Property vs. Income Taxes in Virginia

Thanks to a political decision made by Governor Harry Byrd 70 years ago, income taxes in Virginia are collected exclusively by the state and real estate taxes are collected exclusively by local jurisdictions. (There are, of course, some minor exceptions to this rule.)
Income taxes are tied to wages - an annual salary, commissions on sales, tips for "waitpersons," or hours actually worked. In addition, Virginia taxes income from interest on the money in your bank account; dividends; and capital gains from sale of stock, bonds or real estate. In contrast, the state property taxes are based on personal property such as cars and boats, and real property such as land and houses.

Obviously, real property taxes are based on accumulated assets while income taxes are based on current earnings. Retired people and the elderly may have low income, but own significant amounts of property accumulated over a lifetime. At the other end of the spectrum, "twentysomethings" with a well-paying job may still be renting (or even living with parents), while they enjoy the good times or accumulate enough capital to purchase their first home.

So the property tax rate, and the income tax rate, impact generations differently. As Virginia's population of Baby Boomers gets older, the politics of taxing Social Security benefits and military retirement will continue to shift. Those between 18-30 years old and not registered to vote are, by default, allowing the older generations to shape the tax burden in their favor.

There's a simple spatial pattern to the impact of taxes, as well as a generational pattern. In 1997, the average wage for a job in Virginia was 40% higher in metropolitan areas ($30,892) than the average wage for a job in rural areas ($21,986).

If you're an elected official from a rural area, think there's still a temptation to keep the state income tax high and the local property tax low, then try to get the state to provide funding for local activities? Harry Byrd made that bargain when the state assumed responsibilities for maintaining roads for the counties, back in 1935. Because of that deal, the state can allocate funds collected in Northern Virginia for improvements to Route 58.

Both George Allen and Jim Gilmore tried, as governors, to reduce state funding for local historical and cultural programs. They suggested state government could be reduced and local cultural activities could be financed by local taxes. Roanoke politicians noted that state-sponsored museums are concentrated in Richmond, too far for school children from the Southwest to visit easily... and the General Assembly has rejected such budget cuts - so far.

When Harry Byrd became the state's premier politician in the 1920's, he restructured the tax system so county officials would collect 100% of the real estate taxes and the state would collect 100% of the income tax. The state income tax rate is the same for all residents of the state, while property taxes vary significantly by city/county. Byrd's restructuring ensured that county officials would have complete control over the property tax, the primary source of funding for school systems.

Rural farmers, the core of Byrd's support, were concerned that the urbanizing areas coming to power in the General Assembly would set a high tax on rural property to finance roads, schools, and social welfare projects in the cities. Farmers had substantial property, but relatively low cash income compared to residents in urban areas such as Alexandria, Norfolk, and Richmond. The emerging majority of urban voters might be able to force the rural taxpayers to finance major improvements in city schools, using the changing balance of power to redistribute the wealth from the rural minority to the urban majority.

Current political debates regarding how much the state should finance school construction and teacher salaries is another geographic urban-rural story, even though it is presented as a partisan issue in most news stories. See Population, Wealth, and Property Taxes: The Impact on School Funding for more details.

After Byrd restructured the tax system, the General Assembly still had the power to raise income taxes to pay for new services that would benefit primarily the urban areas. However, the urban residents would have to pay most of the extra income taxes. Farmers (with their low annual incomes) would pay a relatively small amount of income taxes, compared to the metropolitan areas. The net effect was that, in rural areas, the local officials kept taxes low on their property, while urban areas raised local taxes to improve their schools. The imbalance in school funding is still evident today.

This sort of regional conflict and political dealing in the General Assembly is not new. A century earlier, plantation owners in eastern Virginia had worried about western representatives raising taxes on slaves to pay for transportation improvements west of the Blue Ridge.

The "law of unintended consequences" applies to the Byrd decision to assign property taxes to local communities and income tax to the state. In the 1990's, the state government received a great surplus of tax revenue from the income tax, reflecting the growth in population and prosperity during the decade. At the same time, the counties struggled to pay for federal- and state-mandated improvements in schools. Property values did not rise as fast as personal income. While state revenues climbed to unprecedented levels, tax revenues to the counties rose only gradually, and even falling in some locations.
The General Assembly has the option of spending the extra income on schools, transportation, or other services. However, cutting taxes is also popular. The governor was successful in getting the General Assembly to pay for car tax refunds to cities and counties first, and the sales tax on food and medicines is being reduced now.
This ensured the rural farmers that the urbanizing areas coming to power in the General Assembly would not be able to set a high tax on rural property to finance roads, schools, and social welfare projects in the cities. Farmers had a low cash income, so they would pay a relatively small amount of taxes compared to the metropolitan areas. If the state legislature wanted to raise taxes to pay for services that would benefit the urban areas, then the urban residents would pay most of the extra taxes. The state income tax rate is the same for all residents of the state, while property assessments and tax rates vary substantially by city/county.

WARNING: If numbers cause your eyes to glaze over, beware the next section. But if you pay taxes in Virginia, or vote, or both, it helps to know the statistics...

If you're going to compare tax rates, be sure to compare apples and apples, not apples and oranges. The Federation of Tax Administrators has some excellent tables of tax rates. If you compare the 1996 State & Local Taxes by Source with the 1998 State Tax Collection by Source, it appears there was a dramatic shift away from the property tax:
Source 1996 1998
Property tax 31.0 0.2
General sales 16.6 21.1
Selective sales taxes 14.5 16.0
Individual income 27.5 51.3
Corporate income 2.3 4.2
Other 8.0 7.2
Total 99.9% 100%
But there are lies, damned lies, and statistics. The 1996 statistics include local taxes, while the 1998 statistics deal with just state taxes. After Governor Byrd, state government has minimized its reliance on the property tax and allowed local governments to tap that revenue stream almost exclusively.

An alternative source is the Bureau of Census - State Government Tax Collections for 1996 and 1998:
(total in thousands of dollars, per capita amounts in whole dollars)

Code Tax Source 1996 Total (000's) 1998 Total (000's) 1996 Per Capita 1998 Per Capita
T01 Property Taxes 18,808 21,268 2.82 3.13
T01 Sales and Gross Receipts Taxes, Total 3,588,976 3,911,261 537.67 575.92
T09 General Sales and Gross Receipts 1,995,787 2,225,021 298.99 327.63
T09 Selective Sales Taxes, Total 1,593,189 1,686,240 238.68 248.29
T10 Alcoholic Beverages 108,767 111,165 16.29 16.37
T11 Amusements 62 88 0.01 0.01
T12 Insurance Premuims 218,046 236,971 32.67 34.89
T13 Motor Fuels 706,823 760,721 105.89 112.01
T14 Parimutuels X X X X
T15 Public Utilities 114,872 100,036 17.21 14.73
T16 Tobacco Products 16,112 15,905 2.41 2.34
T19 Other Selective Sales 428,507 461,354 64.20 67.93
  License Taxes, Total 418,817 455,443 62.74 67.06
T20 Alcholic Beverage License 6,580 6,685 0.99 0.98
T21 Amusement License X X X X
T22 Corporation License 25,607 20,494 3.84 3.02
T23 Hunting & Fishing License 18,026 19,594 2.70 2.89
T24 Motor Vehicle License 257,941 284,253 38.64 41.86
T25 Motor Vehicle Operators License 24,074 25,605 3.61 3.77
T27 Public Utility License X X X X
T28 Occupation & Business Licenses, NEC 82,461 94,730 12.35 13.95
T29 Other Licenses 4,128 4,082 0.62 0.60
  Other Taxes, Total 4,873,812 6,154,994 730.16 906.30
T40 Individual Income 4,300,918 5,405,468 644.33 795.93
T41 Corporation Net Income 362,830 445,659 54.36 65.62
T50 Death & Gift 69,398 122,304 10.40 18.01
T51 Documentary & Stock Transfer 94,826 126,112 14.21 18.57
T53 Severance 1,653 1,924 0.25 0.28
T99 All Other 44,187 53,527 6.62 7.88
VIRGINIA, Total Taxes 8,900,413 10,542,966 1,333.40 1,552.41

Note that the value of utility properties is established by the state, not the counties or cities. This facilitates equitable taxation statewide of property owned by electrical utilities and railroads in particular. Otherwise, a county could assess the value of such property at a high value, and tax it heavily. After al, utilities don't vote... so they maintain skilled lobbying efforts in the General Assembly.

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