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McDonnell: Time is Right for Tax Reform

Gov. Bob McDonnell says the final year of the single, nonrenewable term Virginia affords him may be the right time for him to push sweeping tax and fiscal reforms as his legacy.

Photo Courtesy Office of the Governor.

May 13, 2012

The General Assembly has the last word Monday on yet another state budget. Good times come and go, but it's even harder in bad times with a state tax system designed for the farm-and-factory state Virginia was long ago.

So maybe the time is right to reform the state tax code, Gov. Bob McDonnell said in an Associated Press interview last week. A tax system that broadens the tax base, lowers overall rates, provides more reliable revenue streams and feels fairer would be an enduring legacy for the Republican governor in the final year of the single, non-renewable term Virginia uniquely allows its governors.

"We have a tax structure that was put together when Virginia was generally an agrarian society 50 years ago," McDonnell said during a flight back to Richmond from a Southside Virginia tour touting economic growth.

Among the changes McDonnell said he is considering are lowering the overall sales and use tax and expanding it to cover services as varied as car repair, tax preparation and pedicures now exempt from the tax. The sales tax is paid now only on retail merchandise.

"We have now carved out more exemptions to the sales tax than we collect," he said. "I think it's time to take a look at all those tax preferences, both in income and sales, and see if there is not some way of looking at those policies and seeing if there is not some way we can save some money and put it into transportation."

"For the longest time, when you basically had a goods-based economy and services were a small minority of your GDP (gross domestic product), nobody worried about it," he said.

McDonnell also said another idea worth pondering is indexing gasoline taxes to inflation rather than a flat 17.5 cents per gallon. Greater automotive fuel efficiency and a reduction in discretionary driving as gasoline prices rise has resulted in diminishing revenue from the tax that is the primary source of money for building and maintaining roads.

"There may be a way to do that in the overall context of tax reform, and that is an issue that I think is needed," he said.

Transportation funding — along with struggling to meet the state's ever-growing share of costs for the federal-state Medicaid program — is a worry McDonnell shares with every predecessor for at least a dozen years. State law gives maintenance of existing roads priority over funding for new road projects, and within a few years, maintenance will consume all available highway revenue unless something changes.

"I've been crystal clear that we have a significant problem funding maintenance in the near term," McDonnell said.

"This is not a political statement: it's simply math."

He's already found and used the low-hanging fruit. In the first year of his term, a private, independent audit he commissioned of the Virginia Department of Transportation found about $1 billion sitting unused in obscure agency accounts. That, paired with about $3 million in bonds, comprised the largest single infusion of state money for transportation in more than a generation.

This year, he proposed diverting an increasing share of the state sales tax from the general fund — which pays for core state services such as public schools, health care and public safety — and dedicating it to transportation. The legislature killed the idea, even though it was under total GOP control for the first time in four years.

"I'm going to make one more attempt to address that problem," he said.

He has proposed far greater use of toll roads and public-private partnerships to help address the backlog of transportation needs. New tolls are due on Interstates 95 and 85 at the North Carolina line, and proposed sweeping expansion of U.S. 460 from South Hampton roads to Petersburg would be highly dependent on tolls for financing.

The ground rules for any tax reform is that any new system be "revenue-neutral" at best, meaning there is no net increase in overall tax burden from it — perhaps even some tax relief here and there.

Another imperative, he said, is that it doesn't further deplete tax revenues vital to the finances of Virginia's cities, counties and towns.

A tax McDonnell has long loathed is the tax business owners pay on gross receipts, the Business Profession and Occupational License — or BPOL — tax. A commission he appointed to recommend strategies for economic expansion and job growth in the state recommended that it and the machinery and tool tax be eliminated

The resolutely pro-business governor agrees with the Chamber of Commerce, National Federation of Independent Business, and other business and corporate lobbies that it's an unfair tax because businesses pay it even if they lose money.

But because it's a staple of income for cash-strapped localities, McDonnell said it can't be repealed without finding an alternative source of local revenue. Local government budgets have become even more austere than the state's the past five years as they dealt with the Great Recession and a housing market collapse that undercut real property values and the taxes paid on them, the leading source of revenue for localities in Virginia. At the same time, unfunded demands on their resources mandated by the state and federal governments have forced deep cuts in many places to local services, tax increases in others and a blend of the two across the state.

Tax reform is not new on McDonnell's wish list. His first year was spent trying to balance a state budget ravaged by a brutal economy. Now, with six consecutive quarters of modest growth in state general tax collections, the time might be right.

"There wasn't the political will in a down economy when we were cutting in so many other areas to take on what is always a politically difficult task of reforming the tax code," McDonnell said. "We're going to start taking a look at those things over the course of this next year."


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