The famed Supreme Court justice Oliver Wendell Holmes once wrote: “Taxes are what we pay for civilized society.”
He may or may not have rebuked a secretary who complained about taxes by saying: “I like to pay taxes. With them I buy civilization.”
Either way, Holmes was more sanguine about taxes than most of us, because I have yet to meet anyone who professed to like having to pay taxes. While my children were younger, we admonished them to stay away when I was working on taxes, lest I blurt out some unfortunate “tax words.” And I don’t mean “deduction.”
I’m reminded of this by Gov. Glenn Youngkin’s proposed budget, which includes reducing the state’s income tax rate — and raising the sales tax. No one should have been surprised by the former; reducing the income tax rate is something Youngkin has been pushing since he was a candidate. I was surprised by his proposal to raise the sales tax (and broaden the number of things it covers) because this hasn’t been something I’d heard him mention before.
Youngkin contends that we need a lower income tax to be more competitive with other states, and need a broader tax base so that we’re not so dependent on just one thing — about 70% of Virginia’s general fund revenues come from the income tax.
He may well be right from a policy standpoint — Virginia is far more dependent on the income tax than most states. The Urban Institute says that, overall, only about 17% of state revenues across the country come from income taxes. However, as a political matter, I’m not sure he’s sufficiently prepared the ground for this. Then again, how might the recent legislative elections have turned out if this had been the Republican platform? I suspect Democrats would have had great sport with the sales tax portion. They already have been quick to point out that the governor wants to reduce a progressive tax and raise a regressive one. Republicans are usually quite good at reducing policy to simple slogans — “No car tax!” for instance — while Democrats are left fumbling to explain more complicated ones. Here, we see just the opposite. As a general rule in politics, if you’re explaining, you’re losing.
I noticed that after the governor unveiled his budget proposal on Dec. 20, Republicans had little to say. Was that because the holidays were soon upon us? Or because they, too, were taken aback by a proposal that involved raising the sales tax? That seems a very off-brand move for a Republican.
One Republican who was not so reticent was state Sen. Bill Stanley, R-Franklin County, who had some choice words to say about the governor proposing to zero out funding for the New College Institute in Martinsville — a workforce training organization whose board Stanley chairs — in the second year of the two-year budget. Over the years, I’ve heard Stanley speak out quite passionately about how the New College Institute can be an economic driver in a part of the state that’s trying to reinvent its economy. I’m not surprised he’s upset about the budget proposal. I was surprised, though, to see the other comments he made to Cardinal education reporter Lisa Rowan when she talked to him about the New College Institute. He went on to say that the proposed sales tax increase and the governor’s interest in eliminating the car tax were bad for rural Virginia. “Areas that helped get the governor elected are being left on the side of the road,” Stanley said. He went on to say that if the sales tax gets raised for everyone it means the poorest would pay — and they would essentially be funding Youngkin’s proposed income tax cut.
Is Stanley right? Is Youngkin’s tax proposal uniquely bad for rural Virginia, the part of the state that most enthusiastically voted for him?
Questions about tax fairness are much like beauty; they lie in the eye of the beholder, as the Irish novelist Margaret Wolfe Hungerford once said. I will attempt to bring some mathematical analysis to the question but keep in mind that I am not the adjudicator of what’s best for rural Virginia. Ultimately that’s in the hands of voters, and voters across much of Southwest and Southside have seen fit to elect Republicans — yet here we seem to have a difference of opinion between two Republicans. Let’s see what math might tell us.
Income tax
Democrats generally like the income tax because they believe that those with the most should pay the most. Republicans generally don’t like it because they believe the income tax punishes success. It’s no accident that the seven states with no income tax at all either are or have been historically Republican states: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas and Wyoming. Likewise, the states with the highest income tax rates are all Democratic states: California, Hawaii, New Jersey and New York. This is one of the fundamental differences between Democrats and Republicans. Long before the parties disagreed over abortion and guns, they disagreed over taxes — income taxes, in particular.
The historical stereotype is that Republicans are the party of the rich and Democrats are the party of the workers. That generally was true in the days of the New Deal, but those days are long gone. As the two parties have realigned, Republicans have acquired a much more working-class base. The Pew Research Center found that in 2020, voters with no college degree accounted for a much bigger share of the Republican vote (68%) than the Democratic vote (53%). We can see this geographically in Virginia, as the Democratic vote has grown in the suburbs and collapsed in working-class communities, such as Southwest and Southside Virginia.
Youngkin wants to reduce income taxes by 12% across the board, so those in the 2% bracket would see their rate cut to 1.75% and those in the 5.75% bracket would see theirs reduced to 5.1%. How should the impact of this be measured? If Virginia localities were people, a reduction in the top income tax rate would mean that taxpayers in Democratic-voting Loudoun County, where the median household income is $170,483, would get far more money back than those in the state’s strongest Republican localities, such as Lee County, where the median household income is $41,619. On the other hand, given the much lower median household income in Lee County, a reduction in income tax rates might be much more appreciated there. Everybody would get the same percentage reduction but that percentage deduction would mean more dollars to higher-income earners than lower-income earners. This is where the fairness question comes in. Should Lee taxpayers be grateful that their taxes are being cut at the same percentage even if Loudoun taxpayers are getting more actual dollars back? Or should they be upset that the state’s wealthiest county (indeed, by some measures, the nation’s wealthiest county) is getting a bigger break even if it’s all the same percentage? I can’t measure fairness.
I can, though, measure how Virginia’s rate compares to other states. Virginia’s top income tax rate of 5.75% is the same as Georgia and Maryland and lower than West Virginia, which is 6.5%, according to the Tax Foundation. However, Virginia is more typically compared to North Carolina, our biggest economic rival, where the top income tax rate is 4.75%. Tennessee, which would be the big economic rival for Southwest Virginia, has no income tax. I’m not in a position to evaluate the degree to which the income tax factors into economic decisions, but simply as a factual matter, Virginia is tied for the second highest income taxes of any state south of the Mason-Dixon Line (and the Ohio River). Only South Carolina and West Virginia, both tied at 6.5%, are higher. In fact, most states have a lower income tax rate than Virginia — 20 are higher, two have the same, the other 27 are lower.
Youngkin points out that certain other states in the South have been gaining population more rapidly, mostly because people are moving there. Virginia has been gaining population, but at a much slower rate, and that population growth is due entirely to immigration and the birth rate topping the death rate. For a decade now, Virginia has seen more people moving out than moving in, and they’ve generally moved to other Southern states. Is that because their taxes are lower? Again, there’s no formal study that says that’s the case, although lots of people (especially Republicans) believe that’s the reason.
“Our neighbors in North Carolina, South Carolina, Tennessee, Georgia and Florida have been growing rapidly,” Youngkin has said. “Americans and Virginians were choosing to go there instead of here. Each of these states had lower taxes or had started their journey to lower taxes.” (Yes, South Carolina’s rate is higher, but it’s been reducing the rate, so that’s why it qualifies as being on the “journey to lower taxes.”)
Sales tax
This is where Youngkin’s proposal is probably most vulnerable. While we can have a jolly old time debating whether a 12% across-the-board cut in income tax rates disproportionately helps upper-income earners, and whether that really matters as long as lower-income earners get a tax reduction, it’s less disputable that raising the sales tax increases the tax burden on lower-income earners. Everybody has to wear shoes, but those $170,483-a-year households in Loudoun County can afford the tax increase on shoes a lot more than those $41,619-a-year households in Lee County.
The argument in favor of sales taxes is that these are more or less voluntary taxes based on choices we make. Don’t want to pay that increased tax on the shirt? Then don’t buy the shoes. Another argument in favor of sales taxes is that a certain percentage of them will get paid by people from out of state — tourists, business travelers or those just passing through. Let them buy the shoes and help pay for our roads and schools. The argument against is that at some point we all have to have shoes, and those sales taxes are regressive. The folks in Lee County will wind up paying a higher percentage of their income on their shoes than those in Loudoun County. Of more interest politically, localities that now vote strongly Republican will bear this tax more heavily than some of those that now vote strongly Democratic.
While Virginia’s income tax is on the high side compared to other states, especially neighboring ones, our basic state sales tax of 4.3% (you may find it higher because of local sales taxes) is on the low side. North Carolina’s sales tax starts at 4.75%. How does Tennessee manage to have no income tax? Because its sales tax starts at 7%, tying it for the second-highest in the country. (California has both the highest income tax and the highest sales tax.) If you’re of the opinion that the sales tax is the fairest tax because everyone has to pay it, and you’re only taxed by the actions you take in the marketplace, then Tennessee is your tax utopia. If you’re of the opinion that Tennessee has opted out of a progressive tax that would tax the wealthy the most and relies heavily on a regressive tax that falls hardest on the working class, then the state is your tax hell. Take your pick. Either way, if taxes really are a motivating factor in people moving from one state to another, that must be due to income taxes, not the sales tax, because many high-growth states have higher sales taxes than we do.
And then there’s this: The Wall Street Journal points out that “Virginia’s current income tax … kicks in at a lower level than in most states with comparable rates. The top rate falls on residents who earn more than $25,000 a year (after an $8,000 standard deduction), well below the state’s median income of about $40,000. Cutting that rate would be a large boost for nearly all taxpayers.” I notice the Journal doesn’t really address why raising the sales tax might be a good idea, just why cutting the income tax is except to say: “taxes on consumption do less damage than income taxes. A 2022 Congressional Budget Office study reaffirmed that a broad excise tax is a smaller drag on growth than an income tax that raises the same amount of revenue. Virginia’s sales levy is relatively low, which means a small increase is a reasonable step to shrink the income-tax burden.”
Tax philosophy aside, try this thought experiment: The night before Youngkin’s budget announcement, 833 Republicans gathered at the Drakes Branch Fire Department in Charlotte County to nominate a candidate for the state Senate to succeed Frank Ruff, R-Mecklenburg County, who resigned for health reasons. How do you think they’d have responded if one of the candidates had declared he or she would go to Richmond to reduce the income tax? I imagine the response would have been thunderous applause. But what would have been the response if that same candidate then declared he or she would go to Richmond and raise the sales tax? I leave you to your imagination.
The car tax
Youngkin has revived former Gov. Jim Gilmore’s pledge to abolish the car tax. To be fair, it was two unsuccessful Democratic candidates for the General Assembly — Lily Franklin of Blacksburg and Trish White-Boyd of Roanoke — who actually revived it last fall. The car tax, it should be remembered, is not a state tax at all. It’s a local tax. Any locality in the state could abolish it right now. The reason they don’t is they rely on it for a lot of their revenues. Gilmore’s idea was that the state could use its revenue surplus to pay localities what they’d be losing, thereby keeping them whole. Critics saw that as state government diverting resources to the most affluent parts of the state — Northern Virginia had the highest car taxes, so would get paid the most. That’s the challenge Youngkin faces, and likely why Stanley cites the car tax proposal as something that would hurt rural Virginia, as well as the state’s cities.
So far, we’ve focused on the revenue side, but we should acknowledge the spending side. We’d all like our taxes reduced, but some parts of Virginia depend more on state spending than others. Who depends on it the most? Rural Virginia. Most of the funding for rural school systems comes from the state, not local governments or the feds. If there’s less revenue in Richmond, the trickle-down effect is that there’s less money to fund rural schools. If we reduce the income tax, and raise the sales tax, does that make it more likely that Virginia will be more competitive and more people and employers will locate in rural areas? Or does it mean that there’s less money for rural schools, and any new people and jobs will simply go elsewhere in the state? Those are some of the questions here.
Tax break for data centers
A recent report by the Senate Finance Committee found that the state passed up nearly $1 billion in revenue in 2023 due to the tax incentives for the data center industry, according to the Washington Business Journal. This tax break has clearly been a major success: Northern Virginia is now the nation’s data center capital, much to the chagrin of some. Of late, the growth of data centers has lit up a political controversy over how many should be allowed, particularly in Prince William County. I wonder if this report will prompt some to ask whether it’s time to reduce or even eliminate those tax incentives. That’s a lot of money the state is leaving on the table. The argument against eliminating the tax break: It would slow the growth of the data center industry in Virginia. The argument for: Slowing its growth might be just fine with some people. I can’t help but wonder how this report will factor into the tax discussions coming up in Richmond. Why raise the sales tax, which would be borne most heavily by rural Republicans (among others), when you could simply eliminate this tax break and collect more revenue? I’m sure someone will raise that question; the counterargument is, sure, you can eliminate that tax break, but you won’t collect more revenue because those data centers might go somewhere else.
One irony of the whole data center controversy is that while some in Northern Virginia are growing tired of them, some localities in Southwest Virginia are literally begging for them — and can’t seem to get the industry’s attention. Might this be an opportunity to help those localities? To avoid data centers going to other states, you could eliminate the tax break for data centers in Northern Virginia but keep it for data centers that choose to go elsewhere in the state. Will we see anyone propose that solution?
State Sen.-elect Danica Roem, D-Manassas, recently declared: “I oppose the existence of all data centers in western Prince William County — period. And the ones that are there currently need to be taxed to match Loudoun, if not exceed it, and if someone wants to pack up and leave because, oh no their data center tax is too much, I will personally put a big yellow ribbon around it and ship it to Tazewell County where they’re happy to have it…” It’s not a far cry from saying that to actually changing Virginia tax policy to encourage it.
I began this inquiry by asking whether Stanley was right that the governor’s tax proposal hurts rural Virginia. I also said that I’m not the ultimate judge of that — voters are. So, now that you’ve seen the numbers, what do you think?