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

Representatives 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 Virginia’s 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-sion’s 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 are to:

  • 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 Commonwealth’s obligations to core services and invest in its future, and
  • Expand the Common-wealth’s 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.

Subcommittee Meetings

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 service category;
  • 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.

Local government 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 subcommittee’s next meeting in November.

Personal Income and Retail Sales and Use Tax Subcommittee

Delegate Louderback, 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 Louderback’s 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.

Transportation Subcommittee

Delegate Wardrup, 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 following points:

  • 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 Board’s 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 VDOT’s 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 Virginia’s 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 Governor’s 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 Governor’s 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.

Other Miscellaneous 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 is greater.

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 Loudoun.

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 Commonwealth’s 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 Bryant’s 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 neutrality.

According to the Progress and Freedom Foundation’s 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, and
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.

Subcommittee Reports

Each subcommittee chairperson briefed the full commission on the discussions that occurred within the subcommittees.

Next Meeting

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. Parrish

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

Division of Legislative Services




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