There’s No Better Time for Tax Reform in Virginia than the Present
The Tax Cuts and Jobs Act of 2017 marked the first federal tax reform in more than 30 years. However, Virginia has not made a significant effort to reduce the tax burden on Virginians in over a decade. Federal tax reform has generated an economic boom across the country, yet Virginia’s economy lags behind the national average. Virginia ranks 23rd in economic performance in the 2018 edition of the American Legislative Exchange Council’s Rich States, Poor States report. However, regional competitors Tennessee and North Carolina rank 10th and 11th respectively.
Rich States, Poor States also measures the competitiveness of Virginia’s tax code against the other 49 states. While Virginia ranks 10th best in economic outlook, regional competitors once again prevail. Tennessee currently has no personal income tax, and North Carolina’s personal and corporate income tax rates are below Virginia’s. The General Assembly’s refusal to pass tax reform means Virginia misses out on opportunities for new jobs and economic growth as employers choose Virginia’s neighbors rather than the Old Dominion.
This upcoming session, the Virginia General Assembly faces an important question over whether the Commonwealth will conform its tax code to federal definitions. This would not change taxes rates but would follow federal policy of broadening the tax base by limiting and repealing tax deductions, credits, and other loopholes. A broader tax base leads to more revenue as filers can no longer reduce as much of their tax liability. If Virginia broadens their tax base through conformity without cutting taxes, Virginians will see an increase in their tax burden this coming year.
How much will the tax burden increase for Virginians? On August 17, Secretary of Finance Aubrey Layne announced Virginia would see a “tax surplus” of $555.5 million closing out this fiscal year, growing to nearly $1 billion annually by 2024. The surplus this fiscal year primarily represents economic growth, but $333.7 million in tax surplus next year is forecasted to come from the reduction and repeal of tax deductions, thereby increasing tax liability. In all, 26 percent of Virginians will see an increase in state tax burden if the General Assembly conforms to the federal tax code and refuses to provide corresponding tax relief.
During his testimony, Secretary Layne was adamant that “the governor has [not] raised one dollar of taxes.” Secretary Layne is correct that no action on the part of the Governor or the General Assembly caused an increase in tax burden. But, if the legislature makes no motion beyond passing tax conformity, inaction will increase effective tax burdens for hardworking Virginians.
Governor Northam has a plan to provide tax relief to low-income earners by making the earned income tax credit (EITC) fully refundable. Virginia does not currently refund the EITC beyond tax liability, meaning it only zeros-out the liability of low-income earners and does not allow them to earn money just by filing taxes. Governor Northam’s proposal is estimated to cost the state $250 million in revenue yearly, or half of the current surplus.
Fortunately, tax relief for low-income earners can be achieved by raising the threshold on the highest income tax bracket. Currently, all income over $17,000 is taxed at 5.75%. Considering that couples are not required to file an income tax return if they make under $23,900, almost all filers in Virginia are paying the top rate on all taxable income. Raising the threshold to allow more income to fall into lower rates would provide tax relief for all income earners and avoid the redistribution of wealth inherent in Gov. Northam’s proposal.
Alternatively, income tax rate reductions would provide tax relief to all taxpayers and would be a welcome change in Virginia tax policy, as the Commonwealth has not decreased personal income tax rates since 1972. As the ALEC Center for State Fiscal Reform documents in State Tax Cut Roundup, states like North Carolina, Florida, and Tennessee have cut rates many times over the past decade to attract employers and increase take-home pay. As competition for jobs and opportunity heats up, Virginia must signal to job creators that the Old Dominion sees them as partners in economic growth, not wallets to raid. Real tax relief means broad tax cuts with the intention to improve opportunity and prosperity for all.