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

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

June 25, 2001

In its organizational meeting, the joint subcommittee appointed to study and revise the state tax code pursuant to HJR 685 and SJR 387, elected co-chairmen, adopted a work plan, and received background information from staff concerning major general fund and nongeneral fund taxes and revenues.

General Fund Taxes

Approximately 90 percent of the general fund revenues are produced by three taxes: individual income tax, sales and use tax and corporate income tax. Sources making up the remaining ten percent are insurance premiums tax; inheritance, gift and estate taxes; public service corporation tax; interest and rent; wills, suits and deeds taxes and fees; ABC taxes; bank franchise tax; and cigarette tax. The general fund portion of the meeting focused on the top three taxes: individual income, sales and use, and corporate income.

Virginia's individual income tax accounted for about 64 percent of the general fund revenues in FY 2000. It is by far the largest general fund revenue producer followed by the sales and use tax at 21 percent and the corporate income tax at 5 percent. For the past 30 years, the trend has been for the Commonwealth to become more reliant on individual income tax collections and less reliant on other tax sources. As the economy has grown, so have the number of jobs and individuals' salaries, thereby increasing individual income tax revenues.

The individual income tax has experienced few changes during the same 30-year period. In 1971, Virginia conformed its income tax definitions to federal law, making it easier to administer and less complex for taxpayers. Also, the top rate of 5.75 percent was added that year. The only other recent change with regard to rates came in 1987 when the tax bracket for the top rate went from $12,001 to $17,001. The rates and brackets have not change since 1987.

The state sales and use tax, as the second highest general fund revenue producer at 21% in FY 2000, is imposed on the sale of tangible personal property at a rate of 3.5% with an additional 1% local option for a total sales tax of 4.5%. The sales and use tax was enacted in the Commonwealth in 1966 at a rate of 2%. An additional 1% local option, which all counties and cities have adopted, was added in 1969. The state rate has been increased twice since then; in 1968 to 3% and in 1987 to 3.5%. Today, Virginia has one of the lowest state sales and use tax rates in the United States.

Distribution Formula of 3.5% State Sales Tax

2% to the general fund
1% to localities based on school-age population
0.5% to the Transportation Trust Fund

The sales tax is levied on the sales price of tangible personal property sold or leased at retail in the Commonwealth. The use tax is levied on the sales price of tangible personal property purchased outside the Commonwealth but used within its boundaries. The tax is imposed on the purchaser and collected by the seller who then sends it to the Department of Taxation. Sellers are compensated for collecting the tax.

The corporate income tax is the third largest source of general fund revenues accounting for approximately 5% of all general fund revenues in FY 2000. It is imposed on domestic corporations and foreign corporations (those incorporated outside Virginia) with income from Virginia sources. The tax is a net income tax levied on "bottom-line" profit at a flat rate of 6%.

Corporate income tax revenues are volatile and therefore, difficult to depend on and predict. During the 1990's, the annual growth for such revenues flucuated from a low of -10% in 1991 to a high of + 34.6% in 1993 and 2000. There is no obvious explanation why this is the case. However, the corporate tax rate of 6% does not change as corporate profits increase, which is in contrast to the graduated individual income tax rates. Also, a corporation may elect to be treated for tax purposes as a type of legal entity that allows the profits to flow through to the shareholders/members who pay the individual income tax while the corporation pays no corporate income tax.

Nongeneral Fund Taxes

The majority of the revenues comprising the nongeneral fund are not generated by tax sources. In FY 2000 for example, over half of such revenues were generated by federal and other grants/donations (33.4%), and institutional revenues (21.8%) such as higher education tuition/fees and state hospital charges. Major nongeneral fund tax sources contributed the third highest percentage at 12.2%, followed by sales of property and commodities (8.4%), special services assessments (6.3%), rights and privileges fees (5.2%), interest, dividends and rent (3.9%), fines, forfeitures, costs, penalties and escheats (1.9%), and other (6.9%).

The major nongeneral fund tax sources (excluding the 0.5% of the state sales and use tax deposited in the Transportation Trust Fund) are the state fuels tax, the motor vehicle sales and use tax, and the special revenue regulatory tax. The Department of Motor Vehicles (DMV) administers both the state fuels tax and the motor vehicle sales and use tax. For FY 2000, the state fuels tax accounted for 43.5% of all nongeneral fund tax revenues collected by DMV while the motor vehicle sales and use tax accounted for 30.4% of such revenues.

The state fuels tax, known as the "tax at the rack" is assessed at the point the fuel is removed from the terminal rack, although the tax is passed on to the ultimate consumer at the gas pump. The main fuels tax rates per gallon are 17.5 cents for gasoline and gasohol and 16 cents for diesel fuel and alternative fuels. All fuels tax revenues are distributed to (i) the Transportation Trust Fund, (ii) the Highway Maintenance Operating Fund and (iii) DMV for its operations.

The motor vehicle sales and use tax is imposed on the consumer at a rate of 3% on the gross sales price of motor vehicles and manufactured homes and at a rate of 4% on the gross proceeds of motor vehicle rentals. This tax is in lieu of the retail sales and use tax. Revenues attributable to the motor vehicle sales and use tax are distributed to the Transportation Trust Fund and the Highway Maintenance Operating Fund.

The State Corporation Commission (SCC) administers the special revenue regulatory tax. The tax accounted for approximately 17% of all nongeneral fund revenues collected by the SCC in FY 2000. The rate of the tax may be up to 0.2% of gross receipts with the SCC authorized to adjust the rate. The tax is paid by certain corporations furnishing water, heat, light or power; certain companies owning and operating telegraph lines; telephone companies with gross receipts in excess of $50,000; the Virginia Pilots' Association; railroads, except those exempt by federal law; and certain common carriers of passengers. Revenues generated support the making of appraisals and assessments against public service corporations, investigating the properties and services of public service corporations, and administering laws relating to such corporations.

Work Plan

The joint subcommittee will meet in August at which time staff will make presentations concerning local taxes and fees. In September, the joint subcommittee will hear a presentation on the findings and recommendations of the Commission on Virginia's State and Local Tax Structure for the 21st Century, followed by comments from representatives of the Virginia Municipal League and the Virginia Association of Counties. Later in the fall on a date yet to be determined, interested parties will be allowed to present their comments and concerns regarding the joint subcommittee's work. The joint subcommittee is scheduled to report its findings and recommendations by November 30, 2002.

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