Youngkin’s Supply Side Feint
Governor Youngkin has put forth his budget amendment plans for 2023. Unlike last year’s demand-fueling, Keynesian bonanza, this one actually includes some tax reductions that would provide some supply-side relief. That said, he could (and should) have done a lot more there.
With a projected $3.6 billion surplus for this fiscal biennium (WaPo), one could argue that the best thing Virginia could do is nothing. That would keep the billions out of aggregate demand entirely. However, it would also mean no supply-side tax reductions. Youngkin’s budget makes a move – or at least a feint – in that direction.
The feint comes from the proposed income tax reduction, which wouldn’t take place until 2024 – if ever. Youngkin made the tax cut conditional on revenue holding steady. Given that a recession is likely next year (unless Washington moves on supply-side reforms itself), I’m not expecting this to happen.
Youngkin did not leave such a condition on his proposed corporate tax reduction, which earned criticism from Bill Bolling.
I’ve always been very “pro-business,” but I honestly question the need to reduce Virginia’s corporate income tax rate from 6% to 5%. Our current 6% rate is already among the lowest in the nation, although it is higher than North Carolina’s corporate income tax rate of 2.5%, which I suspect is driving the proposal. However, if a business is inclined to invest in North Carolina because of their 2.5% corporate tax rate, I doubt that they would choose Virginia even though our rate was 5%, as opposed to 6%. I think this money could be better invested in other tax cut programs for individual taxpayers.
I have a lot of respect for Bolling but I disagree with him here. Keynesian “tax cut programs for individual taxpayers” will only make inflation worse. Moreover, a reduction of even one percentage point can change the marginal decision of firm might make between Virginia and North Carolina. Finally, the argument Bolling makes can just as easily become an argument for cutting corporate taxation below 5% to get it even closer to 2.5%. Matching NC’s rate would cost about $1.2B a year. That isn’t much more than what Youngkin is proposing in total for his tax reductions.
In short, Governor Youngkin could do more to reform the tax code in a supply-side manner. That said, his budget amendment does include some movement in that direction.