Posts about Taxes

Virginia's smart growth and conservation community expressed concerns with the bill on Saturday.

While Northern Virginia and Hampton Roads will able to raise (tax themselves), keep, and allocate new transportation revenue, VDOT escapes responsibility for meeting the needs of the two most economically important parts of the Commonwealth. The bill frees VDOT to take more of the statewide sales tax revenues for highway construction outside the two regions.

Now that the bill has passed, and presuming the Governor signs it, it will be incumbent upon legislators, local elected officials and the public to watch-dog how the money is spent, starting with the next update of the state's 6-year transportation plan, due in June. Setting the right priorities with the local money from and for Northern Virginia and Hampton Roads will be equally important.

Who voted for and against?

The 25 to 15 vote in the Senate included 17 Democrats and 8 Republicans voting yes, and 3 Democrats and 12 Republicans voting no. Northern Virginia yes votes were Senators George Barker, Charles Colgan Sr., Barbara Favola, Mark Herring, Janett Howell, Dave Marsden, Toddy Puller and Richard Saslaw, all Democrats. No votes were Democratic Senators Adam Ebbin and Chap Peterson, and Republican Senators Richard Black and Jill Holtzman Vogel.

The 60 to 40 vote in the House included 25 Democrats and 35 Republicans voting yes, and 4 Democrats and 36 Republicans voting no. Northern Virginia yes votes were Democratic Delegates Robert Brink, David Bulova, Eileen Filler-Corn, Charniele Herring, Patrick Hope, Mark Keam, Kaye Kory, Robert Krupicka, Alfonso Lopez, Kenneth Plum, James Scott, Mark Sickles, Luke Torian and Vivian Watts; and Republican Delegates David Albo, Mark Dudenhefer, Thomas Greason, James LeMunyon, Joseph May, Randall Minchew, and Thomas Rust.

Northern Virginia no votes came from Democratic Delegate Scott Surovell and Republicans Richard Anderson, Barbara Comstock, Timothy Hugo, Scott Lingamfelter, Robert Marshall, Jackson Miller, and David Ramadan.

The complete bill history can be found here.

Follow the money

The best source for tracking the new taxes and the funding allocations is the HB2313 Transportation Conference Report, but even this requires interpretation.

While the bill no longer eliminates all taxes on gasoline, it still reduces what road users will pay in daily operating costs. It eliminates the 17.5¢ retail gas tax and shifts to a wholesale sales tax on gas. This reduces user fees in 2014 by nearly one-third, and by 20% in 2018 assuming the receipts increase because of a rise in gas prices.

The bill makes up for reducing gas taxes primarily by increasing the sales tax on new car purchases, charging a $100 fee on alternative fuel vehicles like hybrids, and tapping statewide sales taxes on goods and services (but not food).

Day-to-day vehicle user costs will decline, and all taxpayers will pay more even if they drive little or not at all. Meanwhile, transit fares are likely to continue to climb in the absence of adequate state support for transit maintenance and operating costs.

VDOT is free to continue wasting money on unnecessary highway projects

The statewide portion of the bill is truly a highway bill: it directs $538 million (annually by 2018) to the highway maintenance accounts, but this will effectively free up an equal amount in highway construction funds, allowing the current administration to continue a pattern of funding rural highways with little traffic demand.

Just last week, VDOT announced it would allocate another $869 million in federal Garvee bonds to Route 460 and the Coalfields Expressway, two of the most wasteful, unnecessary projects in the history of Virginia. Four questionable projects—Route 460 ($1.4 billion), Coalfields Expressway ($2.8 billion), Charlottesville Bypass ($240 million), and the Outer Beltway in Northern Virginia (estimated $1 billion)—total a potential $5.5 billion in misallocated spending.

Many expect that Secretary Connnaughton intends to divert a substantial portion of the new statewide money to the controversial and sprawl-inducing Outer Beltway, rather than to the critical commuter corridor needs of the metro regions.

Just 21% of the statewide funds go to transit and passenger rail in 2018, although passenger rail advocates are rightly pleased that $44 million in 2014 and $56 million per year by 2018 will go to current Amtrak services for which Virginia is now responsible, and for capital investment in the passenger rail network. An existing funding source supports upgrades for freight rail.

The $84 million for public transit isn't a lot of money when it must be shared among transit agencies across the state. The bill allocates a separate $300 million to Dulles Rail, but like some of the road money it's coming from the existing state sales tax at the expense of General Fund needs like education and health care.

The bill fails to address the empty secondary and urban road capital accounts, unless the administration commits to use some of the freed-up road money in the Transportation Trust Fund for this purpose. Instead, the bill implicitly off-loads the cost of local roads to Northern Virginia and Hampton Roads through the local sales tax increases in those two regions. Shifting this responsibility allows VDOT to spend more money on rural highways.

Part of the future depends on a bill in Congress

Part of the bill also depends on the federal Marketplace Equity Act, a bill in Congress which would let states charge sales tax on Internet purchases. If that does not pass by January 2015, the sales tax on gas will rise another 1.7 percentage points to make up for the expected revenue from the MEA. This would bring gas taxes back to a level comparable to where they are today, if not a little higher at current per-gallon prices.

The Washington Post also reports that Senator Janet Howell (D-Fairfax) secured another provision that would kick in if the MEA does not pass. In that case, the amount of general fund revenue directed to transportation would drop from $200 million a year to $60 million a year.

More taxes rise in NoVa and Hampton Roads

The bill would raise between $300 and $350 million per year in and for Northern Virginia by 2018. It does so by increasing the sales tax in northern Virginia by 0.7 percentage points on top of the statewide 0.3 point increase, for a new total of 6%.

There's also a 0.25% recordation tax on recorded deeds and a 3% transient occupancy (hotel) tax. The bill retains the existing local 2.1% tax on fuel. 70% of the funds will go to "regional" projects and 30% to local projects in the locality where the money is raised. The funds can go to roads or transit, and the Northern Virginia Transportation Authority will decide how to allocate the money.

For Hampton Roads, the bill would raise $219 million in 2018, using a local sales tax increase of 0.7 percentage points and a 2.1% local tax on fuel. However, the legislation directs these funds only for roads, despite the great need for transit and widespread support for light rail in the region.

Following the success of "The Tide" light rail in Norfolk, 62% of voters in Virginia Beach's referendum last November supported extending light rail to the beach. The Navy has also expressed its strong support for extending light rail to Norfolk Naval Station.

In a final example of VDOT off-loading costs onto the two metro regions, the bill failed to allocate state funds to Hampton Roads' Midtown/Downtown Tunnel project which local officials want. Instead, the authors of the bill say that localities should use the new regional funding sources if they want to buy down the costs of the tolls, even as VDOT diverts $1.12 billion of state and federal funds to the unnecessary Route 460 over the objections of many in the region.

Since Governor McDonnell unveiled his plan the day before session began, there have been plenty of twists and turns to the effort to pass the most significant transportation funding boost in the Commonwealth since 1986. Reflecting the deep disagreement over various proposals, the House and Senate each narrowly adopted a major package, with sharp differences between the two versions.

A conference committee met this week and hammered out the proposed deal that now must pass each chamber. The House and Senate could vote on it as early as today.

Where will the money come from?

The primary disagreement between the House and Senate has been over whether to raise revenues through the gas tax and other user fees or to take money from the general fund.

Gas tax: The governor's proposal and the House version of the transportation bill would have eliminated the current 17.5¢ per gallon state gasoline tax, which the Senate voted to raise it and index it for inflation. The conference committee version would eliminate the gas tax, and fill the resulting budget hole (over $4.5 billion in the next five years) by imposing a wholesale tax on gasoline and diesel and increasing the sales tax on vehicle purchases.

Eliminating the gas tax weakens the logical tie between transportation use and funding, and Virginians who use roads less will subsidize those who use the roads more. The compromise does retain elements of a user-pays approach through the wholesale fuels tax and sales tax on vehicle purchases, although it sends a weaker price signal.

A better alternative would have been to increase and/or index the gas tax, or apply the sales tax to gasoline purchases, as the Senate version did. These measures would properly tie fees and taxes to use of public infrastructure and allow revenues to grow with the price of gas. The governor is correct that the gas tax is a declining revenue source, but the main reason it is declining is that it doesn't rise with inflation and hasn't been increased since 1986.

General fund: If much of the proposed funding deal only brings us back to where we are today, where do the additional funds come from? The deal would divert a portion of the existing sales tax, increase the sales tax, and devote possible future online sales tax revenue to transportation.

Sales tax revenues typically go to the general fund. Although transportation is a core function of government, there are few or no other state dedicated revenue sources for education, health care, public safety, and conservation. The deal would divert an estimated $3 billion over the next 5 years that could have gone to other core services, at a time when Virginia ranks 35th in state investment in higher education, 38th in public K-12, and 46th in Medicaid spending.

Clean vehicle fees: The compromise also would impose a $100 fee on alternative fuel vehicles, as the governor had proposed. This "hybrid car tax" is particularly hard to justify when gas taxes are being cut, and it would create a disincentive for purchasing vehicles that help achieve critical goals such as reducing pollution and conserving energy.

Regional funding: The proposed deal also includes regional funding packages of approximately $300-350 million annually for Northern Virginia and $175-200 million annually for Hampton Roads. Funding is likely to come through local sales tax revenues but many details remain unclear.

Where will the money go?

Amid all the debate, a central issue has largely been ignored: how will the state spend these additional funds?

Highway construction: The General Assembly authorized almost $4 billion in additional transportation funds just 2 years ago. The administration has earmarked almost all of these funds for roads, and has spent much of the money on destructive projects that do not address pressing transportation needs.

In the proposed deal, although there is some good news for rail and transit, most of the funding again will go to road-building—at least $2.6 billion over the next 5 years alone. The ultimate impact of this deal depends on how wisely this money is spent.

Passenger rail funding: Passenger rail is a transportation success story, with record ridership last year. Without dedicated, sustainable funding, however, Virginia could lose its intercity services due to federal funding changes. A bright spot of the proposed deal is that it would provide roughly $50 million annually to preserve and expand passenger rail.

Transit funding and Dulles Rail: The deal would provide additional funding to transit as well. In addition, $300 million would go to Phase 2 of the Dulles Metrorail (Silver Line) project, which would help address the relatively small contribution Virginia has made to a project that could significantly enhance multimodal transportation in one of the nation's leading economic and employment corridors.

However, going forward, it appears transit will only receive about 1/6 of the funding devoted to roads, despite transit's benefits in reducing congestion, energy consumption, and pollution while providing better services for elderly, disabled, and low-income citizens.

The compromise before the General Assembly offers some meaningful benefits, but it has numerous shortcomings and does nothing to advance overdue policy reforms to help ensure that our transportation dollars are used wisely.

Virginia needs a more balanced, efficient, and cleaner transportation system. Time will tell how far this deal gets us.

There's a similar benefit for parking costs, but workers can deduct more than for transit—up to $240 per month since the start of 2012. Some members of Congress had been trying to restore parity between transit and parking benefits, and got it into the Senate's transportation bill in March, but the provision didn't survive into the final bill.

The bill Congress just approved for the "fiscal cliff" contains this provision, meaning benefits go up to $240 per month, several people have confirmed. Unfortunately, it's still only temporary, as this new level expires again at the end of 2013 unless Congress extends it once more.

Technically, the new level is also retroactive until the start of 2012, but unlike with tax credits you can claim on this April's taxes for activities in 2012, there's no way for riders to realistically take advantage of it for months gone by.

Tom Bulger, a WMATA board member and lobbyist who's been pushing for the extension, noted that Congressional Republicans had been strongly opposed to any changes in law that increase any taxes, including letting previous tax cuts expire, but hadn't extended that same passion to the transit benefit.

Even if House Republicans just went along somewhat reluctantly with a Senate deal yesterday, in approving this extension, they were now able to give many American workers a tax cut along with helping our cities function more effectively and ending one small example of the many ways government "picks winners and losers" among transportation modes.

Uptown Almanac poked fun at the video, translating its text:

0:02 - "San Francisco is dope and all..."
0:05 - "...but people get parking tickets and bikers look like assholes in my rear-view mirror."
0:10 - Disenchanted high school vice principal reveals himself: "It'd be awesome if we used technology to cure aggro cyclists. Let's give it a shot."

When all you have is a hammer, everything looks like a nail, said some guys named Abraham, and Silicon Valley attracts hordes of people who have a lot of computer, smartphone, and social network hammers. When I go back to visit friends there, there's always a bit of culture shock hearing some people talk so effusively about how their piece of technology is going to singlehandedly solve problems of illiteracy, poverty, war or whatever.

Of course, Washington can sometimes fall into the opposite trap, thinking that government can solve every problem. Neither is true. We need innovative startups, large companies, and boring government agencies all working together. It doesn't help when government officials are totally ignorant of startups, but also a little ridiculous for startup people to ignore the value of institutions besides those with 2-100 software engineers in a suburban garage or San Francisco loft.

This particular video happens to be an ad for a ballot initiative, Proposition E, that would change the tax code in a way that would work better for startups. Uptown Almanac notes:

Now, this isn't all to say that Prop E is bad (it isn't, and it's supported by pretty much every politician, NGO, and newspaper in town), nor that free public wifi would be bad for SF (it would plug up all those cellphone dead zones, reduce utility bills for businesses and residents, provide ever-necessary connectivity to low-income students and families).

However, this ad does more than exaggerate Prop E's benefits or make small fibs—it is straight up deceitful in claiming voting in favor of Prop E will do anything to improve ordinary San Franciscan's problems. Prop E won't give you wifi or fix Muni; all it will do is improve the San Francisco business tax code, largely for the benefit of tech start-ups.

Twitter co-founder Biz Stone talks in the video about how great it would be to place a real-time information screen on every bus stop. That would, indeed, be great. The obstacle to doing that is very little about tech startups and very much about the fact that someone, probably the government, has to pay to buy, install, and maintain that equipment. It would be great if San Francisco, DC, or other cities did just that, but they're not going to do it with tax policy.

(Disclosure: I worked with Biz for a little while, after Google bought his innovative startup Blogger and gradually smothered it under a mountain of amazingly scalable yet complex infrastructure and brilliant executives who all wanted to make every decision, and before he left to start some more innovative startups.)

At a recent conference, Google Ventures' Joe Kraus said, "In 5 to 10 years, your smartphone will replace your car." Smartphones can perform the function of watches, flashlights, even bubble levels, but unless they get a lot bigger and grow wheels, they won't replace the car, bus, train, or bike.

Kraus obviously knows this, and really meant, "your smartphone will be your first go-to resource for a trip instead of just hopping in your car." And it will. It'll let you plan a trip by driving, bicycling, or transit. It can let you compare the travel times, costs, and greenhouse gas impacts of each mode. It can get you a taxi or a shared ride (if regulators don't shut many of those down). It can show you traffic and transit delays.

Kraus wouldn't have gotten the same level of press if he had just said, "Your smartphone is going to be really useful for transportation." But while his statement might have been a lot of puffery, there's a fine line between saying that and a lot of people actually believing that the only thing you have to do to solve social problems is devise the perfect app.

Sometimes, an app or just cheaper technology can make a lot of people's lives better, but sometimes you also need other tools as well.

Venture capitalists don't choose investments based on capital gains taxes

I own a software company in Tysons Corner and have worked with several venture capitalists over the past decade. It is inconceivable that these investors would avoid investing in a company that otherwise would produce a tenfold return simply because the capital gains would be taxed at 8.95%.

Most venture funds look for companies that could potentially grow big and make back 10 to 30 times the initial investment. Instead of trying to make a few percentage points on each investment, venture captalists figure they'll lose money on most of the startups, and then make their profits with the occasional home run.

Let's say an early-stage fund has $10 million, and invests an average of $200,000 in 50 companies. Its goal is to make a multiple of 3, which means it wants its investment to be worth $30 million after taxes at the end of 10 years. But every company won't be worth 3 times as much. Instead, it might expect only to make money on 10 of those 50 companies.

To make $30 million, it will need each of those 10 successes to be worth 15 times as much as when they invested. If the fund pays 3% capital gains tax, they need a multiple of 15.5. If the fund pays 8.95% capital gains tax, they need a multiple of 16.5.

Does anyone seriously think that that difference will bring in additional investment for DC tech companies?

The Gray administration also argues that reducing the capital gains tax rate for tech investors will keep them in DC. In Virginia, capital gains tax rates for tech investments is 0%.

But investors aren't going to fund a DC company that they believe less likely to succeed just because, if it does, it would only have to be worth 15½ times as much instead of 16½. They are looking for companies most likely to make it to the stage of getting bought or going public at all.

Also, venture capital at any stage is regional, not confined to a county. In fact, most investors in DC tech companies live outside of DC.

What is a tech company?

If this tax cut passes, it will create a loophole that is big enough to drive a truck through. Why? The definition of a technology company is such that, according to an analysis of the DC CFO, many companies would reclassify themselves as tech companies in DC to enjoy this loophole.

The CFO testified that the "negative impact cannot be reliably estimated at this time, but it could be substantial."

If the goal of this policy is to increase revenue by keeping investors in DC, then why limit it to tech companies? This tax loophole won't contribute another dime in investment to DC tech companies, and will only make it harder to reduce tax rates for everyone.

Mayor Gray created a Tax Revision Commission, led by former Mayor Anthony Williams, to recommend broad-based tax reform. Let's wait for the commission to finish its work instead of undercutting its with a poorly-conceived tax loophole.

If you agree, use the form below to tell the council to hold off on this tax loophole.