HJR 60: Joint Subcommittee to Study
and Revise the State Tax Code
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
60 states that the joint subcommittee is to complete its work by November
30, 2002, and 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
A professor of economics at Virginia
Commonwealth University gave a presentation on principles underlying tax
systems and identified various tax principles generally present in good
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.
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
There are four main principles
or criteria to evaluate tax systems: equity, efficiency, adequacy, and
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; that is, is 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
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, as explained above.
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
- 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
- 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 prevously identified, the creation of two task forces comprised
of members of the joint subcommittee was discussed. Staff provided a list
of issues for possible study and a framework for dividing the issues between
two task forces. It is envisioned that the task forces would meet in June,
July, and October to complete their work.
May 29, 2002
The joint subcommittee met in
Richmond and formally adopted tax principles intended to guide the joint
subcommittee in its work to revise Virginia’s tax code. In addition, staff
to the joint subcommittee gave a brief presentation that involved answering
questions raised at April’s meeting and explaining several new items of
information distributed to subcommittee members. One of the items discussed
was the assignment of subcommittee members and issues for study to two
different task forces. Task Force #1 and #2 were created to study all
of the tax and other issues identified as subjects of study at the April
meeting. The work of each task force is, for the most part, intended to
be mutually exclusive of the other.
At the conclusion of staff’s
presentation, the full subcommittee meeting ended and both Task Force
#1 and #2 met to discuss the issues assigned to them.
Tax Principles Adopted
The joint subcommittee formally
adopted tax equity, efficiency, adequacy, and predictability as principles
to guide its work in revising the tax code. These are the same principles
that were discussed at length in the April meeting of the joint subcommittee.
Much debate preceded the adoption
of these tax principles. One of the questions debated was whether the
end result of all final recommendations should be revenue neutral in nature;
that is, the net effect of all recommendations would neither increase
or decrease the Commonwealth’s total annual revenue. The joint subcommittee
ultimately agreed that its recommendations should be revenue neutral.
Staff provided several new pieces
of information for joint subcommittee members to consider in upcoming
meetings. These included information on the cost of administering taxes
collected by the Department of Taxation, Department of Motor Vehicles,
and State Corporation Commission; the additional annual cost in increasing
Virginia’s personal and dependent exemption (in $100 increments); and
the Department of Taxation’s Analysis of Sales and Use Tax Exemptions
Task Force #1 Meeting
Task Force #1, chaired by Senator
Hanger, began its first meeting by reviewing its list of issues. Those
issues include several that deal with the state income tax, to what extent
Virginia should conform with federal tax law, the local property tax on
personally owned vehicles, telecommunications taxes, the sharing of income
tax revenues with localities, and the equalization of the taxing authority
granted to counties and cities. After reviewing the issues, the task force
members decided to focus on the state income tax issues at its next meeting
on June 24 and take up the remainder of the issues on July 16.
Task Force #2 Meeting
Task Force #2, chaired by Delegate
McDonnell, began its first meeting by reviewing its list of issues and
discussing certain sales and use tax exemptions, as reported in the Department
of Taxation’s Analysis of Sales and Use Tax Exemptions in Virginia.
Among the issues to be considered by the task force are current exemptions
from Virginia’s sales and use tax, extending Virginia’s sales and use
tax to certain services, conformity with federal law repealing death and
estate taxes, elimination of the BPOL tax, and additional revenue opportunities
for local governments.
The task force asked for additional
information on sales and use tax exemptions of public service corporations.
The task force also asked for more information on the applicability of
Virginia’s sales and use tax to services.
Any recommendations that the
members of the two task forces develop are to be presented to the full
joint subcommittee at its meeting on August 19.
The Hon. Emmett
The Hon. Robert F. McDonnell
Joan E. Putney
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