Joint Subcommittee to Study and Revise Virginia's State Tax Code

HJR 60 (2002)
HJR 685/SJR 387 (2001)

April 29, 2002

The joint subcommittee appointed to study and revise Virginia's tax code held its first meeting of 2002 in Richmond and heard a presentation on underlying principles of tax systems. The joint subcommittee then discussed tax principles it may adopt in making recommendations to restructure Virginia's tax system. House Joint Resolution No. 60 states that the joint subcommittee is to complete its work by November 30, 2002, and shall submit recommendations for consideration by the 2003 Session of the General Assembly.

The joint subcommittee also reviewed a list of issues for study this year and an initial framework for dividing the issues between two task forces.

Principles of Tax Systems

Dr. John H. Bowman, Professor of Economics, Virginia Commonwealth University, gave a presentation on principles underlying tax systems and identified various tax principles generally present in good tax systems.

It is important to understand the distinction between "tax impact" and "tax incidence". The impact of a tax is where the tax first hits the economy. The incidence of a tax falls upon the persons or parties who will actually be paying the tax. Dr. Bowman noted that businesses do not pay taxes because consumers (forward shifting of the tax), labor markets and other suppliers (backward shifting of the tax), and individual owners of businesses (no shifting of the tax) ultimately pay taxes.

There are four main principles or criteria to evaluate tax systems. They are equity, efficiency, adequacy, and predictability.


The equity of a tax system means the fairness of the tax burden upon the taxpayers impacted. One approach in analyzing equity is to determine to what extent the costs of providing government services are paid for by taxes or other charges upon the users of such services. This approach considers the degree to which a tax system is functioning as an economic market, i.e., is it the user who is demanding the service the person who is paying the tax or other charge imposed to fund the cost of providing the service. As with any approach in analyzing the equity of a tax system, there are limitations with this market approach. For instance, it is sometimes difficult to quantify or measure the benefits of particular government services.

A second approach in analyzing the equity of a tax system, the ability-to-pay approach, examines how taxes impact taxpayers with a greater ability to pay. This approach requires an agreement on the standard for measuring one's ability to pay taxes, whether that standard be income, wealth, family size, or other factors. Under this approach, taxpayers in similar circumstances should essentially be paying the same amount of tax. This is called horizontal equity. In addition, this approach favors differing tax burdens for those with different abilities to pay. This is called vertical equity.


Efficiency as it relates to tax systems means the avoidance of waste or getting as much as possible from available resources. There are two major considerations in evaluating the efficiency of a tax system. First, consumer and business decisions for purchasing or investing should not be directly affected by taxes. Second, a tax system should be simple to administer and simple to comply with. The level of resources required to administer and to comply with a tax system is key for purposes of evaluating simplicity.


Adequacy relates to the revenue-producing capacity of the tax base and the level of government services to be funded. The more inadequate a tax base (i.e., the ability to generate revenues is limited in relationship to the agreed upon level of government services), the more likely there will be a high effective tax burden imposed on those left to pay.


As the Virginia constitution requires a balanced budget, predictable revenues are extremely important in appropriating state funds. Volatile tax bases are less desirable as they introduce more uncertainty in making appropriations.

Tax Principles Discussed by the Joint Subcommittee

The joint subcommittee discussed principles that it may adopt in revising Virginia's state tax code. The tax principles discussed by the joint subcommittee were equity, efficiency, adequacy, and predictability, the same principles identified by Dr. Bowman.

In the process of discussing these principles the joint subcommittee raised several issues that could be the subject of further examination. The issues raised included:

Are revenues and services allocated between state and local governments in an equitable manner?

Are user fees a more equitable means of paying for certain services?

Should all citizens share a portion of the tax burden?

To what extent, if any, should the state tax code be a tool of social policy?

Is the tax code easy to understand and administer (for the government and for the taxpayer)?

Are the proposed changes to the tax code defensible?

Will the proposed changes contribute to the state's competitiveness?

Should tax preferences (subtractions, deductions, exemptions, credits) have an accountability component (appropriations v. expenditures)?

Does the tax produce enough revenues to fund the necessary services?

If changes are made to the tax code, is the total state and local tax burden the same as it was prior to the changes (revenue neutrality)?

Is the tax base volatile or fairly secure?

Does the state have a proper allocation and mix of taxes?

To what degree would changes in the mix of taxes impact (i) the state and localities and (ii) taxpayers?

The meeting concluded with a discussion of issues that may be studied this year. Given the long list of issues previously identified, the creation of two task forces comprised of members of the joint subcommittee was discussed. Staff provided the joint subcommittee with a list of issues for possible study and a framework for dividing the issues between the two task forces. It is envisioned that the task forces would meet in June, July, and October to complete their work.

Next Meeting

The next meeting of the joint subcommittee will be May 29 at 10:00 a.m. There will be an initial meeting of the entire joint subcommittee followed by separate meetings of each task force.


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