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Virginia Governor Releases Budget Proposal

2 min readBy: Nicole Kaeding

Governor Terry McAuliffe (D) released his budget proposal this morning. If passed, his budget would make several changes to Virginia’s 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. code.

His plan includes the following changes:

  • Personal Exemption. Governor McAuliffe would increase the personal exemption for individuals and dependents from $930 to $1,000. The exemption for the elderly and the blind would increase from $800 to $900. This is expected to save taxpayers $42 million over two years.
  • Corporate Income TaxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. . This proposal would lower the corporate income tax from 6 percent to 5.75 percent. The governor says that the cut is needed to maintain Virginia’s competitiveness as North Carolina continues its corporate income tax cuts from 2013. This would reduce tax revenues by $64 million over the biennium.
  • Tax Credits. Governor McAuliffe is proposing the expansion of tax credits for corporations. The Angel Investor tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. would increase from $5 million to $9 million. The research and development (R&D) tax credit would grow from $6 million to $7 million, and McAuliffe would create a second, separate R&D credit for companies with more than $5 million in annual research spending.
  • Limiting the acceleration of 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. revenues. Currently, Virginia retailers must remit the bulk of their projected June sales tax collections that month, rather than in July. This captures June revenue in the current fiscal year, and was used to patch a prior Virginia budget deficit the state’s previous budget. Under Governor McAuliffe’s plan, 90 percent of businesses would be exempt from this requirement.

Governor McAuliffe’s plan contains several positive components. The two small changes to the individual and corporate income tax moves the state in the positive direction. Allowing most retailers to remit sales tax revenue on a normal collection schedule reduces complexity for retailers.

But Governor McAuliffe’s adds more complexity to the corporate code. R&D tax credits are designed to encourage firms to partake in research investments, but instead, governmental definitions of “qualified” research may skew corporate R&D decision-making. Corporations waste valuable resources trying to structure their spending to meet the government’s restrictions.

Moreover, Governor McAuliffe’s plan fails to address the most burdensome parts of Virginia’s tax code: the Business/Professional/Occupation tax (BPOL), the Machinery and Tools tax, and the Merchants Capital tax. When campaigning for governor, McAuliffe promised to eliminate these taxes. These three taxes are distortionary, and are widely citied for their bad tax structure.

Governor McAuliffe’s budget proposal would make several positive changes to the tax code, but would also increase complexity by increasing distortionary tax credits. More importantly, McAuliffe ignores the truly destructive parts of Virginia’s tax code.