By Neil V. Birkhoff
A Senior Attorney with the Firm, Past Chair of the Virginia State Bar's Section of Taxation, and Vice Chair of the Virginia Bar Association's Section of Taxation
As usual, the General Assembly tinkered with the Virginia Tax Code here and there, with most changes affecting, directly or indirectly, a limited number of taxpayers. A few tax law changes of general interest and general impact, however, did come out of the General Assembly this year.
The Food Tax Reduction Program implemented under House Bill 1601 will reduce the state sales and use tax rate on food purchased for human consumption by one-half percent each year for four years beginning January 1, 2000, for a total reduction of two percent. The Food Tax Reduction Program anticipates that by April 1, 2003, the state sales and use tax rate on food purchased for human consumption will be one and one-half percent. This legislation, however, does not effect the local option one percent rate on food purchases. As with the car tax relief legislation passed last year, this food tax relief may be suspended for any year when the actual general fund revenues do not meet certain targets set in the legislation. In other words, if the Commonwealth does not collect sufficient tax revenues from other sources in any year, this food tax relief will be suspended.
In a move to keep up with changes at the federal level, the General Assembly, in House Bill 1600, has authorized the Board of the Higher Education Tuition Trust Fund to create a savings trust account program as authorized by the Internal Revenue Code. These savings trust accounts will be offered in addition to the existing pre-paid tuition contract program now offered by the Commonwealth. Individual income tax deductions will be allowed for amounts contributed to such savings trust accounts. The amount of the deduction, however, cannot exceed $2,000.00 per savings trust account in any tax year. Contributions in excess of the $2,000.00 limit, however, may be carried forward into future tax years until the entire contribution has been fully deducted. This tax deduction is effective for any tax year beginning on or after January 1, 1999.
While the primary goal of any tax system is to raise revenues for the operation of government, most legislatures also use the tax laws as a means of implementing social policies by providing economic incentives or disincentives to taxpayers to engage or not engage in actions which the legislature deems appropriate and good for the people. In that regard, the General Assembly passed House Bill 1866, amending the Neighborhood Assistance Act, to allow donations of services by licensed contractors for the development, construction, renovation or repair of (1) homes of impoverished people or (2) buildings used by neighborhood organizations to qualify for certain tax credits. For purposes of valuing the donations of services, contracting services will be valued at the lesser of the reasonable cost for similar services from other providers or $50.00 per hour. Currently, professional services are the only types of services eligible for tax credits under the Neighborhood Assistance Act.
Finally, the General Assembly in this most recent legislative session passed a resolution establishing a commission to study Virginia's state and local tax structure for the 21st century. The commission is to be established to study the proper division of revenues and responsibilities for services between the state and local governments and how the state and local tax structure should be changed to adapt "to the tremendous economic, social, demographic and technological trends which are overwhelming the current taxation structure." We can all hope that this commission will have fair, reasonable and innovative ideas for improving the current tax system in Virginia, and that the General Assembly will listen when this new commission tells the General Assembly how they have missed the mark in designing and maintaining the current tax system. Stay tuned for further developments.
By Neil V. Birkhoff