HD26 - Study and Revision of Virginia's State Tax Code

Executive Summary:

The Joint Subcommittee was appointed to study and revise Virginia's state tax code. The subcommittee was created originally by House Joint Resolution 685 and Senate Joint Resolution 387 during the 2001 General Assembly Session for a two-year period. House Joint Resolution 60 (2002) confirmed the continuance of the study.

The joint subcommittee was specifically directed in BJR 685/SJR 387 to do the following: (i) examine the report and recommendations of the Commission on Virginia's State and Local Tax Structure for the 21st Century; (ii) seek broad input from all levels of government, the private sector, and citizens concerning the sufficiency of the Commonwealth's current tax system; (iii) consider the necessity and sufficiency of current taxes, fees, deductions and credits as well as the rates of taxation; (iv) consider current revenue capacity of localities and the sufficiency of their revenue tools; (v) clarify the definition of manufacturer for purposes of the business, professional, and occupational license tax; (vi) examine the number and costs of tax credits and deductions authorized each year; (vi) determine the loss in sales tax due to electronic commerce; (viii) evaluate the real estate assessment appeals process, the need for any changes to the process, and the effect that such changes would have on taxpayers and local governments; (ix) consider the long-term effect on the Commonwealth's revenues of the phase-out of personal property tax; (x) evaluate the appropriateness of the merchants capital tax and the business, professional and occupational license tax; (xi) consider a plan to more equitably address exemptions, deductions, and rates for personal and business income taxes; and (xii) determine the equitable division of support to be assumed by the state and localities for education and mandated services in light of the reforms recommended by the Commission.

Throughout 2001 and 2002, the joint subcommittee spent numerous hours in meetings receiving information provided by staff and a wide variety of interested parties both from the public and private sectors. During the first year, they studied the state and local taxes and administration of each broadly and then focused on more specific issues during the second year when they divided themselves into two task forces. They examined the individual and corporate income taxes, sales and use tax, property taxes, business, professional and occupational license (BPOL) tax and administrative issues, both state and local.

During that same time period the national and state economies began to suffer and Virginia's has worsened during this past year. Therefore, the joint subcommittee decided it would not be prudent at this time to go forward with all of the changes they have been considering but instead to continue the study for one more year and make the following recommendations to the 2003 General Assembly:

1. Adopt House Finance Subcommittee (Orrock) Report with standards for charitable organization sales tax exemptions.

2. Restore conformity with federal income tax law, except for accelerated depreciation and carry back loss issues in order to essentially eliminate fiscal impact.

3. Revise administrative appeals process for income taxpayers to provide for no payment of tax in advance of adjudication.

4. Eliminate June accelerated sales tax collections in 2002 - 2004 budget.

5. Revise property tax appeals process to clarify procedures and standard of proof for taxpayer.

6. Phase out estate tax beginning in Fiscal Year 2005.

7. Impose no new state unfunded mandates on localities, and to maximum extent possible, eliminate existing ones.

8. Support a moratorium on new sales and use tax exemptions.

9. Maintain policy of no sales tax on access to Internet and digital downloads.

10. Continue working with the national Streamlined Sales Tax Project.

11. Require purchasers to report the greater of (i) the actual purchase price or (ii) the NADA value (less $1,500) for casual sales of motor vehicles that are no more than five years old.

12. Continue the study in 2003 with final report in December 2003.

The joint subcommittee looks forward to the continuation of the study through 2003 in order to complete its monumental task of revising Virginia's state tax code. The changes they anticipate will have Widespread, long-term effects, some known and some unknown. Therefore, they want to be as certain as possible that they make the best decisions for the Commonwealth and its citizens.