As Virginia tax revenues continue to show steady recovery in the aftermath of the “Great Recession”, state leaders can perhaps hold hope that the Commonwealth is finally pulling out of a record fiscal slump. Still, the prospect of returning to post-recession economic levels any time soon seems all but non-existent. As Clarke County struggles to tighten its financial belt both citizens and elected officials are looking for new ways to fund essential county services.
This is the second in a series of articles examining potential challenges and solutions facing Clarke County’s financial future.
As the Commonwealth of Virginia’s general fund slowly begins to recover from the ravages of the Great Recession, thoughts that federal or state-supplemented local spending will return to pre-recessionary levels any time soon are unlikely.
Although Virginia revenues have grown over the past nine months and current fiscal year revenues are 5.5 percent greater than over the same period a year ago, the increased fiscal trend still leaves the state nearly 2.6 percent below its level of tax collection from a year ago. While Virginia’s fiscal situation is still difficult, it is better than the 3.5 percent decline that was being heralded a year ago.
On the Federal level, future fiscal support for localities seems even less likely as Washington lawmakers struggle to find a debt ceiling solution that would avoid an August 1st default of US government financial obligations.
As both Richmond and Washington struggle to adapt their spending habits to what appears to be a long-term readjustment in America’s fiscal health, localities like Clarke County could feel increasing pressure from citizens to continue financing county operations and services at pre-recession levels despite the loss of state and federal assistance.
Clarke County’s recent debate over increasing teacher compensation is, perhaps, a recent example of this phenomenon. As local teachers faced a fourth straight year of stagnant salaries, many Clarke County citizens voiced expectations that county officials spend tax reserves to help preserve teacher retention despite warnings by Clarke County Supervisors that next year’s state educational payments will not cover expected expenses. In the end, the Supervisors agreed to a teacher funding compromise but not without first exacting a pledge from the Clarke County School Board that it understood the fiscal implications of granting the one-time bonus.
But as future “must have” county projects arise, finding new revenue sources to fulfill citizen expectations may prove more difficult to do.
“Clarke was doing very well financially prior to the â€˜Great Recession’” said Clarke County Supervisor John Staelin (Millwood). “Tax revenues were increasing, County employees were getting pay raises and County services were well funded. The problems started when the â€˜Great Recession’ hit. The Commonwealth cut its funding of all local programs including schools and Clarke County’s revenues flattened.”
Staelin said that Clarke County’s experience was not unlike that of other localities across the state.
“Tax revenues of every jurisdiction across the Commonwealth fell” Staelin continued. “Even jurisdictions like Loudoun and Fairfax that have much larger commercial sectors were forced to hold down salaries, reduce staffing levels and eliminate programs. National statistics showed similar trends to what we saw locally and the press is still full of articles describing how local and state governments are shedding jobs. No locality has been immune. The biggest cause of Clarke’s funding problems has been the weak economy, not Clarke’s mix of commercial business. This is not to say that commercial development is not important. Some types of businesses are profitable to a county and it is always good to try to expand those.”
But striking the “right” balance between commercial growth, open space easements and residential amenities is no easy question to solve. Most Clarke County citizens and officials have strong views on whether County policies should be changed to promote or restrict commercial growth.
“The County’s overall plan is to maintain a rural posture” said Clarke County Commissioner of Revenue Warren Arthur.
“To be sure, there is strong and continued interest in the County’s efforts to diversify its tax base” said Clarke County Board of Supervisors chairman Michael Hobert (Berryville). “There is also a general recognition that there are or should be limits to taxing residential real estate, and that the challenge of paying for public services and education may best be addressed not only by adding to an appropriate balance of commercial and light industrial businesses for the County, but also by encouraging tax reform in the Commonwealth with a move away from local dependency on real estate, personal property, and an antiquated machinery and tools tax.”
In Virginia, local governments are restricted by the state in the ways that businesses can be taxed to generate revenue. The primary allowable taxation categories are real estate, retail sale of physical products, business equipment and machinery and tools, however other special tax options – like a “business, professional and occupational license” tax (BPOL), lodging tax, and meals tax – can be implemented with approval from local taxpayers and the General Assembly.
Companies subject to multiple tax categories offer the highest potential benefit to Clarke County according to Supervisor John Staelin (Millwood) who said that the County tax collection strategy targeted the more profitable varieties of business when it built out the Business Park.
“Not all businesses are profitable to a county” Staelin said. “Office buildings, for example, generally bring in limited tax revenue (normally just taxes on real estate and business equipment) and if they bring in lots of new residents they can add thousands of dollars to the County’s cost of education.”
But while it is true that a physical office building may only by subject to real estate and equipment taxation, the activities that occur inside could be taxed if county officials chose to implement a BPOL tax said Revenue Commissioner Arthur.
“Under a BPOL tax, county businesses would pay an additional fee to Clarke County based on a maximum percentage of gross revenues” Arthur said. “Right now the Virginia Assembly says that a county of less than 20,000 citizens can only charge a $30 for a business license. A BPOL tax would be one way to increase the county’s revenues.”
Arthur said that the idea of a BPOL tax had been considered in Clarke County in the past but was never implemented due to objections from area businesses. Arthur also pointed out that implementation and enforcement of a BPOL tax would require an additional staff person with a financial auditing background.
Arthur estimated that salary and benefits for the professional staff to implement a BPOL tax could be could be as much as $65K.
Arthur said that because Clarke County has few restaurants and hotels, the existing lodging tax – which Arthur estimated generates about $12K – or the addition of a meal tax offers little tax generation help.
The combination of Clarke County’s limited commercial development and few mechanisms to generate tax revenue from local businesses means that any attempt to make up funding shortfalls eventually ends up on the shoulders of Clarke County taxpayers. And although the Board of Supervisors worked hard to keep tax rates “revenue neutral” last year – Clarke County’s real estate tax rate remains lower than that of Loudoun and Fauquier County’s but higher than most other neighboring counties – it is not clear how much longer the Supervisors will be able to shield local voters from a tax rate increase.
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Source: Clarke County, Virginia
“This is a question every locality in the country is asking as virtually every state has cut its support to local government and the Federal government is proposing drastic cuts to nearly every program” said John Staelin. “It would be nice if locally elected officials could say that local governments will be able to find ways to fill in the gap without increasing local taxes but that is impossible. Certainly we are all trying to find new sources of revenue but new sources of revenue are hard to find in these troubled times.
Staelin said that he sees a combination of local tax increases and a closer examination of local spending occurring in localities across the country.
“Local government cannot be expected to fill in all the holes left by cuts in State and Federal spending” Staelin continued. “The good news for Clarke’s citizens is that the responsibility for local programs will shift to our locality versus Washington or Richmond. That will give Clarke’s citizens more control over how their tax dollars are spent. The bad news is that local governments in Virginia have to rely on property taxes and are not allowed to tax income. That means Clarke County is not able to place the added tax burden on those with the greatest ability to pay. Property tax increases affect everyone regardless of income. Without the ability to tax income more and more of the tax burden in Clarke will end up falling on those with lower and middle incomes, something I do not want to see. We have joined with counties all across the Commonwealth to lobby for the right to charge a small local income tax but so far the General Assembly in Richmond has not heeded our requests. Hopefully we will be more successful in the future.”
“There is no magic wand to wave that will generate funds to make up lost funding from federal and state sources” said Chairman Hobert. “Further, it is questionable to think local government can or should continue to fund all those activities for which the Commonwealth or the Federal Governments have reduced funding, defaulting responsibility for these decisions to local governments. Nevertheless, we do what we can reasonably do. We regularly evaluate our community needs and resources; We work to expand our tax base; We lobby the General Assembly to refrain from imposing additional unfunded mandates and to seek reform of tax laws.”
In the article “Senator Harry Flood Byrd of Virginia – The Pay-As-You-Go Man” author Richard F. Weingroff recounts a June, 1957 issue of Highway Highlights which includes an interview with Senator Byrd. Weingroff says that the unnamed reporter who conducted the interview described Byrd as: “White suited, white haired, a rather small man with great energy, unquestioning confidence and authority, he is tradition-rooted, but not tradition-bound. It is typical of him that the orchards he began on the land of his forefathers are a great present day success.”
The writer pointed out that roads – “laid on a solid ‘pay as you go’ foundation, of course” – had been the foundation of Byrd’s career.
Perhaps the underlying question still to be answered is whether Americans, and in particular Clarke County citizens, are willing to readjust their expectations of federal and state government revenue support for local projects by returning to the “pay-as-you-go” model championed by Clarke County’s most successful politician of the last century.
Harry Flood Byrd was appointed to fill a vacancy in the United States Senate in 1933 and went on to win reelection as a Democrat from 1933 to 1964, a period that included the nation’s Great Depression.