THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Tuesday, June 4, 1996 TAG: 9606040003
SECTION: FRONT PAGE: A14 EDITION: FINAL
TYPE: Opinion
SOURCE: By WILLIAM F. HELLMUTH
LENGTH: 79 lines
For years Virginia was considered to be a well-managed state. Over the past two years, however, the state has come under fire for fiscal irresponsibility. Unfortunately, there is some merit to those charges.
While it is true that the state budget is balanced with a relatively low overall tax burden, state taxes hit the poor disproportionately hard, and recent proposals for capital expenditures, specifically prisons, have not taken long-term costs into account. In important ways, our state government needs to improve.
Let's begin with taxes. The commonwealth of Virginia primarily uses income and sales taxes to finance services, including public safety and law enforcement, public schools and colleges, public health and road construction and maintenance.
Virginia's taxes are relatively convenient to pay. The state income tax generally uses the same definitions of income and itemized deductions as the federal version.
The state's taxes are low enough that taxpayers don't change their purchasing habits or work behavior to avoid them. Its maximum tax levels are equal to or less than those of neighboring states, so Virginia's rates don't harm its competitiveness in attracting new businesses. And Virginians can deduct their state income taxes when calculating their taxable income for the Internal Revenue Service, further reducing their impact.
What about tax fairness? Since Adam Smith, fairness in taxes and fees has been based on two principles: ability to pay and benefits received. Ability to pay ties the tax levied to the income or wealth of the taxpayer. A fair income tax is a progressive one whereby the tax rate increases as the taxpayer's income increases.
By this standard, Virginia's income tax is not fair. Virginians pay state income tax even when their incomes are substantially below the poverty line. For example, the state exempts only $8,200 from taxes for a married couple with two children, even though the poverty threshold is $15,150. Under Virginia's personal-income tax, rates begin at 2 percent on the first $3,000 of taxable income but quickly reach their maximum of 5 3/4 percent at $17,000.
Moreover, Virginia's sales tax, like sales taxes elsewhere, is regressive since the poor pay a larger portion of their income on sales taxes than the rich. The state's sales tax is even less fair than most because it includes food as a taxable sales item.
The benefits-received principle calls for a tax or fee to be roughly equal to the benefit the payer receives. Many of Virginia's fees follow this rule. For example, motorists pay the gasoline tax, which pays for roads, and college students pay tuition. Yet these same fees also hit the poor harder than they do the rich - another violation of the ability-to-pay principle.
The second major fiscal-management issue concerns borrowing to finance large capital expenditures. Governments need to follow a deliberate, long-range plan that doesn't unbalance the rest of the budget or unduly burden taxpayers in the future. This is not happening in Virginia.
In 1995, state officials proposed to build more prisons to accommodate longer sentences and a reduced rate of parole. They wanted to increase the number of beds in the system to 50,000 by 2003.
It's not a good idea. Construction costs alone could be as much as $2 billion. Borrowing that money would greatly increase the state debt, require payments on that debt of as much as $200 million a year for 20 years, and probably hurt the state's credit rating, which is currently AAA. A lower credit rating would boost interest rates on all new state borrowing, adding yet another burden to taxpayers.
In addition to the cost of construction debt, operating costs for the Corrections Department would have jumped to at least $1 billion by 2003, about $600 million a year more than today. If Virginia pays another $800 million per year for debt payments plus operating expenses for new prisons, the necessary money for other legitimate needs - education, roads, health care - may not be available. Fortunately, the 1996 General Assembly adopted a more-reasonable long-term approach for prison expenditures.
To improve the fairness in our revenue system, the commonwealth should consider removing the sales tax on food and adopting an earned-income-tax-credit policy to ease the tax burden on the working poor. Further, to restore balance to our capital budgeting process, we should require that all proposed expenditures pass a rigorous test of long-term feasibility. MEMO: William Hellmuth is emeritus professor of economics at Virginia
Commonwealth University in Richmond. He served as deputy assistant
secretary for tax policy at the U.S. Treasury during 1968-69. by CNB