By Kathryn Watson | Watchdog.org Virginia Bureau
ALEXANDRIA — In a time when some say the state seriously should be second-guessing its plethora of tax preferences, many lawmakers this session are expanding Virginia’s “ocean” of tax credits, in the words of one delegate.
Why don’t they reform the system? They crave their power to dole out tax incentives too much, some lawmakers and analysts say.
Following the House of Delegates’ lead last month, the Senate on Wednesday passed a bill filed by Delegate David Ramadan, R-South Riding, creating a $250 income tax credit for any Virginia worker who works from home or from a telework office at least 20 hours a week.
“We’ve got an ocean full of exemptions and tax credits,” Delegate Bobby Orrock, R-Thornburg, told Watchdog.org. He was the sole dissenter in a House subcommittee vote.
Orrock, one of 14 members of a joint House-Senate subcommittee formed last year to evaluate the state’s myriad tax preferences, said he had hoped state legislators would lay off on the tax credit bills until the commission looks at the full scope of tax preferences. But that extra $1 million annually in telework tax credits just adds to roughly $12.5 billion annually that the state loses in all forms of corporate and individual tax preferences, forcing other taxpayers to make up the difference, Orrock said.
The subcommittee has “just stuck our toe in the water,” Orrock said.
“And yet this session we’ve upped the level of the ocean a little bit with additional credits,” he said. “Now, we’ve got to look at even more than what was already there.”
Virginia offers so many tax credits — 20-something and counting — that Sen. Walter Stosch, R-Glen Allen, filed a bill this year to eliminate any credits that no one had claimed in five years or more. Incentives like the Day-Care Facility Investment Credit and the Tax Credit for Certain Employers Hiring Recipients of Temporary Assistance to Needy Families have never been claimed, according to the bill’s impact report.
Stosch, whose bill passed the House of Delegates on Wednesday after finding favor in the Senate in January, did not return calls for comment.
The sheer number of unused credits shows just how tax-credit happy the General Assembly is, Orrock said. And the telework bill, to him, is just the most recent illustration of that.
After all, telecommuters already benefit by saving gas money, among other savings and conveniences of working from home, Orrock said. And, employers with telecommuting employees already can receive a tax credit of up to $1,200 per employer from the Old Dominion, Orrock said.
But beyond that, Orrock opposed the telework tax credit for the same reason he opposes other tax credit bills.
“When you give somebody a tax credit, then at the end of the day they’re not paying as much in taxes as the rest of the citizens,” he said. “So that means the other folks have to pay more.”
Republicans may not want to admit it, but doling out credits is basically like doling out subsidies, said Scott Drenkard, economist with the Tax Foundation’s Center for State Tax Policy in Washington, D.C.
“It’s economically equivalent to a subsidy,” Drenkard said.
In 2008, Virginia handed out $12.5 billion in tax preferences, while it took in in $14.8 billion total in tax revenues, according to a November 2011 study by the Joint Legislative Audit and Review Commission, the watchdog arm of the General Assembly.
“Can you imagine how many roads you could build and bridges and everything else with that kind of money?” said Robert Dean, chairman of the Tidewater Libertarian Party.
But lawmakers aren’t eager to change their ways, said Sen. Chap Petersen, a Fairfax Democrat.
He would know.
The Senate shot down a resolution Petersen filed this session requiring the General Assembly to re-evaluate and vote on each tax credit every five years. Petersen wanted to embed that requirement in the Virginia Constitution. The burden of proof for a tax credit’s existence should fall on the groups receiving the credit, rather than the credit’s critics, he said.
“I’ve been in the Assembly since 2001,” Petersen said. “I’ve never seen a tax credit get repealed. I’ve seen a couple get limited, but I’ve never seen one taken off the books.”
Why is changing the status quo so impossible? It’s a two-part problem, Petersen said. First, the senators who call the shots are beholden to the lobbyists who enjoy those credits, he said.
“Anytime you enact a credit, you either create or further a special interest group,” Petersen said. “And that special interest group is obviously going to fight like hell. … I felt like every lobbyist in the building was fighting me on my bill.”
And in tandem with that, senators on the decision-making Senate Finance Committee don’t want to concede power.
“There’s a hierarchy in the Senate,” Petersen said. “The Finance Committee’s on top, and they like having the authority to enact or not enact tax credits, or to control that process. And my bill would have democratized it.”
But the power struggle goes beyond the Senate Finance Committee, Dean said.
“Because all these industries, whether it’s the railroads, coal mines or whatever — they’re all up there trying to get special deals for their industry or their company or whatever,” Dean said. “And so, it’s a power thing with the General Assembly members, both the House and the Senate side. Oh, you want to go out to dinner tonight? Sure, OK, fine. It won’t have any effect on how I vote, even though you’re going to spend $150 ….’”
Orrock said it’s time lawmakers analyze tax credits from a cost-benefit perspective.
“If we’re going to give tax incentives, then the public policy decision we’re making is, ‘Whatever you’re doing is going to benefit the commonwealth so much that we’re willing to let you not pay as much in taxes as the rest of the citizenry,’” Orrock said.
And until legislators know the effectiveness of a tax credit, they shouldn’t invent more, Orrock said. That’s what the Joint Legislative Subcommittee to Evaluate Tax preferences is supposed to determine. But the subcommittee, which has met twice so far, doesn’t have any timeline for reporting its findings.
Petersen, for one, said he doesn’t have high hopes for the subcommittee’s effectiveness.
“There are two responses to every problem in Richmond,” Petersen said. “One is to take action. The other is to appoint a commission. You can see what I think of that.”
And even in subcommittees and commissions, the lobbyists influence decisions, he said.
“I’ve served on commissions, and the only people who attend those are lobbyists who have a stake in the underlying legislation,” Petersen said. “And they will usually pretty much write the recommendations or heavily influence the recommendations.”
So, if state lawmakers are serious about reforming state tax preference policy to be fair and effective, what should they do?
Petersen said pressure for reform needs to come from the top down.
“Now, I’m not running for governor,” Petersen said. “But if I was, I’d make this my number one issue, saying, there are lot of people in this state who don’t pay income tax, wealthy people. And I’m going to get to the bottom of that and basically make sure we have a level playing field in terms of taxation. I think you’d need a governor to lead that charge.”
Drenkard said he likes Petersen’s proposal to require a re-evaluation and a vote on tax credits every five years — but he’d tweak it.
“In general, the heart of this proposal is in the right place,” Drenkard said. “Tax reform is about closing loopholes and removing credits. But then also, it’s about lowering rates with the additional revenue that it brings in.”
Ideally, unpopular or unproductive credits should expire as they’re re-evaluated, Drenkard said. Then the state is left with extra revenue. So, lawmakers should either have a rate cut kick in after revenue reaches a certain threshold, or lawmakers should earmark the extra money to the state’s rainy day fund, he said.
“Traditionally, that’s used in tough economic times to prevent against calls for tax increases,” Drenkard said.
Whatever approach lawmakers take, reform is something both sides of the aisle should be able to agree on, Petersen said.
“I think Republicans and Democrats can come together,” Petersen said. “Because I think … whether it’s a conservative or a liberal base, neither base likes to see people with connections and people with the top attorneys and the top CPAs being able to avoid taxation.”
Contact Katie Watson at email@example.com.