By: Dean Stansel and Stephen Moore
| As the Virginia General Assembly convenes in Richmond, legislators return to find a healthy state revenue surplus awaiting them. That excess of tax collections could not have come at a better time since the number one issue facing the legislature this year is the repeal of the car tax.
This study documents how an immediate repeal of the car tax, rather than the five-year phase-in proposed by Gov.-elect Jim Gilmore, could be financed without raising other taxes or cutting politically popular programs. Our analysis relies upon the Senate Finance Committee’s November 1997 report, which estimated that when fully implemented the annual revenue loss from the car tax cut would be $958 million, as opposed to Gilmore’s initial estimate of $620 million a year. Therefore, we have already taken into account Gov.-elect Gilmore’s recent announcement that his tax cut will cost more than he had previously estimated.
Despite the strong voter mandate for this tax cut, numerous interest groups have lined up in opposition to cutting taxes. They claim that Virginia’s top priority should be to spend billions of dollars on so-called unmet education and transportation spending needs. That political strategy was successful in defeating Gov. George Allen’s 1995 income tax cut proposal. Our examination of budget trends over the past 12 years and our comparison of Virginia’s budget with that of other states finds substantial evidence that these claims of spending shortfalls are contrary to the facts.
Gov. Allen recently announced that Virginia will collect $1.8 billion more revenue over the next three years than had been anticipated. That windfall provides a unique window of opportunity to eliminate the car tax immediately, not five years from now. Based on the Senate Finance Committee’s recent estimates, implementing the Gilmore plan immediately would result in a revenue loss of roughly $1.9 billion over the next two years. Given that, financing the full car tax repeal in 1998 would require only two steps:
1) Use the $1.8 billion revenue windfall for tax relief, not new spending.
2) Implement a budget cap to slow the growth of spending to the rate of population growth plus inflation, as numerous other states have done. That would produce more than $1billion in budget savings in the next biennium alone.
While we believe that there is plenty of opportunity to eliminate unnecessary programs in Richmond, under this budget strategy all areas of spending could continue to expand, just not as rapidly as they have been. If legislators or the governor wish to increase spending more rapidly in some areas, then they will have to make corresponding adjustments in other areas. This fiscal strategy requires politicians to establish priorities, just as Virginia’s taxpayers must do. With those two simple steps, the hated car tax could be eliminated today, not five years from now.
Over the last four years, state governments have enacted the largest tax cuts since the early 1980s. The biggest reductions have come in the personal income tax. New Jersey reduced its income tax by 30 percent. Arizona and New York cut theirs by 20 percent. California, Connecticut, Georgia, Massachusetts, Michigan, North Carolina, and Pennsylvania have also enacted substantial income tax cuts. Unfortunately, despite Gov. George Allen’s efforts in 1995, Virginia has been a relative non-player in this nationwide tax revolt. That is until the election of November 1997. The voters of Virginia sent a strong message that they demand tax relief.
This study examines the claims of vocal tax cut opponents, like the Northern Virginia Business Roundtable, that Virginia cannot afford a tax cut because the state faces a crisis in education and transportation needs. Similar arguments helped to derail Gov. Allen’s 1995 income tax cut proposal. Our examination of budget trends produced substantial evidence that those claims are contrary to the facts. Virginia already spends at or above the national average on highways and education, and that spending has been growing faster than the national average.
Richmond ended fiscal year 1997 with a surplus of more than $200 million. This year, revenues are once again pouring in faster than expected. On top of that, the administration recently announced that the state will collect $1.8 billion more over the next three years than they had anticipated. Nevertheless, some have said that Gov.-elect Jim Gilmore’s plan to implement a five-year phase-out of the personal property tax on vehicles valued up to $20,000 cannot be accomplished without major spending cuts. To the contrary, we find that Gilmore’s plan could be implemented immediately without raising other taxes or reducing the level of spending. While a reduction in Virginia’s excessive personal income tax burden would be more beneficial economically, we find that eliminating the car tax immediately, rather than five years from now, would require only two steps. (Alternatively, these same two steps would allow Virginia to enact a personal income tax cut of roughly 15 percent.)
1) Use the $1.8 billion revenue windfall for tax relief, not new spending.
2) Implement a budget cap to slow the growth of spending to the rate of population growth plus inflation, as numerous other states have done. That would produce more than $1 billion in budget savings in the next biennium alone.
This is a budget cap, not a budget cut. Although we believe there is plenty of opportunity to cut unnecessary programs in Richmond, this fiscal strategy would require no cuts in essential services. In fact, all areas of spending could continue to expand, just not as rapidly as they have been. If legislators or the governor wish to increase spending more rapidly in some areas, then they will have to make corresponding adjustments in other areas. In other words, politicians will be required to establish priorities, just as Virginia’s taxpayers must do.
The central theme of Gov.-elect Jim Gilmore’s campaign, evidenced by the ubiquitous signs and bumper stickers, was ‘No Car Tax,’ not ‘No Car Tax Five Years From Now.’ The current fiscal good times provide a unique window of opportunity. With the two steps described above, the hated car tax could be eliminated today, on budget and ahead of schedule.
Where the Money Goes
According to state-by-state data from the U.S. Census Bureau, state and local governments in Virginia spend more than $23 billion a year.1 (Note: That figure refers to the amount spent in FY 1994, the most recent year for which state and local finance data from the U.S. Census Bureau is available.) Table 1 provides a breakdown of where those state and local tax dollars are spent.
The figures for state government spending only, which are more recent, show the same general pattern. (Note: FY 1996 is the most recent year for which state finance data from the U.S. Census Bureau is available.)
As Figures 1 and 2 illustrate, highways and education hardly suffer from lack of attention in the Virginia legislature. Government spending on both highways and education accounts for a substantially larger share of the total budget in Virginia than it does in other states.
Figures 3 and 4 show how Virginia compares with other neighboring states on this issue.
Table 2 indicates how much Virginia spends on a per capita basis. Overall per capita state and local spending in Virginia is below the national average. However, per capita spending on education and highways in Virginia ($1,631) is right at the national average ($1,634).
Budget Growth in Virginia
The growth of government spending in Virginia has outpaced the national average. From 1982-94 state and local general expenditures in Virginia have increased by 72 percent after adjusting for inflation. The U.S. average increased by only 61 percent. (Note: FY 1994 is the most recent year for which state and local finance data from the U.S. Census Bureau is available.)
Table 3 details the growth of per capita spending over the last 12 years in Virginia, compared to the national average.
Finally, Virginia’s government bureaucracy is larger than the U.S. average and is growing faster than the U.S. average. (See Table 4.)
‘Unmet Spending Needs’ in Virginia?
State and local governments in Virginia are clearly not suffering from a lack of funds. The growth of both spending and revenue have outpaced the national average. In fact, as Figure 5 shows, since 1982 taxes in Virginia have increased much faster than both personal income and population. Furthermore, on the heels of last year’s $225 million revenue surplus, it was recently announced that the state will be collecting $1.8 billion more revenue over the next three years than was originally anticipated.
Despite the presence of that excess tax revenue, there has been a substantial organized opposition to tax relief. Even some in the business community, like the Northern Virginia Business Roundtable, have expressed vocal opposition to cutting taxes. Tax relief opponents frequently claim that Virginia faces a crisis in unmet education and transportation needs. They cite the findings of various government commissions to bolster their case. For instance, the Commission on Educational Infrastructure recently claimed that the state has $4 billion in unmet education spending needs over the next five years. The Commission on the Future of Transportation in Virginia claims that the state is $65 billion short of the amount it needs to build new highways and maintain old ones over the next 20 years.
As the Census Bureau data in Tables 2 and 3 illustrated, Virginia already spends at or above the national average on highways and education, and that spending has been growing faster than the national average. Furthermore, the need for building new schools and roads while maintaining old ones is not unique to Virginia. The latest U.S. Census Bureau projections estimated that Virginia’s population will grow by 20 percent over the next 20 years.2 That would rank Virginia 19th highest in rate of growth, but still below states like North Carolina (23 percent), Georgia (28 percent), Texas (30 percent), California (31 percent), and Arizona (38 percent). Unlike Virginia, all of those states have enacted substantial tax cuts in recent years.
Virginia will need new schools and roads as its population grows in the coming years, just as other states with growing populations will. However, Virginia certainly does not face anything resembling a ‘crisis.’ Population growth is a sign of economic and fiscal health. Moreover, a growing population, increased business investment, and rapid real estate development have dramatically increased Virginia’s tax base. Population growth and economic development are arguments for cutting taxes, not raising them.
Governments in Virginia will have plenty of tax revenue in the coming years. The real issue here is where do Virginia’s budget priorities lie. Those who wish to expand spending on education and highways should identify which other areas of spending they would scale back, rather than just hitting-up Virginia’s overburdened taxpayers for more money.
Public opinion polls in Virginia and across the nation indicate that education is a top priority in our society. In response, many in Virginia have called for higher government spending on education. The reality is that school funding already has been rising dramatically. There is no evidence that higher funding alone has led to better schools.3
If more money was the answer to improving education, then the District of Columbia would be far outperforming Virginia. At $9,300 per pupil, D.C. spends 75 percent more than Virginia. However, in reality, SAT scores in Virginia are five percent higher than in D.C. Furthermore, the four highest-spending states’Connecticut, New York, New Jersey and the District of Columbia’spend two-and-a-half times more than the four lowest spending states’Utah, Mississippi, Idaho, and Alabama. Nevertheless, average SAT scores in the more frugal states are 16 percent higher than in the big-spending states.
One reason that education spending has skyrocketed without observable improvements in performance is that a huge proportion of the money has been subsumed into administration, or what has become known as the ‘education blob.’ Between 1970 and 1996, enrollment in America’s public schools shrank by nearly 2 percent.6 Over that same period non-instructional staff grew by 53 percent.
Part of the problem is that the government’s educational monopoly inflates the cost of public education. Per pupil spending in our public school system is nearly double the average tuition at America’s private schools. That private tuition figure includes all of the nation’s most expensive non-sectarian private schools, like Sidwell Friends where Washington’s elite send their children. When those exclusive high-cost schools are omitted the contrast is even greater. Public education spending per student is more than two-and-a-half times the average tuition at Catholic schools, many of which are in the inner cities, and double the tuition at other religious schools. That same pattern holds true in Virginia as well. For a fraction of the price, these schools provide a better education than most government-run schools. They spend less because they have less bureaucracy.
There is no debate that America’s schools need to do a better job of educating our children if the nation is to remain internationally competitive in the next century. Spending more money on the public schools, however, has been tried in earnest for decades, and it has not worked. As education analysts John Chubb and Terry Moe of the liberal Brookings Institution have noted:
As for money, the relationship between it and effective schools has been studied to death. The unanimous conclusion is that there is no connection between school funding and school performance.7
New solutions, including choice in education, charter schools, teacher pay for performance, and ending tenure to get rid of bad teachers, not more money, would seem to be a better way to improve the ailing public school system.
The Economics of Tax Cuts
There is increasing evidence that state tax and budget policies can have a significant impact on the relative economic performance among states. Studies have consistently shown that states with high and rising tax burdens are more likely to suffer economic decline, while those with lower and falling tax burdens are more likely to enjoy robust economic growth.
A study by the Joint Economic Committee of Congress examined the economic growth records in the 10 states that had raised taxes the most in fiscal years 1990 through 1993 and the 10 states that had cut taxes the most over that same period.8 The top ten tax-hiking states experienced a net gain of only 3,000 new jobs, an increase in the unemployment rate of 2.2 percentage points, and a $484 real decline in personal income per family of four. In contrast, the top ten tax-cutting states saw 653,000 net new jobs, an increase in the unemployment rate of only 0.6 percentage points, and a $300 real increase in personal income per family of four.
The contrast was even greater when only income tax changes were considered. The top ten income tax-hiking states experienced the net loss of 182,000 jobs, a 2.3 percentage point increase in the unemployment rate, and a $613 real decline in personal income per family of four. The top ten income tax-cutting states saw 975,000 net new jobs, an increase in the unemployment rate of only 0.3 percentage points, and a $148 real increase in personal income per family of four. Other studies have found similar correlations between high taxes and slow economic growth.9
Unfortunately, some states have learned that lesson the hard way. At the beginning of the 1990s, the national recession presented many states with huge budget shortfalls when revenues came in slower than expected. Rather than restraining the growth of spending, some states like California, Connecticut, and New Jersey enacted record tax hikes in an effort to close their budget gaps. In the years that followed, only a fraction of the projected revenue increases ever materialized. In fact, tax collections actually fell as those state’s economies went into a tailspin. Only after significant tax cuts and budget restraint in recent years have California, Connecticut, and New Jersey seen their economies turn around.
A contrasting approach to the recession-induced budget shortfalls of the early 1990s was taken by states like Arizona, Massachusetts and Michigan. Rather than raising taxes, those states chose to focus on spending restraint to close their budget gaps. As a result, they were able to enact substantial pro-growth tax cuts soon thereafter. Subsequently, Arizona, Massachusetts and Michigan all experienced economic revivals, avoiding the prolonged recessions that afflicted tax-hiking states like California, Connecticut and New Jersey.
In recent years, many states have borrowed from these experiences and revived their economies with a combination of budget restraint and income tax cuts. In fact, in each of the past three years, more than half the states have cut taxes, with the largest reductions coming in the personal income tax.10
While Virginia has been a virtual non-player in this tax-cutting activity, many of Virginia’s competitors in the state-by-state battle to attract residents and jobs have been aggressively reducing their tax burdens. If politicians in Richmond continue to buck that nationwide trend, they risk jeopardizing Virginia’s ability to compete with other states.
Kill the Car Tax, Now
For state governments, financial conditions are about as good as they have been since the 1980s. According to the National Conference of State Legislatures (NCSL), last year (FY 1997) general fund revenues grew by roughly 6 percent, dwarfing initial projections of a 2.8 percent increase. While some states chose to spend part of those excess tax collections, for the third straight year nearly half the states reduced taxes. For example, in recent years New Jersey has reduced its income tax by 30 percent. Arizona and New York cut theirs by 20 percent. California, Connecticut, Georgia, Massachusetts, Michigan, North Carolina, and Pennsylvania have also enacted substantial income tax cuts. Unfortunately, despite Virginia’s high personal income tax burden and Gov. George Allen’s efforts to reduce that burden in 1995, Virginia has been a relative non-player in this nationwide income tax revolt.
Because they punish productive activity (work, saving, and investment)’as opposed to consumption or ownership of property’income taxes are the most harmful to economic growth. Therefore, a reduction in Virginia’s personal income tax would have a stronger economic impact than eliminating the car tax. For that reason, and because Virginia’s income tax is already well above average, we would strongly recommend a substantial income tax cut. However, since the car tax is at the front of the political agenda in Richmond, our analysis is phrased in terms of how to eliminate the car tax. The steps we recommend would alternatively allow Virginians to receive a reduction in their personal income tax burden of roughly 15 percent.
More than half the states, including Virginia, ended FY 1997 with balances larger than 5 percent of general fund expenditures. In Virginia, revenues are pouring in faster than expected again this year (FY 1998), so there should be another substantial surplus at the end of the fiscal year. In fact, it was recently announced that Virginia will collect $1.8 billion more in taxes over the next three years than was originally anticipated. That provides a window of opportunity to implement a ‘NO CAR TAX NOW’ strategy with almost no budget pain. Just two simple steps are required:
1) Use the $1.8 billion revenue windfall for tax cuts, not new spending. The money belongs to the taxpayers and it should be returned to them in the form of tax relief.
2) Implement a budget cap to slow the growth of spending to the rate of population growth plus inflation, as numerous other states have done.
This is a budget cap, not a budget cut. As Table 5 shows, by restricting spending growth in Richmond to 4 percent per year, rather than the 6 percent rate at which it has grown over the past 10 years, the budget cap would produce more than $1 billion in budget savings over the next two years. In the third year (FY 2001), the budget cap would save taxpayers $1.1 billion. Those savings would grow even larger in future years.
Other states already have similar statutory or even constitutional budget caps that prohibit state spending from exceeding the growth rate of population plus inflation.12 As a result, in today’s era of large state budget surpluses, taxpayers in states like Colorado, Missouri, and Massachusetts, will be receiving tax rebates this year, rather than seeing politicians squander their surplus tax payments on new spending programs.
In combination with the $1.8 billion revenue windfall and last year’s $225 million budget surplus, the savings from the budget cap would produce more than $3 billion in funds available for tax cuts over the next two years. According to the Senate Finance Committee’s November 1997 analysis, when fully implemented the annual revenue loss from the Gilmore tax plan would be $958 million,13 for a two-year total of roughly $1.9 billion. Therefore, at $3 billion over the next two years and $1.1 billion per year and higher thereafter, the savings produced by our two-step fiscal strategy will be more than sufficient to ‘pay for’ implementing the full Gilmore tax cut this year, rather than five years from now. In fact, by the end of Gilmore’s term the entire personal property tax could be eliminated by the savings produced by a spending cap.
Despite what many claim, funding for education or transportation would not have to be cut in order to kill the car tax today, much less over five years. Nor are offsetting tax increases necessary. Gilmore would have to specify where he would make offsetting reductions in order to pay for any of his new spending plans, but those should be lower priorities than ending the car tax, which was the centerpiece of the campaign.
If Governor-elect Gilmore and the legislature were to follow these two simple budget steps, the hated car tax would be terminated ‘ on budget and ahead of schedule.
A Budget for the New Biennium
A recent headline stated ‘Gilmore to pay for Allen’s pork.’14 It should have said ‘taxpayers to pay for Allen’s pork,’ but either way Gov. George Allen’s recent activities have made it more difficult for Gilmore and the legislature to eliminate the car tax.
On December 19, Gov. George Allen released his budget proposal for the FY 1998-2000 biennium. In stark contrast to Allen’s reputation as a fiscal conservative, this budget calls for a record $40 billion in spending over the next two years,15 an 11 percent increase over the last two-year budget. That includes what Allen himself describes as ‘an unprecedented increase’ in education spending of 15 percent and new funding for a plethora of pet projects.16
To promote the latter, Allen has been on a statewide ribbon-cutting ceremony tour, doling out millions of Virginians’ tax dollars to fund new pork-barrel projects. Those projects include $19 million to help a foundation prepare for the 400th anniversary of Jamestown in 2007, $10 million to help pay for an expanded convention facility in downtown Richmond, $10 million for a museum of natural history in Martinsville, $2.5 million for a mariners museum in Newport News, $1 million for the Wolf Trap Foundation in Vienna, and $300,000 for a botanical garden in Richmond.17
In response, political analyst Larry Sabato, of the University of Virginia, has referred to Allen as ‘a Republican Santa Claus’ and to his bloated budget as ‘the wanton expenditure of tax funds.’18 Allen’s budget is indeed unprecedented and should be rightsized. While many in Virginia have said that the state ‘can’t afford’ to eliminate the car tax over five years, in reality the $1.8 billion revenue windfall, combined with modest spending restraint, is more than enough to eliminate the car tax today. Those excess tax collections should be used to provide tax relief, not to fund an excessive 11 percent increase in government spending.
Times are good for state governments. With the economy in high gear, revenue coffers are overflowing and surpluses abound. Many states have been returning those excess revenues to the taxpayers. Over the last few years, state governments have enacted the largest tax cuts since the early 1980s. In fact, in each of the past three years, more than half the states have cut taxes, with the largest reductions coming in the personal income tax. Unfortunately, Virginia has been a relative non-player in this nationwide tax revolt. That is until the election of November 1997. The voters of Virginia sent a strong message that they demand tax relief.
Despite the overwhelming voter mandate, numerous interest groups have lined up in opposition to cutting taxes. They claim that Virginia ‘can’t afford’ a tax cut because the state faces a ‘crisis’ in billions of dollars of unmet education and transportation spending needs. We have found that there is substantial evidence to the contrary. Virginia already spends at or above the national average on highways and education, and that spending has been growing faster than the national average. Moreover, the recent announcement that the state will bring in $1.8 billion more in revenue over the next three years than was anticipated, provides a unique window of opportunity for substantial tax relief. Richmond should take advantage of that opportunity and return those excess tax dollars to the taxpayers of Virginia.
1. Unless otherwise noted, all government finance data herein is from the U.S. Census Bureau. The Census Bureau’s annual data on state and local government finances are superior to other sources because they provide comparable figures for all 50 states and they account for every type of outlay and all sources of revenue. Other reports provide data only for state general funds, for instance, which makes state-by-state comparisons problematic because states vary widely on how much of their budget is in the general fund and how much is in other, non-general funds. Unfortunately, the Census Bureau’s data is always several years behind. As of December 1997, the most recent data on the combined state and local level of government spending and revenue was for fiscal year 1994, and the most recent data on state government finances only was for fiscal year 1996.
2. U.S. Census Bureau, Population Estimates and Projections by State, 1995 to 2025, Current Population Reports, Series P25, No. 1131, May 1997.
3. See for instance, Eric Hanushek, ‘Impact of Differential Expenditures on School Performance,’ Educational Researcher, May 1989.
4. U.S. Department of Education, National Center for Education Statistics, Digest of Education Statistics, 1997.
5. Those states are Alabama, Arizona, Arkansas, California, Idaho, Kentucky, Louisiana, Mississippi, Nevada, New Mexico, North Dakota, Oklahoma, South Dakota, Tennessee, and Utah
6. U.S. Department of Education.
7. John Chubb and Terry Moe, ‘Letting Schools Work,’ NY: The City Journal, Autumn 1990.
8. Stephen Moore, ‘Taxing Lessons from the States: Why Much of America Is Still in a Recession,’ Joint Economic Committee of the U.S. Congress, October 1993.
9. See for instance, Richard Vedder, ‘State and Local Taxation and Economic Growth: Lessons for Federal Tax Reform,’ Joint Economic Committee of the U.S. Congress, December 1995; Zsolt Becsi, ‘Do State and Local Taxes Affect Relative State Growth?’ Economic Review, March/April 1996, Federal Reserve Bank of Atlanta; and Stephen Moore and Dean Stansel, ‘Tax Cuts and Balanced Budgets: Lessons from the States,’ Cato Institute Fact Sheet, September 17, 1996.
10. National Governors’ Association and National Association of State Budget Officers, The Fiscal Survey of States, various editions, and National Conference of State Legislatures, State Tax Actions, various editions.
11. U.S. Census Bureau. Note that this refers to state personal income tax revenue only, since Virginia does not have a local income tax. However, Virginia’s personal income tax burden still ranks 13th on a per capita basis and 16th on a per $1,000 of personal income basis when other states’ local personal income tax revenues are included.
12. For a comprehensive examination of the effectiveness of state tax and expenditure limitations see Dean Stansel, ‘Taming Leviathan: Are Tax and Spending Limits the Answer?’ Cato Institute Policy Analysis No. 213, July 25, 1994.
13. Commonwealth of Virginia, Senate Finance Committee, ‘An Analysis of the Personal Property Tax on Vehicles,’ November 20-21, 1997.
14. Andrew Cain, ‘Gilmore to pay for Allen’s pork,’ Washington Times, December 18, 1997, p. C6.
15. Commonwealth of Virginia, Department of Planning and Budget, Executive Budget for 1998-2000, December 19, 1997, p. 2.
16. Governor Allen’s 1998-2000 Executive Budget, p. A1.
18. Mike Hardy, ‘Allen budget plan goes far and wide,’ Richmond Times-Dispatch,’ December 31, 1997.
About the Authors
Dean Stansel is a fiscal policy analyst at the Cato Institute in Washington, D.C., where Stephen Moore is the director of fiscal policy studies. Their work on state and local public finance has been highlighted in the Washington Post, Wall Street Journal, and numerous other newspapers and periodicals. Their recent articles include ‘The Big Businessmen Who Want to Soak Taxpayers Big-Time,’ Richmond Times-Dispatch, September 12, 1997 and ‘How to Ditch the Car Tax Instantly,’ Washington Times, November 28, 1997 (both of which appeared in other papers across the state).
Published by the Virginia Institute for Public Policy, this policy analysis is part of an ongoing series of studies which evaluate government policies and offer proposals for reform. Nothing written here is to be constructed as necessarily reflecting the views of the Virginia Institute for Public Policy or as an attempt to aid or hinder the passage of any bill before the General Assembly of Virginia, or the Congress of the United States.
Contact the Virginia Institute for Public Policy for reprint permission. Additional copies of this study are available for $5.00 each ($3.00 for five or more). To order, contact the Virginia Institute for Public Policy, 20461 Tappahannock Place, Sterling, VA 20165-4791. (703) 421-8635 Fax (703) 421-8631.
The Virginia Institute is classified as a Section 501(c)(3) organization under the Internal Revenue Code of 1954, and is recognized as a publicly supported organization described in Section 509(a)(1) and 170(b)(1)(A)(vi) of the Code. Individuals, corporations, associations, and foundations are eligible to support the work of the Virginia Institute for Public Policy through tax-deductible gifts.