The 1999 Virginia General Assembly addressed a problem that has been discussed for many years but on which little action has been taken: Virginia's outdated tax and service delivery systems.

The Assembly created the 13 member (2 ex officio for a total of 15) Commission on Virginia's State and Local Tax Structure for the 21^st Century (the "Commission"). The Commission, chaired by Emory & Henry President, Tom Morris, had a charge to answer three questions:

1. Are the revenue-raising capabilities of Virginia's state and local governments sufficient to meet public service delivery demands in the new century?
2. Is the current state and local tax structure fair, equitable and appropriate for taxpayers and sufficiently productive to support service delivery needs?
3. Does Virginia's service delivery system appropriately align revenue sources with service delivery responsibilities at the proper level of government so that service delivery is efficient, effective and fiscally responsible?

The Commission held hearings across the Commonwealth, heard from a wide range of experts and front-line practitioners and examined what other states and previous working groups had proposed.

The Commission found many areas of concern including languishing growth in real estate tax revenue, the principle source of local revenue; prospects for diminished growth in several other local revenue sources; in some jurisdictions, disproportionate fiscal burdens due to the nature of their populations and tax exempt property; that the economic prosperity the Commonwealth has experienced in recent years has not been reflected in the fiscal condition of all localities; that lower earning tax payers and citizens bore an inequitable share of the tax burden; that the documented infrastructure needs of Virginia cannot be sufficiently addressed by projected revenues generated by the existing tax and revenue-raising structure; that the Commonwealth's current tax structure did not adequately reflect the future direction of the State's economy; and that the State was not shouldering its fair share of paying for needed services to its citizens, especially those services it mandated.

With those findings and others in hand, the Commission compiled a set of recommendations that addressed these problems by envisioning where the tax structure and service delivery system needed to be in the 21^st Century in order to meet the Commonwealth's infrastructure needs, especially in education and transportation. It also sought to preserve, as much as possible, Virginia's pro-business climate while addressing quality of life issues critical to the Commonwealth's attractiveness to business.

Among the unanimously adopted recommendations:

1. In recognition of the importance of education to the future economic and social health of the Commonwealth, the Commission recommended that the state significantly increase its support for both the operational and capital costs of local school divisions. Specifically, the state should revise the "Standards of Quality" to reflect more accurately the prevailing practices of local school divisions and then fully fund at least 55% of the revised SOQs. Further, the "composite index" should be modified to more accurately reflect localities comparative fiscal efforts. Finally, the state should continue its recent efforts to shoulder more capital costs for local schools including identifying a dedicated source of revenue for that purpose.
2. Numerous localities bear inordinate social service costs due to a concentration of residents requiring such services, most of which are mandated by the state and federal government. Accordingly, the Commission recommended that state government assume the full operational costs of all mandated services provided through the Comprehensive Services Act, the public health departments, the Community Services Board, the local and regional jails, and the social service/welfare departments.
3. Localities have few revenue raising options and are overly dependent on the real property tax. Accordingly, the Commission recommended that at least six (6) percent of the state's annual net income tax collection be dedicated for return to localities and distributed via a formula that incorporates a variety of factors such as place of filing of tax return, site of earning and a general distribution.
4. Since the sales and use tax is a vital component of our tax structure, it needs to be preserved by taking action in areas of specific concern. First, in an effort to equalize the tax differential currently confronted by resident and non-resident businesses, Virginia should participate in the Streamlined Sales Tax Project, a multi-state project with the mission of eliminating that inequity. Second, in order to broaden the revenue base of the sales tax and inject another element of equity, the Commission recommended consideration be given to extending the tax to personal services, amusements and repair services. Third, that a moratorium be established by the General Assembly on the granting of any new sales and use tax exemptions and that all existing exemptions be critically reviewed and considered for elimination.
5. Current transportation needs and resources are not projected to match up without bold changes. Among the changes needed is affording localities the ability to work in concert to address regional transportation concerns. Accordingly, the Commission recommended that authorization be provided for localities to form regional transportation entities with broad authority for planning, prioritizing, funding (exclusive of any independent taxing authority), and implementing transportation solutions for their member jurisdictions.
6. Virginia's antiquated individual income tax structure is in need of modification for more equity, efficiency and future tax adequacy. To accomplish that, the Commission recommended:

• that the rate structure be comprised of two brackets, 5% for the first $50,000 and 5.75% for amounts above $50,000;
• standard deductions of $7,000 for married couples filing jointly and $3,500 for single persons;
• personal exemptions of $2,500 with no added exemptions based on age or blindness; and
• to further alleviate the tax burden on those below the poverty levels, move toward an earned and refundable income tax credit.

7. In recognition of changing times, the Commission recommends that the distinction in taxing authority between counties and cities be eliminated.
8. In furtherance of the need to help relieve local fiscal stress, the Commission recommended both a critical review of existing exemptions granted to non-governmental real properties and a re-evaluation of the current law and practice relative to the application of service charges to all non-federal tax-exempt property.
9. In furtherance of the need for an ongoing adherence to fiscal responsibility, the Commission recommended that a permanent body be created with broad public and private representation to offer on a continuing basis critical and objective comment on the long-term trends affecting state and local fiscal resource and service responsibilities.
10. Localities need additional tools to help promote regional economic development projects. Accordingly, the Commission recommended that authority be created that allows localities to develop a cooperative procedure by which citizens of a region agree to fund infrastructure projects of regional significance which they have determined to be needed and they are prepared to pay for through a specified assessment for a limited period as approved by voter referendum.

The Commission's report sets forth a vision of the tax structure and service delivery system needed to allow the Commonwealth to enter the 21^st Century poised to adequately address its infrastructure needs and tax its residents in a manner that is fair, equitable and adequate to provide sufficient funds to meet citizen needs.

The Commission realized that adoption of these recommendations does not remove from local and state government the necessity to scrutinize their expenditures and to prioritize their public service needs. This can be done by adhering to the principle that government cannot do everything. It should perform well on essential services and serve as a catalyst for providing non-essential services.

The Commission also realizes that state fiscal concerns may well require an incremental implementation of the recommendations. In the Commission's judgement, however, the recommendations set forth in its report collectively constitute a vision of where the Commonwealth needs to be heading as we proceed into the 21^st Century.

Previous commissions and organizations have advocated changes in Virginia's antiquated tax structure. Unfortunately, no significant changes have been made. Instead, there have been piecemeal efforts made to change certain aspects of the tax structure, sometimes for purely political reasons. Without a comprehensive vision of the appropriate systems to enhance Virginia's prosperity and quality of life while delivering efficient, cost-effective services, such piecemeal actions will only result in continuation of an antiquated, out-of-touch tax and service delivery system that will eventually result in a huge "due bill" to be paid by future generations and administrations.

Hopefully, this Commission's report will not be relegated to a spot on the shelf but will instead be acted upon by the General Assembly and Governor in a timely fashion to create the framework for a fair, equitable tax system and an efficient, fiscally responsible service delivery system. Future generations cannot afford for us to do anything less.

¹ Jim Dyke, Former Chair of the Fairfax County Chamber and former Virginia Secretary of Education, was a member of the Tax Restructuring Commission. He is a partner in the law firm of McGuireWoods LLP.