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A Project of The Annenberg Public Policy Center

Twisting Cuccinelli’s Tax Plan

Virginia Democrat Terry McAuliffe uses the reluctance of his Republican opponent, Ken Cuccinelli, to name the tax exemptions and loopholes he would eliminate to offset his proposed tax cuts as the basis for misleading, doomsday claims about Cuccinelli’s tax plan.

In speeches and on his campaign website, McAuliffe claims Cuccinelli’s tax plan could cut education spending by hundreds of millions of dollars and result in the layoff of thousands of teachers.

The McAuliffe campaign also has a web ad with a tax calculator purporting to show how much Cuccinelli’s tax plan could end up costing individual taxpayers in increased local property taxes to offset the loss in local aid from the state.

These are actually competing scenarios, and both are based on the assumption that Cuccinelli will not offset his proposed tax cuts by closing tax loopholes — something Cuccinelli has repeatedly said he would do.

Cuccinelli proposes to cut the top individual income rate from 5.75 percent to 5 percent and the corporate income tax rate from 6 percent to 4 percent. When fully implemented over four years, Cuccinelli estimates those cuts would reduce revenue to the state by about $1.4 billion a year. Cuccinelli claims, however, that he would offset that lost revenue by slowing the growth of the state’s general fund spending and by eliminating tax exemptions and loopholes that “promote crony capitalism.”

Cuccinelli has yet to identify which exemptions and loopholes he has in mind. And therein lies the opening for the McAuliffe attack.

Speaking to students at Old Dominion University, McAuliffe warned that Cuccinelli’s tax plan would lead to dramatic cuts in public school funding. According to an account in the Virginian-Pilot, McAuliffe said Cuccinelli’s proposed tax cuts could result in an annual reduction of at least $525 million in state education funding, leading to layoffs of more than 8,000 teachers.

A similar claim is made on the McAuliffe campaign website, in a post titled “Virginia’s Schools in Danger.”

McAuliffe website: If the Cuccinelli tax scheme were enacted, and he fails to find offsetting revenues, the public education system could face an annual shortfall. Thirty percent of the General Fund is spent on direct aid to elementary and secondary schools. Therefore, at minimum, 30 percent of the $1.4 billion would fall on education. However, education aid will likely have to pay more than its fair share as certain General Fund allocations are almost impossible to cut, such as Medicaid spending (almost 21% of the General Fund). These payments, while they come out of the General Fund, are required to match federal payments and provide healthcare to citizens in need. With this in mind, a conservative prediction for the total Cuccinelli cut to education investment is $525 million.

The McAuliffe campaign then used a calculation from the Virginia Education Association that one teacher would have to be laid off for every $64,635 — the average salary and benefits for a teacher — cut from the education budget, and concluded that the cuts would require the layoff of more than 8,000 teachers.

The key assumption upon which this whole exercise hinges, however, is that Cuccinelli “fails to find offsetting revenues.”

Similarly, the tax calculator used by McAuliffe in web ads assumes Cuccinelli would follow through on his pledge to cut tax rates, but would not follow through on his pledge to offset that revenue loss by eliminating some tax exemptions and loopholes, and slow the growth of state spending.

“Because he has offered no concrete proposals on how he will pay for the $1.4 billion in lost revenue the state would incur as a result of his plan, localities could be forced to raise property taxes and place greater burdens on Virginia’s middle class,” said McAuliffe spokesman Josh Schwerin.

Cuccinelli says he will pay for the tax cuts. Cuccinelli has proposed creating a commission that would rank every credit and loophole in the Virginia tax code based on effectiveness. The state’s General Assembly would then be asked to eliminate the least effective ones. Cuccinelli has repeatedly declined to name specific credits he would eliminate, saying he would leave that to the commission and the legislature, the Washington Post reports.

That’s politically convenient, for sure, as Cuccinelli names all the goodies in his tax plan without identifying the more politically painful givebacks. But that doesn’t mean he won’t or can’t do it. Virginia offers almost 200 tax preferences that in 2008 collectively reduced taxpayers’ liability by $12.5 billion — representing nearly 90 percent of the tax revenues collected by the state that year, according to a report from the state’s Joint Legislative Audit and Review Commission. The Cuccinelli campaign told us tax exemptions for education and health care would not be reduced or eliminated, but all other exemptions would be on the table.

The Cuccinelli plan also calls for capping the growth of the state’s budget to the rate of inflation plus population growth. According to the Cuccinelli campaign, the cap on spending would have trimmed about $370 million from the 2012 budget. That means the lion’s share of revenue offsets will have to come from reducing or eliminating tax preferences.

Specifically, Cuccinelli’s campaign spokeswoman Anna Nix insisted in a press release that Cuccinelli “is not proposing reductions to education funding and he is suggesting increased flexibility at the local level that will allow us to stretch existing education investments even further.”

Moreover, Cuccinelli pledged during a July debate that if he can’t cap state spending and reduce tax preferences enough to offset his proposed tax cuts, then the tax cuts simply won’t happen.

Cuccinelli: 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.

This attack by McAuliffe reminds us of some of the attacks made by the Obama campaign against Mitt Romney’s tax plan during the 2012 presidential election. The Obama campaign talked about Romney’s plan for a $5 trillion tax cut, leaving out that Romney claimed he would offset the revenue loss by reducing or eliminating unspecified tax breaks. We also noted that tax experts concluded Romney’s promise to cut individual income tax rates without either favoring the wealthy or losing revenue wasn’t mathematically possible.

We can understand McAuliffe’s frustration with Cuccinelli’s plan revealing all the goodies — the tax cuts — without specifying the hard parts — the tax exemptions and loopholes that would be closed. However, McAuliffe misleads voters when he talks about the ramifications of the plan and ignores the offsets that — while unspecified — are also a part of Cuccinelli’s plan.

— Robert Farley