RD114 - 2013 Executive Summary of the Joint Subcommittee to Evaluate Tax Preferences

    Executive Summary:
    Chapter 777 of the Acts of Assembly of 2012 (HB 777, Landes) created the Joint Subcommittee to Evaluate Tax Preferences and tasked it with the systematic review and evaluation of Virginia's tax preferences, which include but are not limited to tax credits, deductions, subtractions, exemptions, and exclusions. The members elected Senator Jeffrey L. McWaters chairman and Delegate Harry R. Purkey vice-chairman.

    The entire membership of the Joint Subcommittee is:

    The Honorable Richard L. Saslaw
    The Honorable Walter A. Stosch
    The Honorable Janet D. Howell
    The Honorable Emmett W. Hanger, Jr.
    The Honorable Jill Holtzman Vogel
    The Honorable Jeffrey L. McWaters, chair

    The Honorable Benjamin L. Cline
    The Honorable Timothy D. Hugo
    The Honorable S. Chris Jones
    The Honorable Mark L. Keam
    The Honorable James P. Massie, III
    The Honorable Robert D. Orrock, Sr.
    The Honorable Harry R. Purkey, vice-chair
    The Honorable R. Lee Ware, Jr.

    The Joint Subcommittee met four times during the 2013 Interim. Chairman McWaters established two work groups, one to examine sales and use tax preferences and the other to examine income tax preferences. Senator McWaters is the chairman of the sales and use tax work group, and Delegate Ben L. Cline is the chairman of the income tax work group. Each work group met two times during the 2013 Interim.

    As a relatively new body, the Joint Subcommittee devoted substantial time to learning about the history of tax preferences, previous studies of tax preferences, the use and evaluation of tax preferences in other states, and other sources and topics relevant to its charge. In this regard, staff provided an overview of the 2011 study by the Joint Legislative Audit and Review Commission (JLARC) regarding the effectiveness of Virginia tax preferences. One of the recommendations of that study was the creation of a legislative joint subcommittee to oversee tax preferences. The full JLARC report is published as Senate Document 4 (2012).

    In addition, over the course of several meetings the Department of Taxation presented to the Joint Subcommittee (i) an outline of the current reports it compiles regarding tax preferences; (ii) detailed information on two of the largest income tax credits, the land preservation tax credit and the historic rehabilitation tax credit; (iii) an overview of all sales and use tax exemptions and a list of the approximately 7,000 nonprofit entities that have a sales and use tax exemption; and (iv) a compilation of all income tax and sales and use tax preferences.

    The Joint Subcommittee also received a presentation from officials from the State of Washington regarding their tax preference evaluation initiative. Washington State is widely recognized as a leader in this regard. The process in Washington begins with auditors Washington's Joint Legislative Audit and Review Commission (JLARC) conducting the initial reviews and making a recommendation. The recommendations then go to a Citizen Review Commission. The citizen commission, established by statute, includes appointees of the majority and minority parties in the House and Senate and a gubernatorial appointee. The chairman of JLARC and the state auditor also serve as nonvoting members. The citizen commission cannot change the auditor's recommendation, but its members receive public comment on the preferences and make comments regarding the recommendation that become a part of the public record. Finally, the report is presented to JLARC, and the legislative members decide whether or not they wish to introduce legislation based on the auditor's report and recommendations.

    As directed by Senator McWaters, staff, after consulting with various economic and tax experts, presented a proposed standard format and process for reviewing each preference: establishing purpose, establishing impact, and what an ideal deliverable should look like. The Joint Subcommittee adopted the major portions of the recommendation.

    The proposed format would include a detailed summary of the preference, which would contain any discernible purpose for the preference, relevant legislative and legal history, the identification of current issues related to the preference, and an overview of similar preferences in other states. The next section of the format would review the scope of usage of the preference, such as the number of beneficiaries, the average dollar amount claimed or used by each beneficiary, and the populations or sectors that primarily use the preference. An analysis section would follow that would present not only the results of the analysis but also details of how the analysis was conducted. Finally, to achieve continuity among other tax preferences and for perspective, a closing section would set forth other existing preferences that seek to achieve similar goals or that might seek a cross-purpose.

    There was much discussion among Joint Subcommittee members on the pros and cons of static versus dynamic analysis (i.e., modeling) of tax preferences. Static analysis examines only the direct impact of a preference, whereas dynamic analysis also examines the indirect impact on the economy. The Joint Subcommittee decided to explore in depth the feasibility of using both types of analysis.

    The committee next turned its attention to setting a schedule for the review of preferences. Staff from the Division of Legislative Services and the Department of Taxation indicated that the Joint Subcommittee might anticipate reviewing, on average, 10 preferences per year. This number might vary depending on the complexity of the preferences on the schedule for a given year. There was much discussion regarding the order in which preferences would be evaluated (e.g., from the highest revenue cost to the lowest or vice versa, or grouping preferences that have some commonality. The Joint Subcommittee decided to formulate a schedule for evaluating tax preference at a future meeting.

    More detailed information concerning the work of the Joint Subcommittee is available at the Joint Subcommittee's website ( http://dls.virginia.gov/commissions/tax.htm).