Governor Terry McAuliffe jumped the budget gun by presenting his plans to cut taxes (rather thinly) and expand certain tax credits before dropping the rest of the budget on the legislature and the public (that’s two weeks from now).
The proposed tax reduction
First and foremost is a reduction in the corporate income tax, from 6% to 5.75%. In an irony that apparently no one in the Governor’s office noted, the press release (link above) notes: “The broad-based tax proposal will provide significant benefits for all corporations rather than selecting winners and losers.” The next several tax credit expansions proceed to list the “winners”: a new R&D tax credit “designed to benefit companies with more than $5 million in annual research spending,” an expansion of the existing R&D credit, and an expansion in the investor tax credit, but “with $2 million earmarked for bioscience projects.” Finally, there would be a narrowing of the firms required to fork over accelerated sales tax payments every June.
The economics
Lower taxes are lower taxes, which naturally appeals to me. That said, the broader the better, so I would have rather seen the expected revenue loss from the credit expansions go to a deeper reduction in the corporate rate (or elimination of the accelerated sales tax payment nonsense entirely). Overall, this “cut” is more lathe-like than ax-like. McAuliffe himself cited “healthy revenue collections” (WDBJ7), rather than government efficiency in spending, as the method of covering the revenue loss. Of course, T-Mac could have chosen to spend the money instead, which leads us to…
The politics
T-Mac made a major effort to flip the State Senate back to his party, and failed. That said, there wasn’t much movement in either direction in Virginia – and what little there was reaffirmed the state’s position as the ultimate swing state for next year. The Democrats have already tipped their hand – social issues today, social issues tomorrow, and social issues forever. The presence of any economic issue can distract – especially taxes. So, Hillary Clinton’s best friend in a Governor’s mansion is doing his best to neutralize it. That starts by shifting the conversation to tax reductions (which Virginia hasn’t seen at the state level in this century).
The reaction
If the Republican reaction (courtesy of House Appropriations Chairman Chris Jones) is any indication, T-Mac is already halfway there. Jones was caught so flat-footed he even threw in a line opposing Medicaid expansion – a fine position to have, but odd to bring up when the Governor never mentioned Medicaid in the press release. My first impression is that Jones (and the rest of the Richmond Republicans) were expecting spending hikes and another call for Medicaid expansion – not tax cuts. Even more problematic (admittedly, just from my perspective) was Jones’ unwilling to back the corporate tax cut. While waiting for the full budget to be presented is fine, was it really that hard to say the GOP would find the budget cuts to cover the tax reduction if the Governor’s revenue assumptions were off? If Jones, Howell, and Norment et al aren’t careful, Virginia voters in 2016 will see their Governor positioned to the GOP’s right on the tax issue – and as a Republican, if the Democrat is to your right, your position is wrong.
All in all, this was smart political maneuvering and a small move in the right economic direction by T-Mac. As for the Republicans, I fear they don’t even realize they’ve been outflanked – in which case, next year could be a long one for them.
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