RD151 - Executive Summary of the 2018 Interim Activity of the Virginia Joint Subcommittee to Evaluate Tax Preferences
Chapter 777 of the Acts of Assembly of 2012 created the Joint Subcommittee to Evaluate Tax Preferences (the Committee) 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. Pursuant to the powers and duties authorized under § 30-338 of the Code of Virginia, the Committee held two meetings during the 2018 interim. Delegate R. Lee Ware, Jr. served as chairman.
October 23, 2018
The Committee's October meeting covered three topics: (1) taxes on cigarettes and vapor products; (2) real property tax exemptions for charitable organizations; and (3) tax benefits for veterans and military personnel.
Dr. Carrie Wade of the R Street Institute presented to the Committee on harms caused by tobacco products and efforts to reduce those harms. She provided information about dependence on cigarettes and, more broadly, on other addictive substances such as opioids, including statistics on related deaths. She acknowledged potential concerns about harm reduction strategies like syringe access programs. However, in her view, the success of such programs in reducing overall harm and health care costs often outweighs these concerns. Dr. Wade recommended treating noncombustible products differently from combustible cigarettes in order to express a public policy preference for less harmful products.
Joe Mayer of the Department of Taxation explained the origin and history of the cigarette tax in Virginia. He described the administration of the tax, involving registration by dealers, certification of tax paid with stamps, and posting of bond to assure collection of tax revenue. In recent sessions, the General Assembly passed legislation intended to counteract cigarette smuggling by requiring businesses to register to purchase large volumes of cigarettes. He pointed out that Virginia has one of the lowest cigarette tax rates in the country.
Connor Garstka of the Division of Legislative Services provided information about previous bills in Virginia that would have taxed vapor products, as well as how such products are taxed in other states. Generally, states have used one of two tax schemes. Some states tax the liquid solution that is depleted as a device is used on a per milliliter basis. Others apply a percentage tax to the wholesale or resale price of the vapor device.
Mr. Garstka then reviewed the most recent attempt to tax vapor products in Virginia, HB 2056 (2017). HB 2056 would have imposed a 5 cents per milliliter tax on consumable liquid and a 10 percent tax on the retail price of devices. This would have generated about $11 million in revenue per year, distributed to the Tobacco Settlement Fund; $500,000 per year to the general fund; and $5 million per year to localities. Mr. Garstka explained that three similar bills had been introduced in previous legislative sessions that would have taxed vapor products at different rates.
Lisa Wallmeyer of the Division of Legislative Services presented on the historical background of state real property tax exemptions for charitable and other similar organizations, as well as the current local scheme of providing such exemptions. Prior to 2003, the General Assembly authorized by statute real property tax exemptions for charitable organizations, some of which were specific to certain localities. Starting in 2003, pursuant to legislation enacted by the General Assembly, localities had the sole power to create and eliminate new exemptions by ordinance. However, existing state statutory exemptions were grandfathered and can be repealed only by legislation passed by the General Assembly.
Delegate Dave A. LaRock described legislation that he had introduced in previous sessions that would have repealed the state statutory real property tax exemption for one nonprofit organization located in Frederick County. This legislation did not pass. Delegate LaRock described new legislation that he had been working on and planned to introduce during the 2019 legislative session that would try to address the issue in a different way by repealing all existing state statutory exemptions for nonprofits; however, the repeal would have an effective date that would be deferred by five years.
Connor Garstka provided background information about several state tax preferences that are available for military service members and veterans. Generally, military pay and military retirement income are subject to state income tax. However, there are five income tax preferences related to military service. First, National Guard members may deduct up to $3,000 of wages for their service. Second, military personnel on extended active duty may deduct up to $15,000 of basic pay per year; however, this deduction is phased out and eliminated altogether if the amount of pay exceeds $30,000. Third, combat pay and hazardous duty pay are completely exempt from income tax. Fourth, any death gratuity payment received by the survivor of a service member killed in the line of duty after September 11, 2001, is tax exempt. Fifth, Virginia exempts all military retirement income of a Medal of Honor recipient.
In addition to the income tax preferences, Garstka indicated that there is a real estate tax exemption for veterans who are 100 percent disabled. Such veterans may claim their principal residence as tax exempt. If the disabled veteran dies, the tax exemption continues for the surviving spouse, including if such spouse moves to a different residence.
November 19, 2018
The Committee's November meeting concerned recent federal tax legislation, remote sales tax collection, and a revisiting of issues from the previous meeting.
Craig Burns, the Tax Commissioner, explained the history and function of state conformity to federal income tax definitions. Conformity makes recordkeeping easier for taxpayers, allowing them to keep one set of accounts for state and federal tax purposes. It also improves enforcement, freeing the Department of Taxation (the Department) to focus on enforcing state-specific tax policy. Mr. Burns observed that the 2018 Session of the General Assembly did not decide whether to conform to the provisions that affect taxable years 2018 and beyond. He stressed the importance of passing conformity legislation as soon as possible during the 2019 Session so as to minimize taxpayer uncertainty and reduce the costs that could result from taxpayers filing multiple returns.
Kristin Collins of the Department provided an overview of the Virginia consequences of the recent federal tax law, known as the Tax Cuts and Jobs Act (the TCJA). She listed some of the TCJA's major changes, such as increasing the federal standard deduction and reducing the value of the federal personal exemption to zero. She identified some proposed Virginia tax policy solutions, such as increasing the Virginia standard deduction or increasing the Virginia personal exemption.
Joe Mayer of the Department presented the legal background of the collection of state sales tax from remote (out-of-state) sellers under federal law as articulated by the United States Supreme Court. Until 2018, federal law prohibited states from requiring a remote seller to collect state sales tax unless the seller was physically present in the state. But in a 2018 decision, South Dakota v. Wayfair, the Supreme Court overturned the physical-presence rule, clearing the way for states to enact law requiring remote sellers to collect state sales tax.
Next, Connor Garstka of the Division of Legislative Services reviewed information presented at the Committee's last meeting, on October 23, 2018. Mr. Garstka explained the Committee had received presentations on Virginia's tobacco taxes and the taxation of vapor products in other states. Senator Bryce E. Reeves proposed that the Committee recommend new legislation to better define new tobacco products in the Code of Virginia. Because the Committee lacked a quorum of senators, no formal recommendation could be made. However, Delegate Ware took a straw poll of the present members, who agreed to the recommendation by voice vote.
Mr. Garstka summarized information from the Committee's previous meeting about Virginia's real property tax exemptions for charitable organizations. Delegate R. Steven Landes stated that there is no consensus on how to address this issue and proposed a motion to include in the Committee's 2019 work plan an in-depth review of nonprofit taxation. This review would take a holistic approach to nonprofit taxation, examining the entire regimen and not just the specific issue of real property exemptions. Though the Committee lacked a quorum, it took a voice vote and agreed to the motion.
Mr. Garstka reviewed information presented at the Committee's last meeting about the state tax preferences that are available for military service members and veterans. No recommendation or vote was taken.
The Committee did not formally vote on any legislative proposals for the 2019 session, and it did not recommend that any tax preferences be eliminated, expanded, or otherwise modified.