By Steve Haner

The largest item among Governor Glenn Youngkin’s many proposed changes to the Virginia state budget is his idea to set aside $1.1 billion from last year’s surplus revenue to cover three years of future car tax rebates. You don’t need to call the California Psychics who run ads on Richmond’s conservative radio station to predict what will to happen to that.

When the Democrats who control the money committees in both the House and the Senate report their list of budget amendments in a few weeks, most or all that dedicated fund to support those rebates is likely to be diverted to their spending priorities. The rebates are also in doubt.

The Republican governor, facing his final of four General Assembly sessions, has been among the most fortunate of governors on financial matters. This is the fourth of four fat years, with no painful lean year during his term. 

The General Fund revenue of $31.4 billion now predicted for Fiscal Year 2026 (starting next July) is $5 billion (19%) more than the revenue projection four years earlier, for Fiscal Year 2022. Almost another $5 billion in cash is locked up in reserves, $2 billion more than was being held as protection against a downturn at the start of Youngkin’s term.  

Despite that, the budget and tax policy debate coming in the 2025 General Assembly is far more focused on spending than on tax cuts. Youngkin put most of the state’s General Fund surplus and revenue growth – $4.4 billion dollars – on the spending side of his ledger.  

Youngkin is proposing $720 million of that new money be spent to cover inflation and utilization growth in the cost of the Medicaid program for low-income Virginians, largely mandatory. About double that, $1.4 billion, is directed to various capital projects. 

There are several other large ticket items on his list and myriad smaller ones, best viewed with this summary prepared by the Commonwealth Institute for Fiscal Analysis. More details can be found in this longer Department of Planning and Budget presentation, which reports a net increase of $3.4 billion in General Fund spending over the 18 months remaining in the current budget cycle. 

In comparison, only about $400 million in new personal tax relief would be provided in that period, and to far fewer than half of Virginians.  The Governor’s proposal to eliminate income tax on tip income would save those particular Virginians an estimated $35 million during the remainder of his term, and $70 million per year under the next governor. Even if Youngkin’s car tax rebate is approved, only about $350 million would be passed out while he remains in office. The surplus money is being spent, not returned.

The proposal to eliminate tips as a category of taxable income is also on shaky ground with many in the Democratic majority, but it could end up being adopted by Congress in 2025. Given Virginia’s tendency to conform to federal definitions of income, it is unlikely Virginia would force those taxpayers to track and add back in their tip income. Stay tuned on that one.

As has become the usual practice, the tax policy proposals have two paths to passage, one within the budget document and a second in their own individual pieces of legislation.

One significant personal income tax policy proposal from Youngkin that likely will pass with bipartisan support is making permanent the higher standard deduction amounts he has implemented, which will keep his tax relief legacy alive. The deduction amount has risen to $8,500 per individual or $17,000 for a couple filing a joint return.

Another significant Youngkin tax proposal causing no partisan divide, but with an undetermined fiscal impact, would change the way a business would allocate its profits between the various states where it does business, to determine how much of that income Virginia could tax. What is called the market-based sourcing rule is now the most common around the country and it is proposed Virginia join the club.

With most of the legislation filed by the end of last week, Republican legislative proposals are mostly sticking close to the Governor’s list of ideas. One Republican bill that jumps out for those with a long memory is Senator Chris Head’s Senate Bill 1001. It would restore a sales tax exemption for equipment purchases by electric utilities, an exemption stripped out of the law during the bitter tax battle in 2004. But it only applies to Appalachian Power Company.

Democrats have their own tax bills, of course. The Commonwealth Institute for Fiscal Analysis produces excellent budget summaries like the one linked above, but questionable tax ideas. It was probably the source of Delegate Phil Hernandez’s legislation to create a new income tax bracket and a 10% rate on incomes above $1 million. The Commonwealth institute claims the revenue boost would be $3 billion. 

More likely to draw votes is the approach taken by Delegate Vivian Watts, who chairs the House Finance Committee. Her House Bill 1754 would set the new top tax bracket at $600,000, looping in far more taxpayers, and set the top rate at a less dramatic 7%. She adds two commendable provisions – to increase the standard deduction for a couple up to $24,000 and to then establish annual increases for it based on inflation. Would that the governor had taken those two latter steps. 

Watts also has put in House Bill 1755 to restart last year’s debate about imposing the sales tax on more Virginia services, including digital services. As with last year’s Democratic push on this issue, which mainly focused on just the digital services, there is no exemption for transactions between businesses. Without that, a pyramid of taxes piles up as vendors pass the taxes along the supply chain, and the whole load then falls on the final consumer. 

Call the California Psychics again and expect to be told no major changes in Virginia tax law will pass going into the 2025 elections.