SJR 347: Commission on the Revision of Virginia's State Tax Code and
the Streamlined Sales Tax Project
September 25, 2003
The third meeting
of the commission adopted the same format it had in August, with the full
commission meeting briefly, followed by the subcommittee meetings, and
finally, the full commission reconvening after lunch. The full commission
received presentations from education and local government representatives
in its morning meeting and a report from Delegate Preston Bryant, chairman
of the telecommunications tax study (HJR 651, 2003), as well as subcommittee
reports during its afternoon meeting.
Full Commission Meeting
from two education organizations, the Virginia Education Association and
the Virginia Education Coalition, and one local government organization,
Virginia First Cities Coalition, were the first to address the full commission.
The president of
the Virginia Education Association asked the commission in their deliberations
to consider the shortcomings of the current tax structure to support a
high quality elementary and secondary education system that serves all
Virginia students. The two main issues on which she asked them to focus
are (i) the burden on Virginias local governments to fund schools
and the impact it has on local property taxes and (ii) the inadequate
level of state funding for Standards of Quality. (For a copy of the complete
presentation, see the commis-sions website.)
The Virginia First
Cities Coalition is comprised of 15 cities throughout the Commonwealth
that have been losing population and tend to be home to lower income individuals,
thereby placing a greater fiscal burden on the cities that already receive
less state support in general than rural and suburban areas. Its recommendations
- Modernize the
tax system to reflect current economic drivers and to more equitably
share the tax and service burden,
- Establish tax
rates to produce enough revenue to meet the Commonwealths obligations
to core services and invest in its future, and
- Expand the Common-wealths
funding for at-risk students.
The third and final
speaker during the morning session of the commission was a representative
of the Virginia Education Coalition, who suggested that the commission:
- Develop real,
long-term funding sources for education,
- Use coalition
support to achieve its goals, and
- Heighten interest
throughout the Commonwealth in education needs.
According to the
coalition, the most pressing needs are in special education, technology,
school construction, and teacher salaries.
BPOL Tax Subcommittee
The BPOL Tax Subcommittee
heard presentations by representatives from local government and the business
community. Both sides had been asked to focus their remarks on two questions:
First, if the BPOL tax is repealed, what other revenue-generating sources
can be made available to localities in order for them to replace lost
BPOL revenues and on whom should such new sources be imposed (only on
business or more broad-based)? Second, if the BPOL tax is not repealed,
how can the law be amended to improve the tax?
The Virginia Chamber
of Commerce favors repealing the tax, but it recognizes the difficulty
with finding an alternative revenue source so localities would remain
whole. Therefore, it suggested changes that include:
- reviewing all
BPOL tax rate caps in light of current economic data;
- exempting each
service category from the BPOL tax if the sales tax is extended to that
- totally exempting
the first $100,000 (possibly less in towns) earned by a business from
the BPOL tax; and
- maintaining the
laws against taxing sales and services delivered to other states.
According to the
Retail Merchants Association of Greater Richmond, retailers have pushed
for the elimination of the BPOL tax for some time, citing the unfairness
of the rate at which they are taxed and their generally low profit margin.
As a replacement revenue source, the association suggested that Virginia
take a more active role in the Streamlined Sales Tax Project and adopt
the necessary legislation to participate in the collection of sales and
use tax by remote sellers. In the event the BPOL tax is not repealed,
the association suggested (i) reviewing all the BPOL tax rates and eliminating
all exemptions for businesses that do not pay another tax similar to the
BPOL tax and (ii) using the revenues created by eliminating the exemptions
to reduce the rates paid by each business category.
representatives provided the subcommittee with a brief history of the
BPOL tax, followed by a summary of BPOL tax reforms that have been enacted
since 1975. At the conclusion of the meeting, the local government representatives
were asked by Delegate Drake to answer more thoroughly the two questions
during the subcommittees next meeting in November.
and Retail Sales and Use Tax Subcommittee
chairman of the subcommittee, began the meeting by reviewing his proposal
for changes to the individual income tax and the retail sales and use
tax. The remainder of the meeting was a public hearing during which 25
speakers shared their thoughts and concerns about the proposal. Most of
the speakers represented business, labor, or nonprofit organizations.
The majority of
the speakers expressed concerns about the proposal and how it would affect,
in a negative way, their organizations. Some speakers praised Delegate
Louderbacks effort to improve the current system by creating a more
equitable and simplified way of levying the individual income and sales
and use taxes. Delegate Louder-back concluded the meeting by encouraging
ongoing discussions about the proposal in an effort to create a plan that
all Virginians can support.
chairman of the Transportation Subcommittee, began the second meeting
by briefly summarizing the first meeting. As a follow-up to that meeting,
two documents were distributed to those in attendance: (i) a one-page
short synopsis entitled State Sources of Revenue for Transportation,
and (ii) a chart comparing motor fuel excise tax rates for all states.
According to the
chairman, the purpose of the second meeting was to look at the transportation
needs of the Commonwealth and to explore ways of meeting those needs other
than through raising taxes. Accordingly, Secretary of Transportation Whitt
Clement was invited to speak on this topic. Secretary Clement made the
- Certain recent
factors have reduced the available transportation funds, including (i)
deficit reduction payments to projects in the Six Year Program
as a result of realistic revenue projections; (ii) more costly winter
storms in 2003; and (iii) the financial impact of Hurricane Isabel.
- Regarding the
relative expense of maintenance versus construction, $407 million in
construction funds had to be transferred for maintenance costs. Projecting
recent trends, VDOT expects planned maintenance spending to exceed construction
spending by fiscal year 2005.
- The Commonwealth
Transportation Boards policy goals addressing limited resources
are as follows: (i) maintain what we have, (ii) finish what we have
started, (iii) seek multimodal solutions, (iv) use realistic revenue
and cost estimates, (v) restore and rebuild bridges, and (vi) relieve
congestion in urban areas. Some of VDOTs initiatives to address
limited resources include a uniform cost estimating system, 24-month
cash flow projections, and mandatory financial plans for major projects.
- Federal funding
is in a precarious position, with the current funding authorization
set to expire on October 1, 2003, and uncertainties surrounding the
amount that the Commonwealth might receive assuming there is a reauthorization.
Delegate Wardrup expressed his concern over Virginias reliance
on federal funds because (i) for every $1.00 Virginians send to the
federal government in taxes only about 90.5 cents return, and (ii) of
the increasing trend of the federal government attaching conditions
and dictating how the money is to be spent.
- The Governors
general priorities regarding federal funding include: (i) national security,
(ii) no mandates, (iii) multimodal funding, (iv) rail and transit funding,
and (v) adequate and fair funding. Some of the Governors specific
priorities for federal funding include: (i) I-81, (ii) Dulles Rail,
(iii) Coalfields Expressway, (iv) High Speed Rail, (v) VRE, (vi) Third
Crossing, (vii) Route 460, and (viii) Transit Capital.
- Regarding tolls,
in general they have been eliminated or are capped in Virginia. The
Commonwealth is pursuing a federal pilot program for tolls on I-81 and
value pricing in Northern Virginia and Hampton Roads where the amount
of tolls can rise and fall depending on demand.
- Moreover, 37 proposals
have been submitted to VDOT under the Public-Private Partnership Act
(PPTA) with six comprehensive agreements, two in negotiation, two to
be reviewed by the Advisory Panel, and two in the competition period.
PPTA projects are desirable only when they encourage competition of
ideas and prices, and ensure risk and/or cost sharing.
State and Local Taxes Subcommittee
Senator Hanger, chairman
of the subcommittee, first recapped the substance of the first subcommittee
meeting. He emphasized that the subcommittee had agreed to recommend to
the full commission to (i) eliminate the accelerated sales tax collections
by vendors, (ii) eliminate the estate tax, and (iii) move forward with
the Streamlined Sales Tax Project.
Senator Hanger said
that the first item of new business was to examine the car tax issue.
His goal would be to move to 100 percent elimination on the personal property
tax on all vehicles for personal use, with no cap on the value of such
vehicles. He acknowledged that to accomplish this goal, some feasible
means would have to be developed to account for the additional revenue
loss to localities in excess of $400 million.
Senator Hanger stated
that allocations to localities under the current car tax reimbursement
formula are not based on rational public policy and have many disparities,
because they are based on whatever tax rate the locality happened to have
in place on such vehicles as of July 1, 1997, or August 1, 1997, whichever
In this regard, staff
presented charts, as requested by the chairman, which showed (i) the amount
of reimbursement to each locality for vehicles valued at $5,000, $10,000,
and $20,000 and (ii) the per-capita reimbursement amount for each locality.
The first group of charts (divided among cities, counties, and towns)
showed, for example, that the reimbursement amount of a vehicle valued
at $10,000 ranged:
- for towns from
a low of $1.50 in Haysi to a high of $330 for West Point;
- for cities from
a low of $142 in Galax to a high of $500 in Emporia; and
- for counties from
a low of $20 in Bath to a high of $490 in Dinwiddie.
The other chart depicted
the similar information but showed the amount of reimbursement on a per-person
basis for each city and county. This chart showed a range:
- for cities from
a low of $30.19 per person in Harrisonburg to a high of $195.72 per
person in Falls Church, and
- for counties from
a low of $8.09 per person in Bath to a high of $213.68 per person in
Senator Colgan recounted
a proposal that he had introduced in a prior General Assembly Session
that would have: (i) called for a referendum to amend the Constitution
of Virginia to eliminate personal property taxes on all motor vehicles
and boats and (ii) increase the sales and use tax by one and one-half
percent. His proposal also replaced the current car tax relief statutes
with a funding formula that would pay (i) all counties 15 percent of their
total local tax revenue indexed to the annual percentage growth in sales
and use tax revenues, (ii) all cities 11 percent of their total local
tax revenue indexed to the annual percentage growth in sales and use tax
revenues, and (iii) all towns five percent of their total local tax revenue
indexed to the annual percentage growth in sales and use tax.
Senator Hanger discussed
the cigarette tax and staff presented one potential proposal for a statewide
uniform cigarette tax. This proposal would impose a 30 cents per-pack
state cigarette tax, and eliminate any local cigarette taxes. Such a tax
would generate net additional revenue in excess of $100 million per year.
A representative of the Virginia Municipal League commented that his organization
would be concerned at the loss of local taxing authority and the fairness
of how the additional revenue might be distributed. The Virginia Association
of Community Services Boards supports an increase in the cigarette tax
with the revenue being returned to localities for health purposes. Staff
was requested to develop alternative allocation formulas for distributing
possible increased revenues from an increase in the cigarette tax.
Senator Hanger concluded
the meeting by briefly introducing an issue concerning real estate taxes
that he said will be addressed more fully, along with other issues, at
the next meeting of the subcommittee. In particular, he said he would
like to explore if there are any ways in which the Commonwealth could
have an increased role in taking some pressure off the local real estate
taxes, which have seen relatively dramatic increases as a result of increasing
valuation of real estate in certain areas.
State and Local
Government Services and Responsibilities Subcommittee
The meeting began
with a presentation from representatives of the Virginia Municipal League
(VML) and the Virginia Association of Counties (VACo) regarding local
government expenditures and sources of local revenue that are used to
fund such expenditures. A representative of the Joint Legislative Audit
and Review Commission (JLARC) then discussed several key service functions
that are funded, managed, or delivered by the Commonwealth in concert
with local governments.
VML and VACo reviewed
city, county, and town expenditures for fiscal year 2002. For cities,
education made up 49 percent of total expenditures, public safety made
up 17 percent, and health and welfare 12 percent. For counties, education
made up 59 percent of total expenditures, public safety made up 13 percent,
and health and welfare 11 percent. For towns, public works made up 35
percent of total expenditures, public safety made up 31 percent, and general
government 14 percent. In general, because counties pay for public education
expenses of town residents, town expenditures for public education average
about 5 percent of total town expenditures. VML and VACo also stated that
63 percent of all services provided by cities and 72 percent of all services
provided by counties are state-mandated. The subcommittee asked VML and
VACo to supply information on urban, suburban, and rural spending on education.
VML and VACo indicated
that local spending exceeds the Commonwealths Standards-of-Quality
requirements by more than $2.7 billion per year, and Commonwealth spending
exceeds the Standards-of-Quality requirements by more than $492 million
per year. In regard to the funding of operating and capital expenditures
for education, local governments account for 56 percent of all such funding,
the Commonwealth for 31 percent, the state sales tax for 7 percent, and
the federal government for 6 percent.
For fiscal year 2002,
of all locally generated revenue, (i) real estate taxes made up 46 percent,
(ii) personal property taxes 10 percent, and (iii) user fees 10 percent.
VML and VACo were asked by the subcommittee to update this information
to include personal property tax reimbursement payments from the Commonwealth.
In addition, the subcommittee asked VML and VACo to provide information
on all sources of revenue received by local governments, whether or not
generated at the local level.
Real estate taxes
account for 49.1 percent of all locally generated revenues in counties,
39.1 percent in cities, and 21.3 percent in towns. Total real estate tax
revenues in fiscal year 2002 were $4.5 billion while total local education
spending for the fiscal year equaled $6 billion.
Some of the major
services for which the Commonwealth and its localities have shared responsibilities
include local and regional jails, law enforcement, public education, comprehensive
service for youth and families, health, community services boards, social
services, transportation, and courts. For all these service areas, the
Commonwealth has set minimum standards that must be met, and in many cases,
funding to local governments has been conditioned upon achievement of
the minimum standard.
JLARC compared the
services provided by local governments with the minimum standards required
by the Commonwealth. Most local governments exceed the staffing standards
required for local and regional jails. They also exceed the training and
staffing minimum standards in place for law enforcement. Local governments
exceed the Standards-of-Quality and Standards-of-Learning for public education,
and 55 percent of public schools meet adequate yearly progress (AYP).
Local governments spend more than is required as a match for comprehensive
services for youths and families. For health services, although primarily
operated by the Commonwealth, localities have developed local health programs
and supplement salaries and staffing for the provision of health services.
Most local governments provide more than the core services in contracts
approved by the Commonwealth for community services. In regard to social
services, all local governments exceed standards for administration and
programs. Generally speaking, local governments do not exceed transportation
minimum standards, although some local governments have spent local funds
on new roads and cities exceed street maintenance standards. For court
services, local governments exceed some standards for office space, staffing,
and salary supplements.
JLARC also reported
on the overall degree of flexibility local governments have in performing
these selected services under the mandate or statute requiring the provision
of the service. JLARC indicated that local governments have moderate flexibility
for the performance of services relating to local and regional jails,
high flexibility for law enforcement, low to moderate flexibility for
public education services, moderate flexibility for comprehensive services
to youths and families, low to moderate flexibility for services relating
to health, moderate flexibility in regard to community services boards,
low to moderate flexibility in performing social services, low to moderate
flexibility for transportation, and low flexibility for courts services.
Full Commission Meeting
Delegate Bryants Report
The full commission
reconvened heard an update from Delegate Preston Bryant regarding the
work of the Telecommunications Tax Study (HJR 651, 2003), which he serves
as chairman. Delegate Bryant explained that while a number of unresolved
issues exist, the industry and local government negotiating group is making
strides in finalizing changes in the way communications and video are
taxed that will make the system fairer and simpler while maintaining revenue
According to the
Progress and Freedom Foundations Committee on State Taxation, Virginia
ranked first in the nation in 2001 having the highest overall tax rate
on telecommunications. Delegate Bryant explained how the telecommunications
tax burden is inequitable because only three industry sectors collect
such taxes (local exchange providers, wireless, and cable) while four
industry sectors do not (long distance providers, paging, satellite TV,
and phone cards).
In its deliberations,
HJR 651 joint subcommittee members have been working with the industry
and local government toward achieving the following six goals:
1. Consolidate taxes
into fewer line items on the billing statement,
2. Make taxes uniform statewide,
3. Reduce tax rate on consumers,
4. Make taxes competitively neutral among industry sectors,
5. Preserve state and local government revenues now and into the future,
6. Remit tax collections to a single point of administration.
The taxes that would
be repealed under the new system, which would go into effect July 1, 2005,
are the local consumer utility tax, the local gross receipts tax (only
the portion billed to consumers where applicable), the current E-911 rate
structure, the Virginia relay fee, and the cable franchise fee.
The simplified telecommunications
tax plan would impose a statewide sales and use tax of 4.5 percent on
communications and video services and a 911 fee/tax not to exceed $0.75
on wireline and wireless. Tax revenues collected would be remitted to
a single point of administration (either the state or a third party administrator).
Localities would be kept whole based on (i) tax rates adopted no later
than July 1, 2003, and (ii) revenues from such rates collected beginning
July 1, 2003, and ending June 30, 2004, as determined by the Auditor of
Public Accounts. The sales and use tax imposed on communications and video
services will be in lieu of the retail sales and use tax; however, the
rate of such tax will not exceed the retail sales and use tax rate. Finally,
the distribution of revenues back to the localities under this plan will
be determined by the local governments and approved by the General Assembly.
The industry and
local government representatives will continue to meet to work on the
outstanding issues in order for a final plan to be submitted to the HJR
651 Joint Subcommittee for its approval. It is anticipated that legislation
will be introduced during the 2004 General Assembly Session that will
meet the goals through a simplified telecommunications tax plan.
chairperson briefed the full commission on the discussions that occurred
within the subcommittees.
The full commission
originally set October 16 as the next meeting date but due to the upcoming
elections decided to cancel that meeting so all the members could concentrate
on the various races around the state. It was suggested that any subcommittee
chair who wanted to call a meeting for that date could do so. Therefore,
the next meeting of the full commission will be November 6 in Richmond
followed by another meeting on November 25.
The Hon. Emmett W. Hanger, Jr.
The Hon. Harry J.
Joan E. Putney
Division of Legislative Services
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