
                         Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: TUESDAY, January 3, 1995                   TAG: 9501070058
SECTION: EDITORIAL                    PAGE: A4   EDITION: METRO 
SOURCE: FRED FOLDVARY
DATELINE:                                 LENGTH: Medium

LOOKING FOR PRO-GROWTH TAX REFORM

AS NOTED by the Roanoke Times' editorial of Dec. 13 (``Sticking it to the localities''), tax policies being promoted both in the federal and state governments will shift the burdens to local governments, but there have been few proposals about how the lost revenues can be offset. While some savings can come about from reduced spending, some of the tax revenues may well have to come from other sources.

We can turn this tax problem into an opportunity, a chance for tax reform.

As noted by the editorial, the business and professional license taxes that Gov. George Allen proposes to eliminate are not ideal sources or revenue. They do make it more costly to conduct business. If employment and enterprise are good things, then government should not punish their providers with added costs.

Then where shall the revenues best come from? We can look to Pennsylvania for one possibility. Virginia law dictates how property taxes are set by the cities and counties.

But in Pennsylvania, cities that want to encourage growth can set different property-tax rates on buildings and on land. Places with a lower tax rate on improvements have experienced more growth than those that have a uniform tax rate.

Now that local revenues are more important, Virginia can reform its property-tax laws to allow local government to do as in Pennsylvania: set different tax rates on land and buildings. By gradually shifting taxes off buildings, those counties that wish to encourage growth and opportunity could do so without reducing any revenues or sacrificing services.

As the editorial states, the governor can ``recommend that localities be authorized to impose another, better kind of tax to take the place'' of the business-license taxes.

But a local income tax would not be helpful. In Virginia, the counties are small, and people will move to nearby counties with lower taxes. It's better to tax something less mobile, such as land.

Real-estate taxes, especially if buildings are exempt, are very suitable for local government, because land does not run away, and its value is due to a large extent on local services. If buildings are exempt, then a property tax is pro-urban, because there is no tax penalty for new construction, improvements, new enterprise and new jobs.

The governor's tax proposal to eliminate business and professional license taxes does indeed require something better to substitute for them. More flexible local authority on the property tax is a pro-growth alternative to consider.

Fred Foldvary is a visiting assistant professor of economics at Virginia Tech.

by CNB