RD50 - 2017 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. Delegate R. Lee Ware, Jr. served as chairman during the 2017 interim.

    The Joint Subcommittee to Evaluate Tax Preferences ("the Joint Subcommittee") met once in 2017, on September 25, 2017.

    After calling the meeting to order, Delegate R. Lee Ware, Jr., chairman of the Joint Subcommittee, provided introductory remarks regarding the work of the Joint Subcommittee to date and suggestions for work going forward. He noted that at the Joint Subcommittee's early meetings, issues such as the role of tax preferences in the overall tax structure, the relationship of preferences to the overall tax base, and the principles of a sound tax system were all discussed. However, once the actual review of preferences began, individual preferences were discussed and these other issues were not a part of the discussion. Because members of the public rarely spoke against a given preference, the Joint Subcommittee generally recommended to maintain preferences in their current form.

    Delegate Ware suggested that, in his opinion, reviewing each preference in a vacuum did not allow for the perspective of reviewing how preferences as a whole impacted the tax base and tax structure. He suggested that a review of the collective cost of all tax preferences would naturally lead to a discussion of overall tax rates, as many would consider cutting tax rates in light of a windfall of substantial revenue gains in the Commonwealth. He was careful to note that he was not suggesting that the individual merits of each preference should not be considered, or that all preferences should be eliminated. However, he felt that it was important to learn, from an academic perspective, what the Commonwealth's tax system might look like without policy-based preferences and that this might be a better vantage point from which to review tax preferences.

    David Rosenberg, Senior Attorney at the Division of Legislative Services, provided an overview of the basic principles that guide the creation of a sound tax structure. Generally, experts agree that a sound tax structure should be simple, transparent, fair, economically neutral, and reliable. In summarizing this information, Mr. Rosenberg relied on a variety of sources, including the Tax Foundation, the National Conference of State Legislatures, and the American Legislative Exchange Council. As for the application of these principles to tax preferences specifically, Mr. Rosenberg suggested that any review of a tax preference should include questioning whether the preference would make a tax system more or less simple, transparent, fair, economically neutral, and reliable. The answer to each of these questions depends on the particular preference in question. A copy of the tax principles presentation is available on the Joint Subcommittee website. ( http://dls.virginia.gov/commissions/tax.htm)

    Next, Kristin Collins, Policy Development Director at the Virginia Department of Taxation, presented information regarding the revenue impact of tax preferences in Virginia. The data and information presented were based on an academic review of the overall impact of preferences that estimated revenues in the Commonwealth if no tax preferences existed. In conducting the analysis, the Department of Taxation did not make policy assumptions that particular preferences should remain in Virginia's tax code. Generally, the Department of Taxation estimated that the Commonwealth foregoes $8.3 billion in revenue annually from all preferences: $2.9 billion annually due to retail sales and use tax exemptions (excluding the exemption for services); $4.8 billion annually for the retail sales and use tax for services; $787.6 million annually from individual income tax deductions and subtractions; $371.8 million from tax credits; and $40.7 million from corporate income tax deductions and subtractions. Ms. Collins provided a more detailed look at each of these groups of preferences. In conclusion, Ms. Collins presented information regarding potential reductions in tax rates that could result if preferences were eliminated and the foregone $8.3 billion were collected. Examples included reductions in retail sales and use tax, personal income tax, and corporate income tax rates. The examples were not provided as suggested actions to the Joint Subcommittee but instead to provide perspective on the impact of tax preferences as a whole on the tax rates. A copy of the revenue impact presentation is available on the Joint Subcommittee website.

    Throughout the meeting, members of the Joint Subcommittee asked several questions and engaged in substantial discussion regarding the issues presented. Members requested more detailed information at future meetings regarding trends in the shift from a goods-based economy to a service-based economy, how other states apply their retail sales and use tax to services, and how other states define services. Members expressed a strong interest in learning more about the tax reform package adopted by North Carolina in 2013 that substantially restructured its tax code and eliminated most tax preferences. Specifically, members were interested in what was proposed versus what was passed, and where North Carolina's economy is today. Members of the Joint Subcommittee also suggested that tax reform might lead to consideration of the elimination of local license taxes, and they requested more analysis of this.

    This executive summary constitutes the 2017 report of the Joint Subcommittee to Evaluate Tax Preferences, and no further report is forthcoming.