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Terry McAuliffe’s double vision on Cuccinelli’s tax plan

Chris Wattie/Reuters
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“Cuccinelli’s tax scheme, proposed in May of 2013, could strip at least $1.4 billion annually from the General Fund, which is a crucial source of operating funds for local school divisions.”

campaign literature from the Terry McAuliffe campaign

“Under Ken Cuccinelli’s tax plan, you could pay more in property taxes.”

–McAuliffe campaign tax calculator

Here we go again. One candidate proposes a tax plan with precious few details on how the lost revenue would be recouped. The opponent then slams the other side with worst-case scenario scare statistics.

Sound familiar? We went through this last year during  the debate over Mitt Romney’s fuzzy tax plan — and the Obama campaign’s insistence on talking about Romney’s “$5 trillion tax-cut.”

But McAuliffe in recent days has taken it to a new level. Let’s take a look.

The Facts

Cuccinelli’s tax plan would cut the individual income tax rate from 5.75 percent to 5 percent and reduce the business income tax from 6 to 4 percent, which he estimates would reduce tax revenues by at least $1.4 billion. Part of the lost revenue would be recouped by capping increases in state spending so it grows with inflation and population growth; the rest would come from unspecified loophole closings and deduction eliminations via a special commission.

The commission would rank current credits and loopholes in the Virginia tax code from most to least effective, and then the General Assembly would be asked to eliminate the least effective ones.

Let’s stipulate that generally such grand plans are rarely implemented – or drastically revised — once a politician is in office. They mostly serve as rhetorical devices, designed to show the direction a politician hopes to tread (Tax cuts! Loophole closings! Spending caps!).

Obviously, Cuccinelli does not want to offend potential business interests which might lose a cherished deduction, which is why (politically) he does not want to identify specific items. He just identifies what he wants to target, such as a disliked Business Professional Occupational License tax, which has been around for 200 years and brings in lots of revenue for localities. Businesses dislike it because it is levied on revenue, not profits.

Still, while Romney had trouble showing how his numbers would add up, Cuccinelli appears to have some running room. A state review of tax preferences in 2011 found that tax preferences reduced Virginia taxpayers’ liability by $12.5 billion in 2008. That amounts to nearly 90 percent of all tax revenue collected. So it might not be a stretch to find some $1 billion to fill the hole created by Cuccinelli’s tax cut.

The Thomas Jefferson Institute, which is sympathetic to Cuccinelli, has also published a report that purports to show how sales tax exemptions could be adjusted to make up the $900 million in lost income from the business taxes that the candidate hopes to eliminate. (McAuliffe also says he wants to eliminate some of these taxes.)  We take no position on whether the calculations are correct, but certainly the state report suggests there is revenue to be found, even if it might mean taxing (ahem) newspapers. (The biggest pot of money, more than $4 billion, would be found by eliminating exemptions for the service industry.)

Still, the Virginia General Assembly has a poor record of eliminating any tax preference once it’s been granted, so Cuccinelli’s confidence that he can fill this gap may be misplaced.

But McAuliffe, in his campaign’s statements, simply assumes that Cuccinelli does not fill the gap at all — that the entire tax is cut is implemented without eliminating any tax preferences. He also assumes that Cuccinelli would not be able to make up revenue by restraining spending, as he pledges. He just assumes Cuccinelli passes a $1.4 billion tax cut — and localities are left holding the bag.

In the case of the property-tax calculator, McAulliffe assumes localities that have lost state funds will make up the gap only by raising property taxes. (As we noted, there are other ways to make up this lost revenue.)

In the case of the education cuts, McAuliffe assumes localities have not raised property taxes at all and instead make up the gap in revenue by cutting spending.

In other words, pick your scary tale. But both can’t happen at the same time.

“We specifically don’t say both will happen,” McAuliffe spokesman Josh Schwerin said.  “It’s all framed as ‘could.’  It could have these cuts to education or property taxes could increase to stop that.”

Cuccinelli, however, said during a debate in July that he would give up the tax cut if he did not find a way to pay for it: “You know if I don’t succeed in reining in government growth and if I don’t succeed in getting the exemptions and loopholes identified to pay for the tax cuts, we don’t get the tax cuts. This isn’t Washington, Terry. You know, we have to pay for the things that we want to put in the budget.”

The Pinocchio Test

Cuccinelli’s plan may be vague and lack detail, but at least his claim that he would make up lost revenues and not leave localities with the bill is within the realm of possibility. McAuliffe cannot blithely assume that his rival will simply slash taxes by $1.4 billion and leave it at that, even if his campaign relies on that lovely word “could.”

Moreover, the McAuliffe campaign cannot on one day warn of the higher property taxes and then on another day claim that schools will lay off teachers and cut school aid. Both of his estimates are fictional in the first place, based on a worst-case scenario that ignores all but one detail of his rival’s plan. But he comes close to double-counting the same imaginary lost revenue.

Still, given that Cuccinelli has not identified specific cuts, he has left himself open to some speculation about the impact of his plan. Thus we can’t quite label McAuliffe’s fuzzy math as worthy of Four Pinocchios.

Three Pinocchios

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