By Amanda Iacone
Virginia Statehouse News

RICHMOND —Among the hustle and bustle of a busy 45-day session, senators approved a tough new policy to curb the number of future tax credits, which reduce revenue coming into state coffers but are often used to spur business growth and development.

This session, lawmakers sent 17 tax credit bills to Gov. Bob McDonnell for his signature — costing at least $30 million in lost revenue annually, said Michael Cassidy, president and chief executive officer of The Commonwealth Institute for Fiscal Analysis.

That figure is far higher than the past few sessions, but future approvals are likely to decline  dramatically because of reforms the Senate plans to enact starting next session.

“It could safely be described as the binge before the diet,” Cassidy said.

The Commonwealth Institute for Fiscal Analysis is a Richmond-based non-partisan think-thank that focuses on statewide fiscal and economic policy, according to the group’s Web site.

Of the tax credits approved this session, the governor proposed a handful to spur business growth and development. Those would reduce state revenue by an estimated $10.3 million.

Lawmaker use tax credits to entice businesses to locate in certain areas or encourage farmers to use certain techniques to improve their yields. But they reduce the tax liability for individuals and businesses that qualify for the credits.

Tax credits approved this year are designed to reduce the costs of planting or expanding vineyards and encouraging telecommuting for employees.

The Senate killed another 31 tax credit-related bills during this year’s session.

The goal behind many of the credits is to spur economic growth. If businesses expand or add jobs, they pay more in corporate payroll and sales tax. Their employees also pay income taxes and sales taxes, all sending more cash into state coffers, said Delegate Steven Landes, R-Weyers Cave.

Spurring such growth is a good thing, but lawmakers don’t know how effective such incentives are and haven’t reviewed any data or results, said Landes. He serves on the House Appropriations Committee, which helps craft the state budget and decides spending priorities for the Commonwealth.

“It’s very important to know how many are in place and how much tax revenue is not going into the general fund,” he said. “We don’t know how effective they are unless we track them.”

He said the House and Senate need to jointly review the credits.

Lawmakers approved more credits this year compared to the past few sessions, said Sen. Mary Margaret Whipple, D-Arlington.

Legislators were hesitant to offer such tax breaks because the state was losing billions in revenue during the recession. Lawmakers felt more freedom this year as tax revenue began to rebound, Whipple said.

Also increasing senators’ comfort are two studies currently under way that will review the impact of tax preferences and economic development incentives and whether they accomplished the intended purposes, Whipple said.

Lawmakers have wanted to know for some time whether tax credits are meeting an unmet need or attracting businesses as intended. They are adopted one by one, year after year without any review or updates on their impact, Whipple said.

“You don’t know how much money they are costing. … Are they doing a good job?” Whipple said. “In today’s constrained fiscal environment, are they things we still feel are valuable?”

The Finance Committee this year included a five-year sunset clause on most tax-credit bills it approved. That will give lawmakers a chance to review and reconsider the credits rather than allow them to continue unchecked, Whipple said.

“The sunset I think is a big improvement,” she said.

The committee also adopted a policy to help members rate future tax-credit proposals. The policy
calls for all such bills will be considered together during the final week of committee action so the combined financial impact is known, Whipple said.

Any bills with an unknown financial impact will not be approved, giving legislative staff more time to evaluate how many businesses or agencies would take advantage of the credit. The Senate also will  only consider new credits during the budget year.

The policy reflects a bipartisan agreement among committee members that they need to know more about how tax credits are affecting state revenue, Cassidy said.

Republican support makes it more likely the Senate will continue following the policy after the fall elections, he said.

Election results could change the complexion of the committee as Democrats currently hold only a slight margin over Republicans in the Senate.

“The proof will be in the pudding as far as how consistently they stick to it,” Cassidy said.

He said legislators will have to think carefully how they apply the principles because some could negatively impact good programs, such as the state’s earned-income tax credit that helps low-income Virginians recoup the cost of sales and other non-income taxes.

“I definitely think it’s a step in the right direction saying we are going to take stronger and more systemwide approach to these tax credit bills,” Cassidy said.

In 2009, the Institute reported that tax credits and other tax preferences that were part of the commonwealth tax code cost the state $2.5 billion a year. The study also found that more than 60 tax grants, incentives, deductions, credits and other preferences are in the state’s tax code.

The Institute called on the state to regularly review such policies.