A Tax Repeal's Inequities
Sunday, September 15, 2002; Page B08
Virginia is a state of economic contrasts. Wealthy suburban districts enjoy a standard of living more than twice that of rural areas and older urban centers, and former governor James Gilmore's car-tax rollback has only worsened that inequity. To Northern Virginians, challenging the repeal may be public heresy, but as Virginia's budget nightmare deepens, it's time to reevaluate a policy that shifts so much state money from Virginia's poorest regions to its wealthiest.
The car-tax repeal was sold as a policy with no losers. Virginia's seemingly ever-expanding tax base could absorb a local tax cut. But the state tax base is a shared resource, funding the schools, roads and programs that define the state. By contrast, the refunds from Richmond aren't spread evenly across the state. They're concentrated in a handful of extremely wealthy counties and cities.
For fiscal 2002, the car-tax reimbursement to cities, counties and towns removes more than $826 million from the state's tax base, or about $122 for every man, woman and child in Virginia. So any locality that receives less than $122 per person back from the state is a net loser. With few exceptions, the lower a locality's income, the bigger the net loss it endures.
Low income is a feature of Virginia's economic landscape. As of 2000, in 66 of Virginia's 95 counties average income ranged from $17,000 to $24,000. Sixty-four of these poorest 66 counties are net losers, and 10 get less than $45 per person in car-tax rebates.
The story is the same in Virginia's cities. Among larger cities, Norfolk is the biggest loser ($52 per capita), because its income average of $21,000 is among the lowest in the state. Virginia's poorer small cities and towns fare even worse.
The big winners are suburban and wealthy. The average income in Fairfax County is the highest in Virginia -- $52,000, so Fairfax will get back approximately $202 per resident, or 23 percent of the total state reimbursement. The prize for the biggest average rebate goes to Loudoun County, where residents take home a hefty $263. Other big winners near Washington include Fauquier, Arlington and Prince William counties and cities such as Alexandria and Falls Church. Elsewhere in Virginia, richer suburban districts such as Albemarle, Chesterfield and James City (where I live) also do quite well.
This pattern should surprise no one. Low income means cars of lesser value, so the local tax base eligible for state reimbursement is correspondingly small. Tax rates also vary across jurisdictions. Virginia's rural counties and small towns tend to have lower tax rates on vehicles than suburban districts, so they collect less in state reimbursement. Because these rural areas are also the poorest, they are last in line at the state trough.
Virginia officials have expressed surprise at how much state revenue the car-tax rebates are gobbling up, but they can expect even larger transfers. The state's rebating 70 percent of the tax on the first $20,000 of a car's assessed value decreases the cost of owning the car and thereby encourages people to own more cars and more expensive cars -- meaning Richmond's obligation will continue to rise.
Gilmore's promise to reimburse local governments for their forgone tax base was popular with car owners. But that promise needs to be reevalauted as part of a package that gives local governments broader authority over what they can tax. Siphoning off state revenue to fund local tax cuts is a deeply disturbing policy that worsens Virginia's already stark regional income disparities.
is a professor of economic at the College of William & Mary.
