Ken Cuccinelli Emerges As One Of The Nation's Most Innovative Policy Makers

Ken Cuccinelli Emerges As One Of The Nation's Most Innovative Policy Makers
May 17, 2013

Peter Ferrara

Peter Ferrara is senior fellow for entitlement and budget policy at The Heartland Institute, a... (read full bio)

Ken Cuccinelli, the GOP candidate for Governor of Virginia in this year’s election, proposed last week the most advanced, sweeping, state tax reform plan in the nation.  Indeed, it is so advanced that it was beyond the capability of the Washington Post  to even describe it accurately for its readers.  As explained below, the plan is a model for other states all across America.

The Cuccinelli plan starts by stating its two goals explicitly, up front:

  • Reform the tax code to “transition from tax policies that stunt economic growth to those that promote economic growth.”
  • Reform “the size and growth of the scope of state government to [make it] more accountable, transparent, and efficient” (in other words so it grows smaller relative to the economy).  That applies to both taxes and spending, a crucial point that the Washington Post completely missed in its analysis of the plan, as discussed further below.

The plan further notes that the Tax Foundation’s State Business Climate Index ranks Virginia’s individual income tax rates 38th in the country in terms of competitiveness.  Cuccinelli’s “Economic Growth and Virginia Jobs Plan” adds,

“Next year, Virginians face a tax hike of approximately $60 million because inflation, even at a low rate, pushes taxpayers into high[er] brackets and makes deductions and exemptions worth less.  This is wrong as a matter of principle.  Taxes should change only with a vote of the legislature, not because of inflation.  In the 1980’s, under President Reagan’s leadership, Congress indexed most of the federal income tax code to prevent this type of tax raise.  Virginia is long overdue in reviewing the income tax brackets. The top [state income] tax bracket was intended years ago for wealthier Virginians, but inflation creep has led to current taxation of a single person who has a full time job making $10.30 per hour at the highest rate of 5.75 percent.”

Cuccinelli’s plan proposes to cut that state income tax rate by 13% during his term as Governor, from 5.75% to 5%.  He proposes as well to index personal exemptions and deductions for inflation.  He also proposes to cut the state corporate income tax rate by one third, from 6% to 4%.  Cuccinelli’s tax reform plan states, “At 4.0%, Virginia would have the lowest maximum corporate tax rate among all 43 states that have a corporate income tax.”  Of course, 7 states do not even have a corporate income tax.  More on that below.

Note that with the federal corporate income tax rate of 35% (highest in the world now except for the socialist, one party state of Cameroon), the total corporate income tax rate prevailing in Virginia is 41%.  That is higher than in Communist China, where the corporate income tax rate is 25%.  In the European Union, the average is even lower than that.  In Canada, the corporate income tax rate has been cut to 15%.

Note also that where capital is mobile, as in our free society, corporate income taxes are born mostly by domestic labor in the form of lower wages.  That is why even the Washington Establishment CBO assumes three fourths of the corporate income tax burden is borne by labor.  A European Union study concluded that 92% of corporate income taxes are borne by labor in reduced wages.  That is why over the past decade the EU has cut their corporate income tax burden by close to half.

The plan further includes establishing a Small Business Tax Relief Commission that will propose additional legislation to be introduced in 2014 to reduce or eliminate three more taxes, the Business, Professional and Occupational Licensure (BPOL) Tax, the Machine and Tool (M&T) Tax, and the Merchant Capital (MC) Tax.  These taxes together approach as big a burden on business and job creation in Virginia as the corporate income tax.  Moreover, unlike the corporate income tax, these taxes are assessed regardless of whether the business earns a profit, which means they can eat up any net income out of a business at all.  That can be particularly burdensome to small, start up businesses, which often must go several years before turning a net profit that could even be used to pay these taxes.  These taxes are consequently often a barrier to starting up a business at all, which means lost jobs.  The Commission is also tasked with proposing a means for maintaining local government revenues while reducing or phasing out these taxes, which primarily support local government spending and services.

Cuccinelli’s tax reform plan specifically states, “The Thomas Jefferson Institute has studied tax restructuring for Virginia…. It proposes to eliminate the BPOL, Machine and Tools Tax, and Merchant’s Capital Tax and considers replacing the lost revenue by eliminating sales tax exemptions and sharing the revenue with local governments.  This study is currently under discussion by stakeholders across the Commonwealth as well as key leaders in the General Assembly.” (emphasis added).  This more than hints where Cuccinelli wants to go with these taxes.

What is even more significant, as explained further below, is that Cuccinelli also assigned to the Commission developing legislation to further reduce personal income tax and corporate income tax rates.

Cuccinelli’s Economic Growth and Virginia Jobs tax reform plan includes two components to finance the rate reductions he has proposed while maintaining sufficient revenues to continue to finance, indeed continue to increase funding for, essential state services and programs.  One is to “[e]liminate outdated exemptions and loopholes that promote crony capitalism;” as well as eliminating credits and other preferences in the corporate income tax code in particular.

This reflects true strategic brilliance in Cuccinelli’s tax reform plan.  Because he is proposing to eliminate as economically objectionable the provisions of current law that involve what his opponent, Democratic Virginia gubernatorial candidate Terry McAuliffe, is proposing as the heart of his economic growth plan for the state.  McAuliffe’s economic program for the state is precisely “crony capitalism,” which is special preferences and taxpayer bailouts for specific, targeted, favored businesses (generally the friends of, and contributors to, Terry McAuliffe).  Why not, McAuliffe must reason: that is how he made his millions, through special, federal government, preferences and connections in Washington, DC (as a pal of the Clintons, and a participant in their shady operations).

The Washington Post thinks it has a good angle on Cuccinelli’s tax reform plan, because it overconfidently thinks it worked in the 2012 election.  ThePost editorialized,

“Like Mitt Romney, Virginia Attorney General Ken Cuccinelli wants to cut taxes – by a lot.  Like Mr. Romney. Mr. Cuccinelli, the Republican candidate for governor, promises this would not reduce government revenues by a dime, since he would also eliminate significant tax loopholes and deductions. And like Mr. Romney, Mr. Cuccinelli adamantly refuses to identify these loopholes and deductions.”

Where did the Post get this information on the Cuccinelli tax reform plan?  The same place Aesop got his fables.  Because the Post does not employ anyone who understands free market tax reform, it does not know that cutting tax rates is not the same thing as cutting tax revenues.  And where does Cuccinelli adamantly refuse to identify those loopholes and deductions? That is where the Post affirmatively lies to its readers.  Four Pinocchios!

The Post thinks this ploy of demanding the full details of legislation for any tax reform proposal made during a campaign worked during 2012.  But it had something in the Presidential election it won’t have in the Virginia’s Governor’s race this fall – a candidate in Mr. Romney so uninspiring to conservatives that millions did not even bother to vote, resulting in the “Progressive” victories in 2012 that have so badly misled so many about the American public.  In Virginia’s Governor’s race, Mr. Cuccinelli will be just the opposite.

The Post offered the same dopey ploy in response to Paul Ryan’s budget tax reform proposal, reflecting the complete ignorance of the Post editorialists over what a budget proposal involves.  It will get the full answer this year through the proper channel, Chairman Dave Camp’s Ways and Means Committee.  They will explain in legislative language what the Post failed to understand about Mr. Romney’s tax reform proposals.  Apologies will be adamantly and not politely demanded when the Committee produces the revenue neutral tax reform plan the Post propagandists joined the Obama propagandists in saying was impossible.

I don’t remember the Post in 2008 demanding that Mr. Obama detail exactly where he would get the money to pay for his “universal coverage” health insurance plan (which turned out to not involve universal coverage).  Maybe if Obama told us it would involve cutting trillions from Medicare, he would not have been elected.  But I don’t read the Post (because I don’t enjoy reading Democrat Party publications).  So I may have missed something.

Let me offer some free help to the poor editorialists of the Washington Post.  For business taxes, free market tax reform involves eliminating every deduction, credit, loophole, preference, and exemption that does not serve the function of defining net income, which is to be taxed, as opposed to gross income, which is not the subject of an income tax.  And there are more than enough deductions, credits, loopholes, preferences, and exemptions that can be eliminated in the individual income tax code too for revenue neutral tax reform.

Plus (something else the Post does not know, even though institutionally it was supposedly up and running during the Reagan years), cutting tax rates increases economic growth, through incentives for increased production resulting from the lower rates.  That increased growth means more revenue that offsets at least some of the revenue lost due to the rate cuts.  Sometimes the higher economic growth resulting from rate cuts means higher revenue overall (see, e.g. every capital gains rate cut over the last 45 years, or the doubling of federal revenues during the 1980s, when Reagan led the cutting of all federal income tax rates, including the top rate from 70% to 28%).

The second factor financing the rate cuts in Cuccinelli’s tax reform plan, which the Post completely overlooked (to the detriment of any readers still benighted enough to depend on the Post to report the real world), is that the Cuccinelli plan also includes a cap on state spending growth.  Under Cuccinelli’s plan, state spending would be limited to grow no faster than the rate of growth of population plus inflation.  Over the past decade that has been 3.3%.

So under the Cuccinelli plan, state spending would grow every year by 3.3% on average.  But the Washington Post editorialized that it wouldn’t be pro-growth because “it would starve the state of the resources it needs to fund public schools, state colleges and universities, public safety, mental health programs and state parks” and “what businesses, and which employees, would be content in a state that starves its schools, infrastructure and social services of resources?”  What can you say about such commentary, except that it is uninformed, ignorant, unreasoned, and for the reasons just explained, quite honestly just stupid?

What the Post is saying here is that state spending must grow faster than the rate of population growth plus inflation, or else in its Socialist Party opinion, the state would be abandoned as dysfunctional.  What it has never said is the real socialist goal driving its editorial commentary is 100% of GDP and income going to the government, which is where its editorial commentaries would take us.

The Post adds, “For the sake of fairness, the wealthiest Virginians should be asked to do more. By cutting personal income taxes, Mr. Cuccinelli would ask them to do less.”  But Cuccinelli’s tax plan would cut taxes for every working person in Virginia, by an equal percentage (just like the historic, landmark, triumphantly successful, Kemp-Roth plan, which the Post also bitterly opposed) for everyone making over $10 an hour, given that the top 5.75% state income tax rate starts applying there.  What you can say about such commentary is that publication of the Post every morning is an abuse of the First Amendment.

For each of the last two fiscal years, total general fund state revenues in Virginia have grown by 5.8%.  As Cuccinelli’s tax plan states, “In the three non-recessionary periods since 1984, average growth in the [General Fund] budget (excluding transfers) ranged from 7.4% to 9.2%.”

What makes Cuccinelli’s tax reform plan truly revolutionary is that it finances it’s wildly pro-growth rate cuts by modestly and reasonably restraining the growth of state spending (not spending cuts), and not by increasing other taxes.  And here is what makes Cuccinelli’s plan truly explosive – if that modest and reasonable state spending restraint holding spending only to the rate of population growth plus inflation (which only keeps spending per person in the state equal to what it is today in real terms), the entire state income tax, personal and corporate, including capital gains, can be phased out completely within 10 years.

That is my own rough estimate.  A thorough economic study is needed to document that, plus the powerful, enormous impacts that would have on economic growth, jobs, wage growth, and income growth in the state.

What we do already know is that 9 states survive perfectly well with no state income taxes.  These include large states such as Texas and Florida, medium size states such as Tennessee and Washington, and smaller states, in terms of population, such as New Hampshire, Nevada, South Dakota, Wyoming, and Alaska.

Income taxes are the most economically destructive of all taxes.  That is because income levies tax directly the reward for work, savings, investment, and entrepreneurship.  With the reward reduced, the incentive for pursuing these economically productive activities is reduced.  The result is less work, less saving, less investment, fewer new businesses, less business growth, less job creation, lower wages and income, and lower overall economic growth.  Higher marginal tax rates reduce these incentives more.  Lower marginal tax rates reduce these incentives less.  A marginal tax rate of zero, as with no income tax, maximizes these incentives, at least as far the burden of income taxes is concerned.

Experience and economic studies bear this out.  Probably the best work was produced by Art Laffer, Steve Moore, and Jonathon Williams, published in the 2010 volume of Rich States, Poor States by the American Legislative Exchange Council.  Economic growth in the 9 states without income taxes raced ahead from 1998 to 2008 almost 50% faster than in the 9 states with the highest top personal income tax rates.  Job growth rocketed ahead more than twice as fast in the 9 no income tax states as compared to the 9 top income tax rate states.  Yet, total state tax receipts in the 9 no income tax states still grew 30% faster in the no income tax states compared to the top tax rate states.

The authors then went on to look at the economic performance of the 11 states that have adopted a state income tax in the last 50 years.  In each case, they compared the performance of the state in the 5 years before the state adopted an income tax with performance 5 years after.  All 11 states grew more slowly than the rest of the country after adoption of the income tax.  Michigan adopted a state income tax in 1967.  By 2008, its Gross State Product as a percent of total U.S. GDP had fallen by 47%.  Ohio adopted its state income tax in 1971.  By 2008, its GSP had fallen by 38% as a percent of total U.S. GDP.  For Illinois, which adopted an income tax in 1969, the decline by 2008 was 31%.  For Pennsylvania, adopting its state income tax in 1971, the decline by 2008 was 31% as well.

Moreover, after Michigan adopted its income tax, it personal income per capita fell from 129.97% of the U.S. average to 88.8% by 2009, a decline of 41 percentage points.  Indiana personal income per capita declined from 113.84% of the U.S. average to 85.79% by 2008, a decline of 28 points.  Ohio declined from 114.57% of the national average to 89.33% by 2008, a decline of 25 points.  These states consequently all declined after adoption of a state income tax from personal income per capita well above the national average to well below by 2008.  But per capita income relative to the U.S. average declined substantially after adoption of state income taxes in all 11 states.  As the authors state, “Personal income per capita is the closest measure to be found that represents the state’s standard of living; gross state product is the truest measure of a state’s output.”  What the results show, as the author’s explain is that in each state that has adopted a state income tax in the last 50 years, “the state’s economy has become a smaller portion of the overall U.S. economy, and the state’s citizens have had their standard of living dramatically reduced.”

Yet, in 9 of the 11 states, after adoption of the state income tax, total state and local tax revenues in the state as a percent of total state and local revenues in the U.S. declined as well, in some cases sharply.  Michigan’s share of taxes, for example, declined by 34%.  In West Virginia, the decline was 33%, in Indiana, 28%, in Pennsylvania, 23%, in Illinois, 21%.  What this means is that in these states all they got for paying state income taxes was a lower standard of living.

Cuccinelli’s tax plan would restore a booming economy in Virginia, with ultimately higher tax revenues, higher state spending, and much higher economic growth, jobs, wages, and incomes.  Given his consistent conservatism across the board, from free market economics to social issues, Ken Cuccinelli is emerging as the Ronald Reagan of Virginia.  Here’s the bottom line.  For reasons of public morality and responsibility, the Washington Post should not publish again until it opens with a front page banner headline – “Cuccinelli’s Tax Reform Plan Would Increase State Spending Every Year by 3.3%.”

[First published by Forbes.com]

Peter Ferrara

Peter Ferrara is senior fellow for entitlement and budget policy at The Heartland Institute, a... (read full bio)