Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, December 15, 1994 TAG: 9412220015
SECTION: EDITORIAL PAGE: A23 EDITION: METRO
SOURCE: W. EUGENE SEAGO
DATELINE: LENGTH: Medium
It is not entirely clear, however, that the increased exemption - and, thus, reduced state income tax - should be available to all taxpayers. Applied to higher-income taxpayers, as will be seen below, the increased exemption is tantamount to the state's paying 140 percent of the list price for goods and services.
The deduction for the personal exemption, along with the standard deduction, are ``means tests" for determining who should be required to pay income tax. Under the federal income-tax system, the combined exemptions and standard deduction are intended as a measure of the cost of a subsistence level of income. If the individual does not make this subsistence level of income, he or she does not have the ability to pay any income tax.
The 1994 federal exemption is $2,450, and for 1995 it will be $2,500. The current Virginia exemption is only $800. Thus, individuals ``too poor to pay'' under the federal system must pay Virginia income tax.
Gov. Allen's proposal eventually would raise the Virginia exemption to $2,400, close to the current federal exemption. But in the future, the federal exemption will likely still far exceed the Virginia exemption because the federal exemption is indexed for inflation.
The questionable part of the plan is the across-the-board nature of the increase in the exemption. Individuals who itemize their deductions (rather than claim the standard deduction), and who thus are allowed to deduct Virginia income taxes on their federal return, would not receive the full benefit of the reduced Virginia income tax.
For individuals in the 28-percent marginal federal tax-bracket (more than $38,000 on a joint return) who itemize their deductions, a $100 reduction in state income taxes would increase their federal taxes by $28. Thus, the individual's after-tax income (after federal and state taxes) would have increased by only $72, but revenues to the state would have been reduced by $100.
In other words, it would have cost the state $1 to give back 72 cents to some taxpayers - the cost is equal to 140 percent of the benefit. Ultimately, the $100 in reduced state revenues means that Virginia would purchase $100 less in goods and services for Virginia residents. Virginia residents who would otherwise have received these benefits would experience a $100 reduction in goods and services received. But the reduction in total tax payments by some would be only $72.
In short, a reduction in state income tax for higher-income individuals would accomplish a form of reverse revenue-sharing - the state gives the federal government a share of revenues.
W. Eugene Seago is professor of accounting at Virginia Tech.
by CNB