Virginia’s Falling Tax Revenues: Cuccinelli Would Cut Them Further

Virginia State Taxes as share of Virginia GDP, FY 1972-2012

A.  Virginia’s Falling State Tax Share

Virginia state tax revenues have been falling as a share of Virginia GDP for decades, as the graph above shows.  Yet predictably, a major plank in the proposals of the Republican candidate for governor, Ken Cuccinelli, is that Virginia state taxes should be cut further.

The line in the graph was calculated from figures on state tax revenues from the US Census Bureau (which collects such data on a consistent basis for all fifty states), with the figures on Virginia state GDP from the Bureau of Economic Analysis (which publishes state figures with its regular GDP accounts).  The downward trend is clear, and a regression line fitted to those figures (in red) confirms it.

With Virginia taxes lower now as a share of income than they were before, it is hard to see how one can argue, as Cuccinelli does, that they are too high and act as a hindrance to economic performance.  The taxes were higher as a share on income in the past, and economic performance then was good.

But the lower share of state taxes in income, coupled with the implications of Baumol’s Cost Disease (discussed in a previous post on this blog), does explain why Virginia state government services are so much worse now than they used to be.  Sub-national governments must over time limit their public expenditures to what they raise in tax revenues (with a limited ability to shift some of these across time through issuance of state bonds), and Virginia has been a particularly strict adherent to such budgetary rules.  With lower revenues, the state government has no longer been able to provide the public services it once had.

I grew up in Virginia in the 1960s, and at that time Virginia took pride in the quality of its public services.  The state highway system was one of the best in the nation.  State universities such as the University of Virginia and William and Mary were among the best state schools in the country, and also ones where good students graduating from high schools in Virginia could reasonably aspire to getting in as spaces were adequate.  This is no longer true.

B.  The Cuccinelli Tax Plan

Virginia is one of only two states holding gubernatorial elections in this off-year (New Jersey is the other).  The Republicans nominated Ken Cuccinelli, the current Attorney General, as their candidate.  Cuccinelli is best known for his support of a radically conservative social agenda.  His tax plan is similarly a radically conservative proposal which would cut revenues drastically.

The key elements of Cuccinelli’s plan are to:

1)  Eliminate the current top individual income tax bracket in Virginia of 5.75%, replacing it by extending the current 5% second highest bracket;

2)  Cut the Virginia corporate income tax rate from 6% to 4%;

3)  Establish a commission to propose further tax cuts;

4)  Close “loopholes” to raise as much in revenue as would be lost through the cuts in the tax rates;

5)  Cap growth in Virginia state government expenditures to the rate of inflation plus population growth.

But note on each of these proposals:

1)  Eliminating the top tax bracket, and only the top tax bracket, of 5.75%, means that only those households paying the top tax bracket will benefit from lower rates.  By construction, only the richest households will benefit.  The Commonwealth Institute for Fiscal Analysis, a nonpartisan institute based in Richmond, has estimated that fully three-quarters of the benefits from this lower tax rate will accrue to households earning more than $108,000 a year, and that 25% will go to the richest 1%.

2)  The corporate tax rate would be cut by a third, a huge cut, and would bring Virginia’s rate to the lowest of any of the 44 states in the US that have a corporate income tax.  The other six states follow a different tax structure.

3)  The mandate of the proposed commission would be to make even further tax cuts.

4)  It has now become the norm in Republican tax plans that while there is great specificity in the taxes that would be cut, there is no specificity at all on what taxes would be raised (other than that they are all “loopholes”) so that overall tax collections will remain unchanged.  Mitt Romney did this for his presidential campaign last year, and independent analysis showed that his plan was simply not mathematically possible.  Paul Ryan has similarly left undefined what loopholes he would close to raise sufficient revenues to offset his proposed cuts in tax rates, in the budget plans he has set out for the Republicans in Congress.

It would probably not be correct to say that Cuccinelli is keeping secret what tax loopholes he would close.  Keeping them secret would imply that he has looked at the issue and has a plan that he refuses to disclose.  There is no evidence that any such plan exists, much less any assessment of whether the revenues thus raised would offset the losses.  But it may be astute politically to propose sharp reductions in tax rates, while asserting that he will come up with the same in revenues by closing unspecified loopholes that one can believe only others benefit from, and not yourself.

5)  Capping growth in Virginia government expenditures at inflation plus population growth implies absolutely zero growth in real per capita terms.  But for an economy to grow, you need to grow supportive public services.  Hindrances such as a totally inadequate road and public transportation network result when you do not.

Cuccinelli’s tax plan is radically right wing, with sharp cuts in tax rates focussed on the rich and the corporate sector, while asserting with no evidence that it will be made revenue neutral by closing unspecified “loopholes”.  But this is consistent with Cuccinelli’s history of radically right wing policies, although in the past on social issues.  Cuccinelli has been strongly opposed to equal rights for homosexuals; believes that the police powers of the state should be used against couples for engaging in certain sexual acts in what most thought would be the privacy of their bedrooms; has insisted, as Attorney General, that new regulations be applied retroactively to shut down clinics providing health care services to women, in particular poor and minority women, since these clinics have provided also fully legal (and constitutionally protected) abortion services to women in need; has attacked basic academic freedoms by insisting that the University of Virginia turn over to him materials, including private emails, of a scientist doing research on global warming (he lost the case); co-sponsored a bill which would have declared that human life begins at the moment of conception under Virginia law, and hence women using certain forms of birth control (and presumably also their doctors) would be guilty of murder; within five minutes of Obama signing into law the Affordable Care Act to extend health care to the currently uninsured, Cuccinelli filed a case in court to block the act (he lost the case, and well before the Supreme Court ruling on the law); sponsored legislation which would not allow children of undocumented immigrants to become citizens, despite the US Constitution saying that they are; and more.

The one point on which all agree, liberal and conservative, is that Cuccinelli would radically change Virginia, if he has the chance.