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Finding a Fix

Is Virginia’s tax system fair? The debate begins.


Calls for reforming Virginia’s tax system have intensified over the past several years, and the issue could dominate the legislative session that begins in January. Del. Allen L. Louderback, R-Page, and the Virginia Organizing Project, a Charlottesville-based grass-roots organization, each have proposed major reforms that would reduce the burden on low-income families and create a new bracket charging wealthy families a higher rate.

In coming weeks, Gov. Mark R. Warner and other legislators will introduce their own plans, most of which are expected to be less dramatic.

Virginia’s tax system also has come under scrutiny by external organizations. Governing magazine, which favors the broad-base theory, gives Virginia two stars out of a possible four in a report published this year.

On the plus side, the magazine, published by Congressional Quarterly Inc., notes that Virginia divides its tax burden between income and sales levies rather than relying on a single source for revenues. Its 4.5 percent sales tax rate is one of the lowest in the country.

But the magazine docks the state for not imposing a sales tax on services, such as dry cleaning and haircuts.

And it raises concerns that the state may be too reliant on income taxes, a revenue source that is more volatile than the sales levy because it is subject to economic swings. Evidence of that has come in recent years as an economic slowdown has produced record revenue shortfalls.

Virginia is one of five states, along with Oregon, New York, Massachusetts and Colorado, that depend on the income levy for more than half their revenues. Income tax is expected to account for $7.2 billion in this year’s $11.7 billion state operating budget, and sales tax will bring in an estimated $2.5 billion.

The labor-funded Institute on Taxation and Economic Policy grades states based on the tax burden they impose on wealthy and poor people.

The Washington group favors Virginia’s emphasis on the income tax over sales levies. Group members believe that a sales tax eats up more of a poor family’s earnings than a wealthy family’s. Although higher-income consumers may be more likely to buy expensive electronic gadgets, they probably spend about the same as a poor person on basic items like toilet paper. The institute also gives the state good marks for maintaining low taxes on cigarettes and liquor, burdens that are believed to fall more heavily on the poor.

Most importantly, Virginia gets bonus points for exempting most families below the federal poverty level from paying income taxes.

But the group notes that Virginia’s income levy is essentially flat for taxpayers over the poverty line. The state imposes the same 5.75 percent rate on single taxpayers making just over $17,000 that it does on multimillionaires.

The institute also criticizes Virginia for charging a sales tax on groceries, a necessity that 27 states exempt from the sales tax to provide relief for poor families. State lawmakers voted in 1999 to reduce the tax from 4.5 percent to 2 percent as revenue growth allowed, but so far they’ve succeeded only in reducing the rate to 4 percent.

The Republican-controlled General Assembly is not expected to adopt a major rewrite of the tax code that raises levies on the state’s wealthiest residents.

“This whole business of progressive income taxes is nothing but Marxism,” says Del. Vincent F. Callahan Jr., the Republican chairman of the budget-writing House Appropriations Committee.

Some economists believe that a graduated income tax is best left to the federal government, while states should stick with a flat-rate structure or one that is only slightly higher for wealthy people. Under that system, high-income people are not tempted to move in search of the most favorable tax bill, economists say.

“If you really get into progressivity, then you want to look over your shoulder at what other states are doing,” says John Knapp, a research analyst at the University of Virginia’s Weldon Cooper Center for Public Service. “If you jack up income tax rates, that may be a problem for employers who are trying to attract highly skilled people.”

But even without a major overhaul, state leaders say there are smaller adjustments they can adopt. Sen. John Chichester, R-Stafford, says he would like to eliminate the “cliff effect” created because the state exempts families below the poverty level but provides no relief if their earnings fall just above that cutoff.

According to an analysis by the Center on Budget and Policy Priorities, a family of four with an income of $18,390 paid $379 in 2002, the fourth-highest rate behind Kentucky, Alabama, and Indiana.

“I don’t think that’s fair,” Chichester says. “I think there are ways to smooth things out a bit.” S

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