A new report from the non-profit Commonwealth Institute for Fiscal Analysis predicts a huge budget deficit for Virginia and demands higher taxes.
Quoting from the Washington Post account:
“The budget relies heavily on sales taxes, which are volatile during economic downturns.”
Both of those claims are false. As a quick check of the latest Census data shows, Virginia is much less dependent on sales taxes than other states, and it is income taxes, not sales taxes, that put state budgets on a roller coaster.
Virginia gets only 33% of its taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. collections from sales compared to a nationwide average of 47.5%. Aside from four states that have no general sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , only Massachusetts and New York get a smaller share of state tax collections from sales taxes. That ranks Virginia 44th among the 50 states on sales tax dependence.
If Virginia collects so little in sales tax, how did it bring in over $17 billion in total taxes during 2006? Income taxes bring in the lion’s share, more than 50% of total tax collections. Only Massachusetts, New York and Oregon get a higher percentage.
As for the alleged volatility of sales taxes in a downturn, go back to the last downturn in 2002. State budgets were in deficit nationwide as total tax collections actually dropped for the first time in decades. In Virginia, income tax collections dropped like a rock while sales tax collections held steady.
Ironically, then, the Institute’s report is correct in saying that Virginia’s budget is “too sensitive to the ebbs and flows of Virginia’s economy” but for the opposite reason that it gives. In fact, the state is over-dependent on the income tax.
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