of actual tax revenue, as a percentage of capacity. ACIR measures put overall Virginia state and local tax effort at 91 percent of the average effort level for all state and local governments nationally.
The ACIR numbers are for fiscal 1988, while those relative to population and personal income are for fiscal 1989, the latest years available for all states in each case.
The basic conclusion - that Virginia state and local taxes are relatively low - surely remains applicable. Virginia has had no significant state tax increases in recent years. By contrast, a 1991 survey by the National Conference of State Legislatures found that most states increased taxes this year, and that the increases amounted to the largest percentage increases since 1971.
Virginia taxes are not uniformly low, however. Indeed, the Virginia personal income tax is above the national average level for state and local income taxes (ACIR tax-effort index, 117).
The other major taxes all are levied at below-average levels: general sales tax (effort index, 66), corporate income tax (effort index, 55), and property tax (effort index, 84). Among lesser taxes, several are above average (e.g., the gasoline tax effort index is 123), but the cigarette tax is quite low (effort index, 28).
While this evidence does not establish that Virginia should raise taxes, it does indicate that if the commonwealth chose to do so, it could raise taxes substantially without bringing Virginia taxes even to the national average level, or to the level found in many surrounding states.
John H. Bowman is professor of economics at Virginia Commonwealth University. Virginia Forum