Targeted tax breaks for everyone from coal companies to the elderly cost Virginia billions in lost revenue in 2008, and there’s little oversight to gauge whether those tax breaks achieve their intended goals.
The state’s nonpartisan Joint Legislative Audit and Review Commission released a study Monday finding preferences written into the tax code reduce overall tax liability for businesses and individuals by a combined $12.5 billion — nearly equal to the $14.3 billion the state collects in taxes each year. Within the $12.5 billion are $2.9 billion in tax breaks designed to aid specific populations — like seniors and the poor — and encourage economic activity in certain sectors — like the $10 million in tax credits for commercial airlines.
But few parameters are in place to determine whether those tax breaks are effective and worth the lost tax revenue, the study found.
“On the revenue side of the ledger, we’ve got $12.5 billion in loopholes baked into the tax code and we’re not doing a good job of finding out if they’re working,” said Michael Cassidy, president and CEO of the Commonwealth Institute for Fiscal Analysis, a nonprofit research group that focuses on low- and moderate-income people.
The JLARC study comes as Gov. Bob McDonnell prepares to introduce his first two-year budget, which is expected to include an $800 million shortfall in a political climate not friendly to tax debate.
About $9.6 billion in tax breaks are structural, and many were built into the Virginia tax code decades ago, including the sales tax exemption for services such as haircuts and legal advice. Since the 1930s, when the state sales tax was instituted, service purchases grew from 45 percent of consumer consumption to two-thirds in 2010. By not taxing services, the state misses out on collecting about $3.5 billion in sale taxes.
Others tax incentives target specific industries with mixed results. Two tax credits intended to slow the loss of coal industry jobs reduced coal companies’ taxes by $31 million in 2008, even as employment in that industry fell faster than expected.
But Republicans are hesitant to start raising new revenues if it means more spending, said Del. Dave Albo, R-Fairfax, a commission member. If Virginia starts taxing services, it should also drop the overall sales tax rate, and money from closing loopholes for individual industries should go toward infrastructure, he said.
“We made a tax system that was built in the 1800s,” Albo said. “Eventually something is going to have to be done.”
That’s not an easy task.
“I’ve served on three or four tax commissions trying to rewrite the tax code,” said Sen. Chuck Colgan, D-Prince William, commission chairman. “It’s very difficult and we’ve made almost no progress.”
