Virginia: Gilmore Allies Jumping Ship
In his tenure as governor of Virginia in the late 1990s, Jim Gilmore was notable primarily for one thing: the cut in the state’s “car tax” he championed. It got him elected, and it was the issue he rode throughout his governorship. And lawmakers in other states took note: cutting vehicle property taxes has been a frequent bipartisan goal of state lawmakers for the last decade now.
But, as countless Virginia observers (and a bunch of angry lawmakers) have noted since then, supporters of the Gilmore car tax cut were sold a bill of goods. It turned out almost immediately that repealing the car tax was unaffordable, since the short-term surpluses that made the tax cut seem feasible were, well, short-term. And Gilmore’s tax cut has been a political football in the state’s budgeting process ever since.
Now, Gilmore has decided to make another run at statewide office, and is running against Mark Warner for the US Senate seat being vacated by John Warner. And he’s finding out what happens when a snake-oil salesman tries to fool the same people twice: it doesn’t work.
The Washington Post reports this week that Vincent Callahan, a Republican lawmaker who was instrumental in the initial passage of Gilmore’s car tax cut, is endorsing Gilmore’s Democratic opponent, Warner, in this fall’s race. The reason, according to Callahan: Gilmore’s misleading advocacy of the car tax cut last time around.
Callahan said Gilmore, Warner’s GOP opponent, misled legislators and the public about the state’s finances and the cost of his signature effort to eliminate the car tax when he was governor from 1998 to 2002. ‘The figures Gilmore used were so utterly erroneous and far-fetched that they were mind-boggling,’ said Callahan.
Of course, revenue forecasting is often more of an art than a science. But in retrospect, there’s little disagreement (from anyone except Gilmore himself, that is) that Gilmore lowballed the cost and the affordability of his car tax cut .
A Washington Post editorial noting Gilmore’s razor-thin primary win over a relative nobody for the GOP nomination offers a scathing review of Gilmore’s fiscal policy record:
At the heart of the Gilmore legacy was his insistence on ramming through a tax cut whose dimensions dwarfed his cavalier initial estimates, and his simultaneous approval of heavy increases in state spending, a strategy — if it can be called that — suggesting that Mr. Gilmore assumed that the boom times in Virginia would never end. He pursued his signature tax cut, a phased repeal of the levy on personal vehicles, even after it became crystal clear that the repeal would drain hundreds of millions of dollars from the budget and cripple state finances. He insisted on his course despite being warned — by fellow Republicans, among others — that it would eventually force deep reductions in spending on core state priorities including transportation and education. And he shrugged off specific, repeated and well grounded forecasts that Virginia was heading for an economic slowdown brought on by the bursting of the technology and stock market bubble — a slump Mr. Gilmore simply denied.
In Mr. Gilmore, Virginia had its very own Herbert Hoover. “State government is in sound financial shape,” he declared sunnily in August 2001, even as state lawmakers from both parties predicted a $500 million revenue shortfall in the commonwealth’s $25 billion budget — about 10 times Mr. Gilmore’s own projections and, as it turned out, itself an underestimation of the state’s actual woes. Mr. Gilmore’s allies
sometimes argue that no one could have foreseen the economic effects of the Sept. 11 attacks, which occurred four months before he left office. True enough, but also irrelevant: The problem had swollen to major proportions well before the attacks, and Mr. Gilmore ignored it.
He did so in part by budgetary gimmickry and sleight of hand of the sort seldom seen in Virginia, with its stodgy custom of fiscal prudence. When it became plain that the state’s revenue growth had hit a wall, a condition that Mr. Gilmore himself had said would preclude a further rollback of the car tax, he proposed a novel solution: conjuring revenue by borrowing against a one-time legal settlement with tobacco companies. That scheme, which encapsulated Mr. Gilmore’s poor judgment and fondness for budgetary trickery, elicited groans from Republican and Democratic lawmakers alike.
Today, Mr. Gilmore innocently states that on leaving office in 2002 he bequeathed a balanced budget and $1 billion in reserves. But the balanced budget was a fiction that papered over a yawning deficit with shenanigans such as requiring retailers to prepay their sales tax and employers to prepay their withholding tax. And the reserves, for which Mr. Gilmore bears no responsibility — they were statutorily required — did nothing to forestall the state’s fiscal crisis. It fell to Mr. Warner, who succeeded Mr. Gilmore as governor, to fix what quickly mushroomed to a nearly $4 billion problem.
Wow.
Wells Fargo Tax Giveaway (Finally) Attracting Some Notice
Better late than never?
The truth of this saying may be tested in coming weeks, as lawmakers and regulators grapple with the question of how to fix an under-the-radar corporate tax break for a few large banks (the federal tax cut for Wells Fargo alone has been estimated at over $20 billion, and the new tax break overall could cost US taxpayers $140 billion) that seems to have been approved without Congress agreeing to it.
A Citizens for Tax Justice report from last week outlines the story:
When one company buys another company that has tax losses, the law prevents the acquiring company from using the purchased company’s tax losses. There’s a very sensible reason for this rule: to ensure that companies don’t purchase other companies simply as a tax dodge.
But a little-noticed September IRS administrative ruling creates a specific, temporary exemption from this rule for banks acquiring other banks whose tax losses are attributable to bad loans.
It’s not that often that a new tax cut gets implemented without Congress ever lifting a finger, but that’s what happened when the Bush Administration’s Treasury officials decided to reinterpret an existing law in a way that would cut taxes dramatically for a few well-off banks. Senator Charles Grassley, who’s accustomed to being at the steering wheel (or at least in the car!) when the tax policy express hits the road, is very angry about it, although he’s stopped short of saying that the Administration’s move is illegal.
Yesterday’s Washington Post has a detailed story discussing how this came about, and today’s Los Angeles Times has this story noting that the state if California stands to lose a couple of billion dollars of its own corporate income tax revenue to boot.
This is obviously an important issue for Congress– the bailout was unpopular enough before it became widely known that it was being hijacked to benefit a few big corporations, so Congressional tax writers have a real incentive to clean this mess up in a way that makes it clear the bailout ultimately benefits America’s economy, not a few fat cats.
But, as Citizens for Tax Justice notes in its analysis of the problem, this is also something state lawmakers need to worry about:
Because states with corporate income taxes almost universally base their corporate taxes on federal rules, federal tax cuts for corporations generally result in state tax cuts as well. When affected states have rules making it difficult to enact tax increases (as istrue of California, whose budget deficit is already in the billions of dollars), state governments find themselves practically unable to avoid costly corporate tax cuts they never wanted… At least eighteen states that tax corporate profits will likely take a hitfrom the new IRS ruling—and any state that taxes the profits of financial companies is at riskof helping to fund the next bank that chooses to purchase another financial company.
With state budgets already going up in flames, this is a problem state lawmakers don’t need. Stay tuned…
End the Break On Capital Gains
In this Washington Post commentary, senior fellow Len Burman explains why the capital gains tax break does more harm than good and why Congress should close the loophole once and for all.
Michigan of the East
“Poor little Rhode Island, smallest of the 48” goes the old song, whose lyrics give away its age. The Ocean state is suffering from a 9.3 percent unemployment rate, almost as high as its 9.7 percent peak in 1982. That’s second only to Michigan and has much the same causes, according to a Washington Post article.
Manufacturing jobs have left for friendlier places and, unlike its neighbors, the state has failed to shift into more promising prospects. Decades ago, textiles decamped for the Sunbelt, the costume jewelry trade headed overseas, and the Navy sailed from Newport to Norfolk. Many residents found employment in job-rich Massachusetts but those opportunities are drying up as the nation’s economy heads south—in more ways than one. And the state has failed to develop abandoned resources—the Navy’s tremendous deep-water port facilities, for example, stand idle in Newport harbor.
Part of the problem is Rhode Island’s work force: the state ranks sixth from last in the percentage of adults with high school degrees. That shortcoming cannot be fixed overnight. Michigan, by contrast, stands 20th among the fifty states.
Job loss has led to a budget crisis—the state faces a deficit of $357 million, the country’s largest relative to spending. And two-thirds of that shortfall comes from falling tax revenues. When the jobs go, so do the taxes.
The stimulus program that the new administration is putting together may help Rhode Island. The state has the highest percentage of bridges in need of work in the nation; the stimulus plan’s infrastructure funding could address that concern while providing much needed employment. In the long run, however, Rhode Island needs to focus on developing both its workforce and its business infrastructure to attract new firms and permanent jobs.