By Steve Haner

Virginia’s Department of Taxation has now released its estimates on the revenue changes that would result if the state’s tax laws were amended next year to conform to the new federal tax rules signed by President Donald Trump. 

To taxpayers, the question is will they get a big tax cut at the state level. To the politicians in Richmond and the headline writers at the Richmond Times-Dispatch, the question is how much money the state will “lose.” The money won’t be lost; it can be found in people’s pockets.   

The amounts in question are similar to but more reliable than those estimated earlier this summer by The Tax Foundation and reported here. The staff at the Department of Taxation also examined more of the provisions of the complicated OBBBA, including some which could be viewed as pending tax increases on state residents. The net impact according to the state’s projections is $2.3 billion over three years (lost revenue to some, tax savings to others). 

Deputy Commissioner Kristin Collins had the Tax Department’s usual easy-to-follow slide deck for the Senate Finance and Appropriations Committee Tuesday. 

Anticipating that major federal changes were coming following Trump’s inauguration, the General Assembly disconnected the state’s normal process for conforming to federal tax changes. Virginia’s state income tax starts its calculation with federal adjusted gross income, and the OBBBA changed that multiple ways.

The portions of the OBBBA which merely extended the previous tax laws from the 2017 Tax Cuts and Jobs Act were assumed to remain in the state’s revenue estimates, so no action is needed on them by the General Assembly. But the new rules all must be approved by the legislature, and the more which are not adopted, the more complicated next year’s Virginia tax calculations will be. 

In some cases, if the General Assembly refuses to conform to OBBBA, Virginia taxpayers will have to add dollars from those provisions back into their adjusted gross income before determining their state tax.  In other cases (such as the tax break on tip income) a failure of the General Assembly to act won’t make the accounting more complicated. It will just mean no comparable reduction on the state tax bill. For any state change to take effect for the 2025 tax year, when many of the federal changes do happen, the Assembly will need to pass emergency legislation, requiring 80% floor votes. That is hard. 

Nobody claims OBBBA simplified anything. As Collins pointed out and the Tax Foundation didn’t focus on, there are several things OBBBA did which will increase state taxes on certain returns if the General Assembly adopts them.

One good example is new limits at the federal level on the amounts of charitable deductions claimed by both individuals who itemize and by corporations as deductible. That could cost individuals $126 million more tax over three years and corporations $21 million. Changes in the federal tax treatment of overseas income could drive up state tax collections another $43 million over three years. The General Assembly could adopt those and ignore the other provisions, those which would lower state tax bills.

For example, there is another new charitable giving provision, which can be taken by individual taxpayers who are also using the standard deduction. If matched with a subtraction on your state taxes, people would save (and the state lose) $136 million. That and the other well-known individual provisions – deductions for tip income, overtime income, and car loan interest – have a combined impact of $1.23 billion over three years.

These were prominent campaign promises in Trump’s successful election, but so far the question of matching them within the state tax code is not a focus for Virginia candidates. The Governor and House of Delegates about to be elected will be consumed with these questions in January, and nobody is being pinned down on how they will vote, nobody is promising to match Trump’s priorities. 

As was noted by the Tax Foundation, the business provisions are similar in impact ($1.1 billion over three years) to the individual tax changes and will likely be the subject of intense lobbying for the 2026 session. Governor Glenn Youngkin and an executive of Eli Lilly were on CNBC this morning talking about that company’s new plant planned for Goochland County, and the Eli Lilly leader cited income tax policy as a key consideration. 

He wasn’t talking about the personal property tax on vehicles, the “car tax.” He was talking about the income tax rate, and probably the big change in how research and development expenses are deducted. Under the old law they were amortized over five years but now will be an immediate deduction, retroactive to 2021. Because of that retroactivity, Virginia’s adoption of the new federal rule would have a huge immediate impact of $404 million in just one year. 

The states that adopt it – not counting of course those states which have no income tax at all – will have a competitive edge for future plant placements in the technology world. Selling it to the 2026 General Assembly will be a challenge. Passing it as an emergency bill with 80%? That will take a Governor who really wants it to happen.