HD22 - Report of the Commission on Virginia's State and Local Tax Structure for the 21st Century


Executive Summary:
This Commission was requested to examine broadly the current tax structure supporting Virginia's state and local governments and the present division of responsibility between the two levels of government for the provision of public services to the Commonwealth's citizens. Fundamentally, this body was asked to evaluate, given current social and economic trends, the adequacy of existing arrangements to address Virginia's future needs. Following the receipt of public testimony from around the Commonwealth, and after extended consideration of relevant data, this Commission concluded that measures should be taken (1) to establish a more efficient alignment of responsibility for the provision of public services with the revenue sources required for their provision, (2) to broaden the revenue base of localities generally, (3) to recognize in the formulation of state aid programs the considerable disparity that exists in the social, economic, and fiscal condition of our political subdivisions, (4) to arrest and reverse the erosion of existing state and local revenue bases that results in an upward impetus on tax rates, (5) to establish a permanent, broad-based entity committed to a continuing analysis of state and local fiscal concerns, (6) to protect and enhance an environment in Virginia that sustains equitably our vital business community, and (7) to promote greater equity in the development and application of tax instruments for all our citizenry.

Consistent with the perspective presented above, the voting members of the Commission unanimously endorse and submit the following proposals to the Governor and General Assembly for consideration. We recommend that:

1) the state increase substantially its support for both the operational and capital costs of the local school divisions;

2) the state government assume the full operational cost for the provision of all mandated services provided through the Comprehensive Services Act, the public health departments, the Community Services Boards, the local and regional jails, and the local social service/welfare departments;

3) at least six (6) percent of the state's annual individual income tax collections be dedicated for return to Virginia's localities for the purpose of broadening their revenue base and reducing their dependence on real property taxation;

4) the state move to protect the role of its sales and use tax in meeting the fiscal needs of the Commonwealth by (a) participating in the Streamlined Sales Tax Project, an interstate effort designed to standardize state sales and use tax provisions in order to overcome congressional opposition to mandating their interstate collection, (b) critically reviewing all current exemptions to the sales and use tax, and (c) extending the tax to certain categories of services and new data/knowledge-related products;

5) increased opportunity be afforded localities to work in concert to address regional transportation concerns;

6) the state's individual income tax be revised, in a revenue-neutral manner, to effect changes in its tax rates, tax brackets, personal exemptions, and standard deductions;

7) the taxing authority of counties be made commensurate with that of cities;

8) the state critically review both (a) the tax-exempt status currently granted to all non-governmental property in Virginia and (b) the restrictions that currently limit the service charges that may be applied to tax-exempt property;

9) a permanent, broad-based fiscal study commission be established to provide to the Commonwealth's elected leadership on a continuing basis advisory comment relative to the current and prospective fiscal needs and resources of Virginia's state and local governments;

10) localities be permitted to retain, for needed flexibility in their revenue options, their current authority to levy the merchants' capital and business, professional, and occupational license taxes; and

11) increased opportunity be granted localities to collaborate in regional economic development activities.

The Commission acknowledges that none of the recommendations above can, nor should, remove from Virginia's localities the necessity to scrutinize their expenditures and to prioritize their public service needs. This Commission anticipates that future years will present localities with a growing intensification and complexity of service needs which will demand the utmost in frugality and efficiency. Moreover, the Commission also anticipates that state fiscal concerns may well require an incremental implementation of the various recommendations, such that the full beneficial impact of these proposals will not be immediate. In our judgment, however, the recommendations cited above collectively constitute a set of measures that will benefit the Commonwealth as we proceed into the 21st century.