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.
Equity
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
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
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.
Predictability
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.
SUBCOMMITTEE
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