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 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. 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: 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; 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 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, 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 vs. 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 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 Presentation

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 in Virginia.

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 W. Hanger
The Hon. Robert F. McDonnell

For information, contact:

Joan E. Putney
Mark Vucci
David Rosenberg
Division of Legislative Services

Website: http://dls.state.va.us/taxcode.htm


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