Thursday, September 30, 2021

The Jefferson Journal: Yes Terry, Tax Hikes Grew the State Surplus

The Jefferson Journal
Yes Terry, Tax Hikes Grew the State Surplus
by Steve Haner
Senate Finance Committee data illustrated the expected state revenue boost caused by 2017 federal changes. Predicted and seen in 2019 and 2020, it carried over into 2021
9/30/2021 -- At the September 28 debate Democratic gubernatorial nominee Terry McAuliffe dismissed the 2021 $2.6 billion general fund revenue surplus as entirely due to extra federal COVID relief funds, which is absurd on its face. By definition, every dollar is General Fund state tax revenue. It came from some form of state tax.
Why do Virginia Democrats continue to deny that recent state tax law changes are in part responsible for almost-embarrassing large cash surpluses recently announced? At the time the deeds were done, nobody was denying the big revenue impacts. The really big hit was a totally bipartisan decision, so Democrats can share the credit or blame.
Federal money flows in and out of a separate category known as non-general funding. Is there another part of the surplus lurking out there, left-over non-general funds raised during fiscal year 2021 but not spent in that period? Was it indeed made fatter by unspent federal dollars? Yes. It is just not included in the big reports shared and discussed in the public meeting of the legislative money committees.
One non-general fund surplus that was reported is in the state’s transportation funds, where federal funds do mix in. Add it to the general fund surplus, and the total is now about $3 billion. It is 100% certain that the 2020 transportation tax increases contributed substantially to that surplus. The gas tax went up a nickel per gallon in some parts of Virginia, 12.6 cents per gallon in all other parts of the state, and an entirely new statewide highway user fee (tax) was imposed on annual vehicle registrations, all July 1, 2020.
The largest element of the $2.6 billion general fund surplus can be traced back to the decisions made by the 2019 General Assembly to keep most of the state revenue windfall generated by the 2017 federal tax code changes. Republicans then ran the committees that made those decisions and fought like COVID-ridden kittens to protect us from that coming state tax hike.
But nobody hid the financial impact. State Secretary of Finance Aubrey Layne (now out of office so let’s admit, a Republican) invested in some excellent financial modeling that showed a revenue surge coming, and then later on confirmed the models were proving fairly accurate. All of these developments were reported on in my column in Bacon’s Rebellion far more than anywhere else.
The impact of the state’s failure to adjust its rates or standard deduction to match congressional actions had the greatest impact on business taxpayers using the corporate income tax. Revenue in the fiscal year just ended rose more than 80% over four years prior.
Two years ago, Layne was quite open about how the federal “tax conformity” windfall also ballooned the state’s 2019 surplus. Now the standard line is, what tax conformity windfall?
The other major contributor to the general fund surplus (and somewhat to the transportation surplus) was sales taxes collected on remote sales through the Internet, hard to collect from the seller prior to a court decision. That was a good policy decision. But people pay more tax after it passed, and it fattened the surpluses.
All the signs are this explosion of state revenue is just getting started (the September reports will be telling). The fiscal year we are now in will reflect the second part of the gas tax increase, the new tax on electric bills tied to the Regional Greenhouse Gas Initiative, and another round of state taxes on Payroll Protection Program (PPP) grants and a similar state grant program helping employers maintain staffing during the recession.
That is the one part of the recent surpluses where McAuliffe’s claim that federal funds are responsible has some truth. Had there not been billions flowing into Virginia for PPP grants and loans, Virginia would not have been able to skim its 6 percent off the top with its income tax. The General Assembly could have made another decision, not to tax, and the failure to do so was – again – disappointingly bipartisan.
The argument over the explanation for the surplus is a sideshow to the real campaign debate, which is whether some tax cuts in compensation are called for. To his credit, Republican nominee Glen Youngkin has routinely recognized that tax hikes built the surplus and tax cuts of some form are called for. The elements of his proposed tax cuts line up well to partially reverse the recent increases.
Search in vain for tax cuts promised by McAuliffe, even those sought by liberal allies who complain (with justification) that Virginia taxes lower income workers too heavily. Youngkin’s idea to eliminate the sales tax on groceries, in particular, was pulled straight off their wish list.
Would there still have been a revenue surplus had the state fully adjusted to prevent a “tax conformity” windfall, or failed to adopt the Wayfair sales tax rules, or skipped some other changes? Perhaps. The COVID federal funds did stimulate personal spending and maintain jobs. But absent those changes the excess revenue would have been far, far smaller.
Stephen D. Haner is Senior Fellow for the Thomas Jefferson Institute for Public Policy. He may be reached at

Support the work of
The Thomas Jefferson Institute for Public Policy

Sunday, September 26, 2021

Your September 26th Sunday Summary ...

Dear Friend of TJI,
         You could not miss noting that the rich and famous attending last week’s Emmy Awards were without masks. Fortunately for them, the event was not in San Francisco, where the city has ordered attendees at live indoor performances to remain masked except when actively eating or drinking. This did not, of course, apply to Mayor London Breed who, according to the San Francisco Chronicle, “spent the night dancing, singing along and posing for photographs without a face covering” at the Black Cat Club last week. Said Breed: “We don’t need the fun police to come in and micromanage and tell us what we should or shouldn’t be doing.” The Left’s attitude remains the same: “Rules for thee, but not for me.”
Meanwhile …
1.) San Francisco is not the only city doing dumb things. In Richmond, the City Council plans to “phase out reliance on gas,” appearing to have targeted city-owned Richmond Gas Works for eventual closure -- ultimately affecting customers in Richmond, Henrico and Chesterfield. Jefferson Institute Senior Fellow Steve Haner has the story here, and follows it up with another here. Come to think of it this, too, doesn’t sound all that different from California’s Bay area cities (here).
2.) In a story finally being picked up by other media, Haner reported that the State Corporation Commission determined that Dominion Energy had earned $1.14 billion in excess profits over the last four years and should return $312 million to ratepayers. Why not more? Part of the reason is that the General Assembly and Governor Ralph Northam approved legislation allowing the use of excess profits for favored capital construction (read: wind turbines). The SCC also recommended a $50 million per year rate reduction in the future. Why not more? The General Assembly and Governor Northam limited the amount that rates could be reduced for users – otherwise, it would have been a $212 million reduction. Read it here.
3.) In other Virginia news, it isn’t just “defund the police.” Over the last few years, George Soros spent millions successfully funding candidates for District Attorney (Commonwealth Attorney) throughout the country, electing men like George Gascón (here). In Virginia, more than $1 million helped elect Soros-backed candidates in Fairfax, Loudoun and Arlington, and now the effect is being felt. In Fairfax County, Judge Thomas P. Mann told a young victim “your government has failed you,” after Commonwealth Attorney Steve Descano accepted a plea deal against the relative who had sexually abused her for five years – sometimes weekly. Mann called the deal “woefully inadequate.” (here). On Friday, Circuit Court Judge Randy I. Bellows rejected a plea deal negotiated by Descano's office for a three-year penalty for a child rapist (here). Descano's office blamed the low penalty on flaws in the investigation of the case.
4.) After three weeks of declines, new unemployment claims in Virginia shot up 300 percent in the week ending September 18 (here). Nationally, first time claims rose modestly and most of that was driven by Virginia and the number one state – California – affirming again that Richmond is becoming “Sacramento on the James.”
5.) Apologies are due. In an internet age filled with misinformation, we strive to verify what we report here. Once before we linked to a video that, while accurate, was more than two years old and had a tenuous connection to the discussion at hand. Last week, we noted vandalism at the University of Virginia against the American flags posted by Young Americans for Freedom as part of a 9/11 memorial. An in-depth investigation by UVA police concludes the vandal was strong winds, and the individual overturning a table was actually trying to set it back up (here). We apologize. We’ll do better.
6.) While serving as president of the Virginia State Board of Education, we recall seeing cars parked at night around a high school in a mountainous, rural community. Why? Students were “stealing” broadband because – other than going to McDonald’s – it was the only way to get their online work done. In an age in which the availability of internet is roughly the equivalent of electricity availability 80 years ago, those students started behind. Ajit Pai, named chairman of the Federal Communications Commission by President Donald Trump, notes that Virginia’s broadband expansion is leading the way, and is a bipartisan accomplishment. (here)
7.) The elections are underway and no institution is a better source for straight-forward data, graphs and visuals than the Virginia Public Access Project. Want to see what legislative district you’ll live in under the different proposals before the Redistricting Commission (and what the Republican vs. Democrat makeup will be?)? Click here. Want to know which gubernatorial candidate is getting the most money from donors in your precinct? Click here. How about a look at Early Voting this year? Click here. Or where the statewide candidates are getting their money? Click here. Or House of Delegates candidates? Here.
8.) The Biden budget would levy $2.3 trillion in new taxes and offer $998 million in refundable tax credits. Want to know the impact on taxpayers in Virginia and your own congressional district? The Tax Foundation offers a handy database to help you drill down here.
9.) But getting his $3.5 trillion budget reconciliation and a $550 billion infrastructure bill won’t be easy, as Matthew Continetti notes that the coalition putting Biden in office “doesn’t agree on much of anything besides the idea that Donald Trump shouldn’t be in the White House.” (here) Over at the Wall Street Journal, Kimberly Strassel reports that the Democrats’ disarray is a sure sign no one is in charge at the White House (here). Conservatives should hope Senator Joe Manchin sticks to his guns (here). A Journal editorial declares $3.5 trillion a “phone number” (here). And National Review says Republicans shouldn’t rescue those who mistakenly believe they have a mandate (here).
10.)               White House staffers do agree that they need to prevent the President from answering the press’ questions, even when foreign leaders are willing to take them (here) and especially on Afghanistan which they fervently hope will go away. One such foreign leader who doesn’t mind talking to the press is the Taliban’s Mullah Nooruddin Turabi, who told the Associated Press that executions and cutting off hands will be returning to that nation, just maybe not in public (here). The Taliban threatens to be especially harsh on women (here) and the arts (here). An all-female orchestra is unable to escape (here) but then, so are an unknown number of Americans, green-card holders, and Afghans who put their lives on the line to aid the United States.
11.)               The obvious question is why the virtuously noble Hollywood arts community so busy lecturing the rest of us on everything else remains so silent. One of them isn’t, says Jim Geraghty of National Review (here). He reports that John Ondrasik (better known as Five for Fighting) has taken a stand by writing a new protest song aiming at “Willey Milley”, “Winkin’ Blinkin,” “Uncle Joe,” and the news media’s silent complicity among others. Titled “Blood on My Hands” (here), he’s using it to close the show on his current tour. Downloading a free copy (here) is one way to lend support. Buying a ticket to tonight’s show at Alexandria’s Birchmere will cost a bit but be a lot more satisfying (here).
Ondrasik is not alone.
Happy Sunday, Everyone.
Support the Arts.
Chris Braunlich
Support the work of
The Thomas Jefferson Institute for Public Policy