With the opening of 2004 Virginia General Assembly just a week away, members of the Mount Vernon-Lee Chamber of Commerce were put on notice that the whole tax structuring effort is critical to business statewide.
That was the message delivered by Michael Thompson, chairman and president of Thomas Jefferson Institute for Public Policy, a Springfield-based thinktank, as he presented a comprehensive analysis of Virginia's financial picture to members gathered for the organization's regular First Tuesday Luncheon. It was geared to the proposed tax restructuring proposal of Governor Mark Warner.
"What we do with our tax dollars and how we spend money determines where we rank among other states in our region," he explained. That region, for purposes of the Institute's analysis, is composed of Virginia, Maryland, Pennsylvania, Georgia, North and South Carolina, Tennessee and West Virginia.
"In the midst of a debate we sometimes lose perspective," he said. In an attempt to avoid that pitfall, the Institute has developed a complex economic model which is able to analyze the impact of various revenue generators and spending plans on the total fiscal picture.
Called a Computable General Equilibrium [CGE] Model it was developed under the guidance of the Economic Department, Suffolk University. It will "identify economic effects of tax changes on employment, wage rates, capital stock, and investment for 50-plus sectors of the economy," according to Thompson.
"When someone proposes something in the General Assembly or suggests a change, that proposal can immediately be plugged into the model to determine its effect on the big picture," he said. "And we will be able to apply the model to various sections of the state."
THE REVENUE PART of the model will be ready in approximately two weeks. That will be followed by the expenditure portion, Thompson noted. "This model will be available to everyone who's interested," he said.
Among some of the tax/spending analysis possible are the effects on tax changes over time, effects of tax changes introduced at different times, comparative effects of government spending on infrastructure and transfer payments, changes in existing state taxes by amount and type, comparisons for economic effects of alternative tax-rate changes yielding similar revenue, and comparisons for revenue yield of alternative tax-rate changes exerting similar effects on the economy.
"The model is designed to run on a personal laptop computer and will be available for public use. I view tax restructuring the same as analyzing your investment portfolio," Thompson told the group.
To make his point he took the audience through a series of economic impact factors that ranked Virginia regionally and nationally. Some of those included personal income per capita: region 2nd; national 11th; gross state product per capita: region 7th; national 36th; employment growth: region 7th; national 36th; economic momentum: region 3rd; national 18th; and total spending: region 7th; national 37th.
IN THE LATTER category, Thompson used a variety of state budget categories such as education, health care, highways, and environmental activities. However, he cautioned, "You have to look at the source of the data and variables that impact the results."
Categories that particularly impacted the Chamber audience were taxes imposed by the federal, state and local governments either on a total basis or segmented. In most of those categories, Virginia ranked approximately midpoint nationally, varying between 21st and 24th place. The one notable exception was the sales tax where the Commonwealth is ranked 41st nationally and eighth regionally.
The state's business tax climate regionally is third, according to Institute data with only Tennessee and Pennsylvania ranked higher. It is 21st nationally in this category by their figures.
Thompson also went into the fiscal impact of various actions on the state revenue stream. As examples, he cited a total phase out of the car tax will cost an estimated $394.5 million if completed as originally planned in 2005.
"However, Governor Warner's proposed car tax phase out is actually an extension of that tax by three years," he noted. "It was supposed to be phased out by 2005."
He also explained that for "every one cent increase in the cigarette tax there is an increase of $6.5 million. Therefore, a 25 cent increase would produce $162.5 million per year in added revenue." He reviewed each element of Warner's proposed tax plan explaining its impact on the total state revenue.
According to Thompson's figures, state spending has continued to increase. In the 2002-2004 budget, he listed state spending at $51,012,214,040. For 2004-2006 he increased that figure to $57,849,976,097.
Thompson emphasized, "Tax restructuring is not simple or easy and has dynamic consequences. Business input to the debate is critical. Taxes have a direct impact on business and the competitive climate."