HD14 - Report on the Sales and Use Tax and Individual and Corporate Income Tax Preferences found in Title 58.1

    Executive Summary:

    Special subcommittee of the House Committee on Finance studying tax preferences found in Title 58.1 of the Code of Virginia

    During the 2004 Special Session I, the House Committee on Finance was directed to study the sales and use tax and individual and corporate income tax preferences found in the Code of Virginia in Title 58.1, the tax code.

    The reasons for the study included: (a) since 1995, the General Assembly enacted legislation that created more than 50 income tax preferences; (b) the fiscal impact of such tax preferences exceeds $600 million annually; (c) since 1966 when the sales and use tax was enacted, the number of sales and use tax exemptions has grown from 23 to more than 425; (d) the estimated fiscal impact of those exemptions exceeds the actual total revenues collected annually from the sales and use tax; (e) no criteria or consistent economic policy tying all of the tax preferences together has been developed; and (f) the effect of all the income and sales tax preferences narrows the tax base thereby shifting the tax burden to fewer taxpayers.

    The committee was instructed to examine the policy reasons for the tax preferences; make recommendations regarding which, if any, preferences should be repealed or amended; and develop criteria for granting any future tax preferences.

    The special subcommittee of the House Committee on Finance was chaired by Delegates Drake and Louderback. Other members on the subcommittee were Delegates Lee Ware, Sam Nixon, Jr., Kathy Byron, Joe Johnson, Jr., Kenny Melvin, and Bob Hull. House Finance Committee Chairman Harry Parrish also participated. The special subcommittee met four times during 2004, heard presentations by the staff, the Department of Taxation and the public regarding the tax preferences and reviewed information provided.

    During its final meeting in December the HR 5004 subcommittee considered the following criteria which provided that tax preferences should be granted only when:

    1. It has been clearly established that it is not administratively feasible to provide the amount of the preference as an appropriation. (If such is administratively feasible, then the tax preference should not be provided, and the matter should go through the appropriations process); and

    2. It has been clearly established which taxpayers will benefit from the tax preference, by what total amount, and that all similarly situated taxpayers are treated equitably; and

    3. The effectiveness of the preference is measurable or the preference is for a limited time; and

    4. If the first three criteria have been satisfied, then one of the following must be clearly established to justify the tax preference:

    (i) that the tax preference is necessary to the structural integrity of the particular tax (e.g. the sales tax exemption for purchases for resale is necessary because the sales tax is a tax on the ultimate consumer); or

    (ii) that, without the tax preference, the Commonwealth would be placed at a competitive disadvantage compared to other states, and would thereby suffer substantial economic loss; or

    (iii) that the tax preference is the only feasible way to carry out an essential and overriding (i.e. overriding the principles of a good tax structure) public policy of the Commonwealth.

    Because a quorum of the members was not present during the final meeting of the special subcommittee, no vote was taken with regard to the criteria.