The Joint Subcommittee has spent a considerable amount of time examining Virginia's revenue structure, the sales tax structure of Virginia and other states, the regressivity of the sales tax on food, and the gradual but steady trend of other states in phasing out or eliminating the sales tax on food. The Joint Subcommittee has also spent considerable time analyzing the anticipated revenue growth of Virginia's General Fund and the composition of that revenue growth.

The Joint Subcommittee notes that 26 states and the District of Columbia exempt (or tax at a lower rate) food products for home consumption from the sales tax base. Moreover, four states have taken action this year alone. The Joint Subcommittee also recognizes the regressivity of the tax which requires a lower income family to spend a greater percentage of its budget on food products for home consumption than does a higher income family. Of course, the burden of the tax is felt especially hard by those elderly who are on a relatively fixed income.

The Joint Subcommittee, however, has spent most of its time analyzing alternatives to make up the revenue loss associated with the exemption of food products for home consumption. Clearly, the revenue loss associated with the repeal of the sales tax on food reflects the importance of the food component of the sales tax as well as the importance of the sales tax in Virginia's General Fund. The sales tax on food represents an estimated 25% of the sales tax base. In fiscal year 1978-79 this represented an estimated $133.7 million of revenue to the Commonwealth and $44.6 million of revenue to Virginia's localities from the 1% local option sales tax.

The Joint Subcommittee has examined numerous alternatives to replace the revenue loss. The alternatives have come from a variety of sources, including those presented by interested· citizens and groups at a public hearing that was held in Richmond on October 8.

The Joint Subcommittee recommends that if the General Assembly wishes to repeal the sales tax on food products for home consumption, Virginia should utilize the anticipated significant growth of other General Fund revenues and gradually eliminate the state sales tax on food over a six-year period. Specifically, the Joint Subcommittee recommends that the state sales tax on food be reduced by 1% on the first day of the next three bienniums starting on July 1, 1980.

The Commonwealth has been fortunate and will continue to be fortunate in continuing its robust General Fund revenue growth into the future. Under this recommendation, the Commonwealth could cushion the impact of the exemption as well as allow time to plan for its impact The Joint Subcommittee notes that the Administration's General Fund projections for the next six fiscal years show annual growth in the 7-11% range. The Joint Subcommittee feels that a gradual phase-out can be accomplished and would not significantly alter Virginia's General Fund growth. As the following shows, even with the proposed phase-out, total General Fund revenue growth would continue unaltered, growing annually in the 6.5-11 % range. (see page 4 of the report for table)

It should be noted that even though the phase-out will lead to relatively large losses of sales and use tax revenue from anticipated collections under the present structure, total sales and use tax collections in each biennium will increase over the previous biennium.

The Joint Subcommittee notes that the following General Fund revenues increases will be available in the next three bienniums to finance the gradual phase-out of the exemption: (see page 5 of the report for table)

In addition, the Joint Subcommittee believes that, based on its staff’s work comparing recent General Fund estimates and collections, General Fund revenue estimates may be revised upward to provide even more funds to provide for a phase-out of the sales tax on food. Moreover, Administration officials have testified that the minimum anticipated surplus for the 1978-80 biennium is $190 million. This would also serve to increase the amount of available funds to finance the exemption.

Although the Joint Subcommittee has obtained accurate and detailed data on General Fund revenue growth, the Joint Subcommittee has been unable to ascertain from the Administration, on even a preliminary basis, General Fund expenditure requirements for the future. The Joint Subcommittee clearly recognizes that additional revenues will be needed in the future because inflation affects the State budget in exactly the same way it affects an individual's. The Joint Subcommittee recognizes the fixed expenditure requirements that must be addressed with the anticipated revenue growth. For example, the funding of the annexation package passed in the 1979 Session will require approximately $150 million of revenue in 1980-82, the funding of just the projected increase in Social Security taxes will require an additional $11 million in the 1980-82 biennium. Moreover, additional funds have been proposed for the Virginia Supplemental Retirement System and the Corrections Department to say nothing of cost-of-living increases for State employees and other priorities. The Joint Subcommittee reemphasizes that these fixed requirements must be addressed before the exemption of food can be funded.

Thus, the Joint Subcommittee recommends the gradual elimination of the state sales tax only if the funds are available from General Fund increases after fixed and necessary expenditures for the obligations of the General Fund are funded.

In regard to localities, 1 % of the State's 3% sales tax is distributed back to localities on the basis of school-age population. The Joint Subcommittee recommends that the state continue to distribute the revenue back to localities as if it were collected. In regard to the local option 1% sales tax which all localities have adopted, the Joint Subcommittee recommends that at the end of the six-year phase-out period, the localities be given the option of exempting food products from the local sales tax. The Joint Subcommittee believes it is up to the localities to make this decision.