Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: TUESDAY, January 21, 1992 TAG: 9201210346
SECTION: EDITORIAL PAGE: A-6 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
MAKE A GOOD TAX BETTER
FOR FAIRNESS, simplicity and revenue-raising ability, no tax in Virginia matches the state's personal income tax.It rises with ability to pay. By generally following federal income-tax rules, it adds few record-keeping burdens not already required of most taxpayers. It does not ask storekeepers to keep track of sales-tax pennies, or government officials to make property-tax judgment calls. And it accounts for half of state revenues.
Even so, it could be made fairer, simpler and more productive of desperately needed state revenue - without raising the income-tax bill of most Virginians. This could be done by:
Establishing a refundable tax credit for low-income Virginians.
While it wouldn't help the state's revenue picture, such a credit would contribute to tax fairness and be easy to administer. Because of the regressivity of the state sales tax, any increase in it - such as the half-cent rise we proposed in an earlier editorial - should be accompanied by help for low-income Virginians.
A refundable credit would be easier to administer than, say, expanding the list of items exempt from the sales tax, and it would better target those who most need relief.
For low-income taxpayers, taking the credit could be as simple as figuring a fixed percentage of the already-existing federal credit. Since the Virginia tax is about one-fifth of the federal tax on the same income, for example, the state credit for eligible taxpayers could be 20 percent of the credit they've taken in filing federal tax returns.
This is the basis for the estimate, in a December report to chairmen of the General Assembly's money committees, that a credit providing up to $238 in additional income for working families at or below the poverty level would reduce 1992-94 state revenues by about $100 million.
Eliminating the "age subtraction."
The subtraction is the much-mutated descendant of Virginia's response to a Supreme Court ruling which said that states can't tax federal retirement benefits unless they also tax state retirement benefits. Repealing this would serve all three interests of fairness, simplicity and revenue production.
It's a complicated rule; the key point is that in many instances it makes age rather than income level the biggest factor in determining how much income tax is paid. This is unfair, and can have bizarre consequences: Under the rule, for example, some middle-class retired couples can pay little or nothing in state income tax while a younger working couple with exactly the same income is paying hundreds of dollars.
Moreover, impoverished elderly Virginians are little helped by the subtraction, since they would pay little in state income taxes in any event.
Repealing the subtraction would add as much as $180 million to Virginia's 92-94 general-fund revenues.
Creating a new top bracket for high-income Virginians.
This would complicate the system only slightly, while promoting both tax fairness and state revenues. Though Virginia's income tax is progressive, it becomes less so near the top of the economic ladder. The top rate of 5.75 percent is relatively low. Of the 42 states (including the District of Columbia) with state and/or local income taxes, only in nine is it less.
Moreover, Virginia's top rate begins to be applied relatively early, after the first $17,000 of taxable income ($34,000 for a married couple). This is a lower figure than in a majority of the other states.
Those two points help explain one finding of a recent state-tax survey by Money magazine. A typical two-worker Virginia couple earning $50,000 can expect to pay more income tax than in 24 other jurisdictions, less than in 17. But a two-worker Virginia couple earning $100,000 can expect to pay more than in just 16 other jurisdictions, and less than in 25.
Creating a 6.75-percent bracket for a Virginia couple's taxable income above $100,000 would bring roughly $200 million in new revenues to the state in the 1992-94 biennium. (The revenue figure would rise, of course, if the $100,000 threshold were lowered to, say, $90,000 or $80,000.)
This is hardly a soak-the-rich scheme. The $100,000 figure is taxable income, after such items as home-mortgage interest are deducted. It is a threshold; only income above $100,000 would be taxed the extra 1 percent. And because state income taxes are deductible from income subject to federal taxes, up to a third of that 1 percent would be offset by a lowering of federal taxes.
This last point, in addition to softening the new bite on well-to-do taxpayers, adds up to a good deal for the Virginia economy. At the cost of less than $140 million in the purchasing power of its most affluent residents, the state would get $200 million for recirculation into the economy.
That's more than $60 million staying in Virginia over the next biennium rather than going to Washington - an amount approaching what Gov. Wilder proposes to raise from a health-industry tax to help offset the spiral in Washington-mandated Medicaid costs.
***CORRECTION***
Published correction ran on January 22, 1992.
Clarification
For married couples with two incomes, Virginia's top income-tax rate of 5.75 percent generally kicks in at $34,000 of taxable income, as noted in an editorial Tuesday. For single-income couples, however, the threshold is the same ($17,000) as for single people. For some two-income couples. it can be less than $34,000, depending on their relative incomes and how they choose to allocate and how they choose to allocate deductions between those incomes.
Memo: CORRECTION