SJR 347: Commission on the Revision of Virginia's State Tax Code and the Streamlined Sales Tax Project

August 18, 2003


During its second meeting in Richmond, the full SJR 347 Commission met briefly in the morning to charge the following five subcommittees, created by the co-chairmen, with their responsibilities:

1. Business, Professional and Occupation License (BPOL) Tax Subcommittee;

2. Transportation Subcommittee;

3. Personal Income and Retail Sales and Use Tax Subcommittee;

4. Other Miscellaneous State and Local Taxes Subcommittee; and

5. State and Local Government Services and Responsibilities Subcommittee.

The full commission then adjourned so that the subcommittees could meet and report back to the full commission later in the afternoon.

BPOL Tax Meeting

The BPOL Tax Subcommittee chair, Delegate Drake, began the meeting by explaining that legislative staff would be reviewing what the Hanger/McDonnell Joint Subcommittee did over the last two years regarding the BPOL tax, followed by comments from interested parties.

Business Community

According to legislative staff, the Hanger/McDonnell Commission formed a working group made up of representatives from local government and the business community to address issues relating to the BPOL tax. The business community believes the BPOL tax should be repealed. Some objections raised at the meetings were: (i) the tax does not take into account the taxpayer’s ability to pay because the tax is imposed on the gross receipts of businesses; (ii) the tax does not favor economic growth; (iii) the tax is not equitable and broad-based due to numerous exemptions; and (iv) the tax is difficult to administer. However, the business community believes that local governments need to be made whole in terms of lost revenue from any repeal of the BPOL tax.

Local Governments

Representatives of Virginia’s local governments stated that the BPOL tax generated more than $459 million in local revenue in fiscal year 2001 (BPOL tax revenues for the fiscal year ending June 30, 2002, were $434.4 million). Local governments believe that the BPOL revisions passed by the 1996 General Assembly have improved administration of the BPOL tax. Under the 1996 legislation, taxpayers were given a right to appeal BPOL taxes to the Department of Taxation.


Several replacement options for the BPOL tax were proposed by various members of the business community. They included replacing the tax with (i) one flat fee charged to all businesses, (ii) a graduated fee determined by gross receipts level, (iii) a sales tax, (iv) a combination of an increase in the corporate income tax with a fee charged to all businesses, and (v) a net income tax on business income (this would include corporations, partnerships, proprietorships, limited liability companies and all other business entities).

In lieu of repealing the BPOL tax, the business community proposed an adjustment to the current tax on retailers, which is imposed at a rate of $0.20 per $100 of gross receipts. The business community proposed reducing the rate on retailers to $0.10 per $100 of gross receipts to take into account the smaller profit margins realized by retailers (in comparison to the profit margins realized by contractors and services providers).

For various reasons, no agreements on BPOL were reached by the business community and local government representatives, so no action was taken by the Hanger/McDonnell Commission.

The BPOL Tax Subcommittee next heard comments from interested parties, including the Hampton Roads Chamber of Commerce, the Virginia Municipal League, the Retail Merchants Association, the Virginia Association of Realtors, the Virginia Manufacturers’ Association, and two commissioners of the revenue. The one certainty at the end of the meeting is that the business community and local government have come no closer to resolving their differences over the BPOL tax.

Transportation Meeting

Delegate Wardrup, as chair of the Transportation Subcommittee, opened the meeting by saying that the purpose of the first meeting would be “educational,” for the members to learn where the money for transportation comes from and how it is spent.

Transportation Programs Subcommittee

Legislative Services staff reported on the status of the Joint Subcommittee to Study JLARC Recommendations on Aspects of Virginia’s Transportation Programs, which was specifically charged with determining:

1. The level of responsibility that the Department of Transportation should bear for the maintenance of roads in private developments;

2. The desirability and feasibility of shifting the primary responsibility for mass transit programs in Northern Virginia from local governments to the Department of Transportation; and

3. The desirability and feasibility of shifting the primary responsibility for construction and maintenance of secondary roads from the Department of Transportation to local governments.

The joint subcommittee has met three times (twice in 2002 and once in 2003) and has discussed, among other things: the JLARC recommendations; the highway construction fund allocation formulas; the interplay of the allocation formulas and the budgetary process—both state and federal; Virginia’s Statewide Transportation Plan; and the Commonwealth Transportation Board’s tentative six-year improvement plan for fiscal years 2004 through 2009.

The joint subcommittee decided in 2002 to postpone consideration of potential legislative recommendations for most of these issues until the 2004 Session, and to date, the joint subcommittee has not recommended any such legislation.

Delegate Wardrup noted that examination of the allocation formula likely is beyond the purview of his subcommittee.

Transportation Financing

The chief financial officer of VDOT, presented a broad overview of transportation financing in which she covered three main topics: (i) the sources of revenues that go to transportation, (ii) the allocation of such revenues, and (iii) an update on projects under the Public Private Transportation Act. The state taxes and fees that support transportation are:

1. State motor fuels taxes—the current rate of 17.5 cents per gallon is estimated to generate approximately $840 million in FY 2004.

2. Motor vehicle sales and use tax—the current rate of 3 percent of sales price is estimated to generate approximately $540 million in FY 2004.

3. Motor vehicle license fee—the current fee of $29.50 generates approximately $283 million annually.

4. State sales and use tax—the one-half cent of the 3.5 cents of the state sales and use tax is dedicated to the Transportation Trust Fund and generates approximately $398 million annually.

5. Tolls—there are three toll facilities operated by VDOT that generate approximately $54 million annually. The seven other toll facilities located in Virginia are operated by various authorities, localities, and private entities.

In addition to these revenues from state taxes and fees, localities may dedicate revenues for transportation. In FY 2002 localities dedicated $542 million to transportation maintenance and construction.

The largest single source of revenues for transportation is from the federal Highway Trust Fund. In FY 2004 Virginia’s share of these funds is estimated to be approximately 1.07 billion, comprising about 30 percent of the state’s total transportation revenues. However, this amount equates to only 90.5 percent of the total transportation taxes and fees Virginians pay into the federal Highway Trust Fund, making Virginia a “donor” state. In addition to the foregoing funds, the Commonwealth has increasingly relied on the issuance of debt to fund transportation, with current outstanding debt totaling approximately $2.1 billion.

The allocation of transportation revenues is determined by the interplay of state laws and policies with federal law and regulations. State law includes various codified provisions, the Appropriations Act, the Virginia Transportation Act of 2000, and policies of the Commonwealth Transportation Board.

Personal Income and Retail Sales and Use Tax Meeting

A proposal containing changes to the individual income tax and the sales and use tax was presented by the subcommittee’s chair, Delegate Louderback, following his opening remarks. He made it clear that this is only a starting point for discussion, but encouraged everyone to “think outside the box.”

Louderback Proposal

Under this proposal, all additions, subtractions, credits and deductions would be eliminated from the computation of an individual’s Virginia taxable income, with the exception of the deduction for social security income. However, Virginia must also allow individuals to subtract income earned on any obligation of the federal government. This is the one subtraction that is not simply a Virginia policy decision. Therefore, under this proposal, individuals’ taxable income would be equal to their federal adjusted gross income (FAGI) minus any social security income and income earned on any obligation of the federal government included in FAGI. This proposal would be effective for taxable years beginning on and after January 1, 2004.

Table 1
Louderback Proposal
Individual Income Tax Rate Tables
and Revenue Impact

Tax Rates
Virginia taxable
income level
Single taxpayer
Married taxpayer
$0 - $14,999
$15,000 - $24,999
$25,000 - $29,999
$30,000 - $49,999
$50,000 & above
Revenue Impact
FY 2004
FY 2005
FY 2006
($241.6 million)
($469.1 million)
($459.4 million)

This revision to how Virginia taxable income is computed for individuals would be done in conjunction with a revision to the tax tables and tax rates for the individual income tax. Table 1 shows the revised tables and rates along with the associated impact.

The second half of the proposal calls for reducing the sales and use tax rate from 4.5 percent to 4 percent and repealing all the exemptions except for those in the government and commodities section of the Virginia Code (Section 58.1-609.1) as well as the manufacturing exemption. This then would make most goods and all services subject to a 4 percent sales and use tax. The resulting increase in revenues is estimated to be approximately $1.5 billion. That amount would cover the revenue loss created by the proposed changes in the individual income tax and possibly allow for the repeal of other taxes such as the BPOL tax and the estate tax.

Public Comment

The remainder of the subcommittee meeting was spent hearing public comment. Remarks were made by individuals and by those representing organizations, such as the Northern Virginia Republican PAC, the Hampton Roads Chamber of Commerce, National Association of Retiree Federal Employees (NARFE), the Virginia Interfaith Center, and others.

Many business interests did not like the fact that most services would be subject to the sales and use tax, even though the rate would be one half percent less than that which is currently imposed. NARFE is opposed to eliminating the age deduction and the use of any kind of means testing for determining who qualifies for the deduction. The Virginia Interfaith Center spokesperson reminded the subcommittee to remember the working poor and those living in poverty.

At the conclusion of the public comments, Senator Stosch reminded everyone that the subcommittee and the entire tax commission would be looking for equity and fairness in developing any changes in the tax code. He also emphasized that tax policy can only be established completely when it is determined what services are most important, and public input is crucial to these decisions.

Miscellaneous State and Local Taxes Meeting

Senator Hanger, as chair of the subcommittee, stated that he would like to see if the following two matters could be disposed of quickly, since they were studied at length under HJR 60 (2002), and there was general agreement on them: (i) repeal the estate tax, and (ii) repeal the portion in the budget bill providing for accelerated sales and use tax payments by vendors. The subcommittee voted to recommend these two items to the full commission.


Senator Hanger then raised the issue of whether legislation should be proposed to align Virginia’s sales and use tax laws with the requirements of the Streamlined Sales Tax Agreement (SSTA). Senator Hanger stated that he would support such legislation because it would simplify the tax, reduce the costs of compliance and administration, and increase revenues.

The Virginia Municipal League (VML) supports such legislation “in concept,” but a more formal endorsement will have to wait until members could work through the potential problems created by the SSTA “sourcing” rule, which requires that sales and use tax revenues be paid to the state and locality at the point of delivery. Virginia law already conforms to this rule (i) for interstate sales and (ii) for intrastate sales where the goods or services are received (“carried away”) at the time of purchase. However, under current law, Virginia credits local sales tax to the point of sale when goods are purchased in one locality and then delivered to the purchaser in a different locality.

The Virginia Retail Merchants Association stated that its members are in complete support of legislation to conform Virginia law to SSTA. Delegate Wardrup stated that he had strong reservations about conforming Virginia’s laws to the SSTA. The subcommittee agreed to postpone a vote on any recommendation on SSTA until a future meeting.

Personal Property Taxes

The subcommittee then looked at personal property taxes, and the consensus of the subcommittee was to move to 100 percent removal of the personal property tax on vehicles without regard to the value of each vehicle. Regarding car tax reimbursement to localities, Senator Hanger stated that the subcommittee should explore alternatives that do not continue the current disparity among localities (caused by the happenstance of each locality’s tax rate on vehicles immediately prior to the initial car tax relief program).

Taxing Authority

Senator Hanger suggested another issue for the subcommittee to explore is whether counties and cities should have the same taxing authority. In particular, he said the subcommittee should take a special look at the equality and uniformity of local cigarette taxes. Senator Colgan stated that he favors giving counties the same taxing authority as cities.

Other Issues

Other issues raised by Senator Hanger for the subcommittee to deal with in future meetings were: (i) real estate tax caps or at least more citizen input in the process; (ii) the potential of a dedicated source of revenue for land conservation; (iii) tax on telecommunications (with a report from Delegate Bryant, who chairs a special subcommittee looking at these taxes); and (iv) whether to eliminate the entire local and state sales tax on food. Senator Colgan stated that he would like the subcommittee to examine other utility taxes in addition to telecommunications.

State and Local Government Services Meeting

The deputy director of JLARC presented JLARC’s 1992 Report on State/Local Relations and Service Responsibilities, with selected updates. Overall JLARC found that Virginia’s governmental structure was and still is sound. Strengths include streamlined government size and structure compared to other states; sound financial management; and low rates of state/local taxation. However, service responsibilities for the state and localities have sometimes developed in a piecemeal fashion and have not always kept up with the changing social and economic conditions in the state.

JLARC Findings

JLARC’s specific findings on the alignment of service and funding responsibilities are in six major areas: transportation, education, human services, environmental protection, administration of justice, and general administration.

Regarding transportation, the state is responsible for construction and maintenance of the primary system, interstate system, and most county roads. Cities and two counties are responsible for most aspects of their streets and roads, although the state provides significant financial assistance. In general, JLARC found the current assignment of responsibility for providing transportation services to be appropriate.

Education services are locally provided with a high level of state regulation and funding. Education constitutes the highest expenditure for localities and accounts for the largest share of state aid to localities. Many localities provide total funding for services that exceed the constitutionally mandated Standards of Quality as determined by the General Assembly. This additional funding varies greatly from locality to locality.

Health and human services are provided through a variety of state, regional, and local entities that have evolved piecemeal in response to specific problems. As a result, state and local officials cite the need for a more integrated approach.

Social services are state-supervised, but locally-administered, with substantial federal funding and regulation. The system was described as complex and involving multiple levels of government, often resulting in a blurring of the division of responsibility.

Environmental protection is mandated by the Constitution of Virginia and implemented largely by localities.

Administration of justice includes law enforcement, jails and correctional facilities, and courts. A relatively recent development in this area has been the creation of regional jails. The JLARC report found that services in this area generally are being performed and funded by the appropriate level of government.

The JLARC Report found that most general administration service responsibilities are local in nature and are appropriately assigned.

Finally, regarding the adequacy of revenues, the JLARC Report found that: (i) national indicators show that Virginia has above-average revenue-raising potential and below average tax effort, and (ii) Virginia’s state taxes are typically lower than surrounding states while local taxes are higher.

Senator Chichester stated that he was particularly interested in identifying and exploring those local services that have substantial funding from localities and that are heavily regulated by the state. He asked that JLARC provide this information and other updates to the JLARC report, to the extent possible, at the next meeting of the subcommittee. Senator Chichester suggested that the State Compensation Board may be of assistance in gathering this information.


The deputy secretary of Health and Human Services spoke on the design and implementation of Virginia’s Comprehensive Services Act (CSA). His presentation included: (i) problems leading to development of CSA, (ii) how CSA works and who it serves, (iii) JLARC’s study findings and current expenditure trends, and (iv) the status of the Secretary of Health and Human Services’ action plan.

Problems that led to the creation of CSA included: a fragmented system for treating troubled children, service duplication among agencies, unequal access to care, reliance on more expensive forms of care, and expenditure increases of approximately 22 percent per year.

The CSA contains state and local components. Services under CSA are mostly reserved for children who have behavioral or emotional problems that either: (i) are persistent or critical in nature, (ii) are significantly disabling and present in several settings, (iii) require resources that are beyond the scope of normal agency services, or (iv) place the child in imminent risk of residential care. Priority is given to special education students who are to be enrolled in private schools and to children in foster homes.

A study by JLARC found that CSA had achieved certain laudable goals but also had some shortcomings. On the positive side CSA: (i) provided a mechanism for involving agencies at the local level in a collaborative process, (ii) was successful in serving most children in the least restrictive and expensive environments, and (iii) appeared to stabilize the behaviors of children who received services once they left the program.

On the other hand, JLARC also found: (i) a failure of localities to consistently use collaborative planning, (ii) inadequate client assessments by local planning teams, (iii) inattention to provider fees and limited program oversight, and (iv) lack of patient data.

Mainly due to concerns about the increasing cost of CSA services, in 2002 the General Assembly directed the Secretary of Health and Human Services to establish an action plan to address this and other concerns. Some of the changes that will be made pursuant to the plan include: (i) having the Secretary of Health and Human Services serve as chairperson of the CSA State Executive Council, (ii) expanding the scope of Medicaid coverage for CSA services, (iii) evaluating local best practices for possible statewide application, and (iv) developing a statewide patient level database.

Reconvened Full Commission Meeting


Delegate Drake reviewed the work of the subcommittee and said that a main focus for future subcommittee meetings would be examining potential sources to replace BPOL revenues.


Delegate Wardrup reported that the first meeting of his subcommittee was educational in nature and noted that it is clear that there is insufficient money in transportation to permit Virginia to be able to “pave its way” out of the current situation any time soon.

In reviewing the VDOT presentation, Delegate Wardrup noted, among other things, that: (i) the imbalance between maintenance funding and construction funding continues to grow, (ii) Virginia continues to be “donor” state with regard to federal transportation funding, (iii) the toll facilities around the state are doing alright, (iii) the state has 10 ongoing public/private transportation enterprises at various stages of development; and (iv) demographics show an ever-increasing number of licensed drivers, number of registered vehicles, and number of vehicle miles driven.

State and Local Government

Senator Chichester presented an overview of the two presentations to his subcommittee: (i) JLARC’s study of the allocation of funding and service responsibilities between the state and localities and (ii) the status of programs provided under the Comprehensive Services Act. He stated in conclusion that his subcommittee will examine how the state and localities can share responsibilities more equitably and efficiently.

Personal Income and Retail Sales

The two-part proposal dealing with the personal income tax and the sales and use tax was explained to the full commission by Delegate Louderback, who emphasized how much simpler and fairer both taxes would be for taxpayers and administration purposes if the proposal were adopted. He also emphasized that the proposal is a starting point and is intended to generate discussion that hopefully will lead to the creation of a revenue neutral tax reform package that everyone will support.

Other Miscellaneous State and Local Taxes

Senator Hanger reported that the first action of his subcommittee was to recommend to the full commission (i) repeal of the estate tax, and (ii) repeal of accelerated sales tax payments by vendors. Senator Hanger then made a motion that the full committee vote to include repeal of the estate tax as part of the commission’s final report. Most members, however, said they were not ready to vote on tax modifications piecemeal, without knowing what the other components of the ultimate tax reform package would contain.

Senator Hanger then gave an overview of his subcommittee’s discussion on whether Virginia should conform its laws to the Streamlined Sales Tax Agreement. He stated that while he supports such action, other members of the subcommittee wanted additional information and discussion before deciding.

Regarding personal property taxes on vehicles, Senator Hanger reported that it was the consensus of the subcommittee to move to 100 percent removal of the personal property tax on vehicles without regard to the value of each vehicle. He also said that the subcommittee believes Virginia should explore alternatives to the present car tax relief program that do not continue the current disparity among localities, and may eliminate the need to continue assessing vehicles.

Future Meetings

After hearing the subcommittee reports, the commission discussed future meetings. There was general agreement to have meetings in September, October, and November, with specific dates and times to be determined. The commission also expressed a preference to follow the same format of having full commission and subcommittee meetings on the same day.

The Hon. Emmett W. Hanger, Jr.

The Hon. Harry J. Parrish

For information, contact:
Joan E. Putney
David Rosenberg
Mark Vucci

Division of Legislative Services




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