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Richard W. Rahn, Ph.D.

8917 Potomac Forest Drive Great Falls, VA 22066 Tel. (703) 759-0440 Cell (703) 338-3994 E-mail:

March 4, 2013 The Honorable Robert F. McDonnell Governor Office of the Governor Commonwealth of Virginia 1111 East Broad Street Richmond, Virginia 23219 Dear Governor McDonnell: I regretfully tender my resignation as a member of your Joint Advisory Board of Economists. The reason for my resignation is that I strongly disagree with the new tax/transportation bill that you supported. Unfortunately, I was not asked for my advice (which I assume was also true of the other Joint Advisory Board members) before you and the legislature embarked on passing the largest increase in taxes in the history of Virginia. This action will do damage to the people of the Commonwealth of Virginia. The business climate and economy in Virginia have been at or near the best in the nation because Virginia has maintained a relatively small state government. The new taxes and spending will grow the size of the Virginia government relative to states GDP a large and unnecessary step backwards. The new sales taxes and user fees should have been offset, at the minimum, with a reduction in the state income tax. As you know, Virginia relies more heavily on the income tax than most other states, and it is perhaps the most destructive tax. With the new increase in the marginal tax rate at the federal level, the combination of the Virginia and federal income tax at the top rates is well above the revenue maximizing tax rate. A number of other Republican governors are supporting major rate cuts in their state income taxes, and in several cases proposing to totally eliminate the state income tax. Virginia should be doing the same. I am fully aware of the cost of the increasing federal mandates, particularly Medicaid, on the Virginia budget. However, again other states are finding ways to deal with it without increasing taxes. Virginia has been innovative in the past for bringing more private sector funding for transportation infrastructure. These programs should be greatly expanded, as should

programs to privatize parts of many other functions now performed by the State, which could be better done, in whole or in part, by the private sector. More innovative thinking would enable Virginia to reduce tax burdens (again particularly the income tax) while at the same time giving the citizens a higher level of service. I am prepared to volunteer time to assist in a serious effort to reform the Virginia tax structure which is badly needed. My resignation should not be taken as anything more than a policy disagreement over the tax issue, for I have a very high regard for the professionals in the Virginia state government, including the Department of Taxation and, in particular, the director and chief economist of Revenue Forecasting, John R. Layman. Also, I do recognize and applaud the many positive things your administration and the legislature have done to enhance the well being of the citizens of the Commonwealth of Virginia. . Sincerely,

Richard W. Rahn CC: Janet Vestal Kelly, Secretary of the Commonwealth, Commonwealth of Virginia Richard Brown, Secretary of Finance, Commonwealth of Virginia John R. Layman, Director and Chief Economist, Revenue Forecasting, Virginia Department of Taxation