Are You In…The Hugo Zone?

Are You In The Hugo Zone?

Delegate Tim Hugo (R-Centreville) is the point person for a state income tax proposal centered on less-than-full conformity with the federal Tax Cuts and Jobs Act.  It only helps a narrow subset of Virginia taxpayers, those in The Hugo Zone.  We will now try to take you there.  (If you want to imagine Rod Serling’s voice in your head, feel free.)

Under straight conformity, as proposed by Governor Ralph Northam, a taxpayer taking the federal standard deduction would be stuck with the state standard, as well.  Under straight conformity, deductions for local taxes on either return would be capped at $10,000.  Hugo, standing Friday with several key House Republicans, announced a bill to put Virginia out of conformity on those two points.

Would that do you any good?  How does it compare for you with the competing Republican-sponsored bill to adopt those conformity points, but also bump up the state standard deduction from $6,000 to $12,000 for a couple filing a joint return?  A version of that was introduced by Delegate Chris Peace (R-Hanover.)

Hugo’s bill saves you some state tax money if you 1) want to itemize deductions and 2) have an amount of allowed deductions which fall in The Hugo Zone.  The bottom limit of that zone for joint filers is $12,000 (the proposed new state standard deduction) and the top range is $24,000 (the new federal standard deduction.)  It is not everybody who itemized before, just some of them.

The boundaries of The Hugo Zone (click for larger view.)

If you are really interested, pull out your 2017 return or your work papers for 2018.  Did you take itemized deductions in 2017?  If so, what was that amount? Be sure to look at the deduction total on the state return, because that is a different amount than the deductions on your federal return.   Uncle Sam lets you take off the amount you paid in Virginia income tax, but Virginia makes you add it back.  No state tax break for state taxes.

If the amount of your allowed Virginia deductions in 2017 was over $12,000 you enter in the Hugo Zone.  But if your federal allowed deductions exceed $24,000 (even with the new cap on state and local taxes accounted for) then you are not in the Hugo Zone.  Your deductions are so high you should itemize on both returns anyway.

The new higher federal standard deduction of $24,000 is expected to lure about 600,000 Virginia filers away from using itemized deductions and to standard deductions.  But do all 600,000 fall into the Hugo Zone?  No, because many of them will have $12,000 or less in allowed Virginia deductions.  They will pay no more state income tax, and some will pay less, if the standard deduction is increased, as proposed by Peace and others.

The basic idea of allowing Virginians to keep using itemized deductions on their state returns, while filing a federal return with the standard deduction, had an obvious flaw.  It only made sense if Virginia stayed with the old rules on deductions, rejecting some or all the other changes in the rules flowing from the new federal rule.

That is what Hugo has now done by proposing to ignore the $10,000 cap on deductible local taxes.  The population of the Hugo Zone grows, especially in high-tax and high-home value neighborhoods.

Why stop there?  Why shouldn’t the General Assembly reject the many other changes detrimental to taxpayers? The state and local tax deductions cap (SALT cap) is not the only thing pushing people away from the Hugo Zone.

The new federal rules take away the ability to deduct interest paid on a home equity loan.  Quite a few people have used that in the past – shouldn’t the General Assembly reject that and maintain that deduction?

Most casualty losses (fire, storm damage) have been deductible in the past, but going forward only casualty losses in federally-designated disaster zones will be deductible.  There is a tighter cap on the mortgage interest deduction.   If the General Assembly is worried that a millionaire’s taxes on a mansion might not be fully deductible, should it not also make sure the interest payment on that house (or second house) can also reduce the tax hit?

The most common deductions going away fall in that broad “miscellaneous” category, including work-related expenses not reimbursed by your employer, some educational expenses, etc.  Plenty of non-millionaires have used them in the past, but they are going to go now.  Future alimony payments might not be deductible.  Moving expenses also fall off the list of deductible costs.

Reverse course and allow those deductions to remain in Virginia, and the population of The Hugo Zone grows even more!

When the smoke clears after the 2019 General Assembly, it may be the best we can say about Virginia is it is a selective conformity state, and quite selective at that.  That is not a positive step for tax policy, uniformity, ease of compliance or economic competitiveness.

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13 responses to “Are You In…The Hugo Zone?

  1. No wonder these people are so arrogant. They are uncountable and out of control, do whatever they please in darkness.

    PS – where is the great Washington Post in all this. Does not Democracy Die in Darkness.

  2. I will sooner or later stop complimenting Steve but he truly is making important contributions that inform and educate folks – not that I agree with all of his views but I give him his due – he does his homework and all who read do benefit.

    Having said that – I think the fundamental basis for conformity may have been overcome by events… it may no longer be a benefit to have Virginia returns linked to Federal tax policies in no small part because the current Federal budget is unsustainable with the tax cuts unless we’re just going to stand by and want the deficit balloon to even worse levels. Sooner or later, reasonable and conscientious folks in Washington are going to revert to adults – I hope.

    But separating Va from the Feds on tax policies has it’s own downside and that is how much confidence do I have in Virginia’s legislative and staff ability to maintain it’s own stand-alone policy when those yahoos don’t exactly cover themselves with glory on other issues like their stupid undermining of the SCC and obvious successful influence from monied corporate interests….

    Finally – I want folks to remember WHO the idiots were that said we were going to simplify the tax code to the point where we could do it on post cards:

  3. Minor comment: Federal Standard Deduction is $25,600 for those over 65.

    • …and for married couples filing jointly over 65 Standard Deduction is $26,600.

      I am confused about Home Equity Loans, I thought those still qualified for interest deductions as long for home improvements. I got mine when we bought the house, for a while they were bundling with mortgage because over $300k was considered Jumbo mortgage (silly I know).

  4. WKJ – yes, many such little wrinkles I just ironed over in my effort to create something people could follow….this is complicated stuff.

    Larry, as I recall the last time we went through this, after the 1986 federal tax reform, there was no serious call to reverse what Reagan did and restore various deductions that had gone away. On both sides then full conformity was never really challenged. You take the standard deduction at the fed level, and that post card and form 1040 EZ look alot alike. They kinda did that for most people!

    • Yes, Steve, that was when our political system and its politicians by today’s standards were honest, sane, and without corruption, unlike modern times wherein they are neither honest nor sane, but instead are full of corruption done in hallways and backrooms.

  5. Steve- Your position seems to be, same as Gov Northam, that it is self-evident that Virginia itemizers in the middle income range should have been paying more Va. taxes all along. So therefore we should without further debate clobber them with higher taxes now, and then the GA can think about how we should best redistribute that tax windfall.

    Your definition of “conforming” is misleading, because you use that term to mean your opinion of what should be done, and but it sounds like it is endorsed Best Practice or something carved in stone.

    Part of your logic is, like robbing banks, middle income is where the money is. But seems to me that middle income group is being selectively clobbered in Virginia, while say less than $100k and greater than $200K are getting off scot-free. In fact the Gov wants to actually deliver hard cash to the favored groups from the say $100k income cohort. Tax free is not good enough for the groups he favors, he implies.

    As far as I can see, Tim Hugo is doing the right thing. We might reflect that since our GA only meets in January, last year they did not really have a good perspective to judge what Va. should be doing. Now we can see better (eg; we know New York decided to allow state deductions even if claiming Federal standard, and we know the IRS ruling in August that controls the difference between donations and state tax deductions).

  6. TBill – for three decades there has been a lot of talk about tax reform in Virginia, and YOU -YOU are the reason it never happens. It cannot be done without making somebody unhappy. Winner and losers. So it never happens. The path I’ve laid out minimizes the pain on people like you, gives you that pain at the same time you are getting a HUUUUGE federal tax cut, finally does something substantial for the 2 million + who take the standard deduction (and cuts the corporate rate, which everybody is ignoring.) If you cannot now step back and think about the tax code you want for the future, you never will….

    To paraphrase, we have met the enemy of reform – and its you! 🙂

    I’ll go away after this crashes and burns, promise….But don’t you dare compare my position to Northam because he wants to keep every dime and provide zero reform to anybody! I have to keep pinching myself when I remember that this approach we’ve designed is actually endorsed by Grover Norquist!

    • Bingo!

    • No. Not me…I hate car tax and all that crazy stuff we have. I feel our tax structure is hurting our growth as a state. We should start from scratch and re-d0 Virginia tax structure. The reason we do not do that is long time Virginians want to favor the historic tax preferences and distortions we have here and carve-outs.

      I am sort of viewing as an outside observer. It just seems to me you are saying to go further in the direction of distorted “Virginia way” approach. But I concede to not have a benchmark study to other states, at th-s poimt I just have to go with with my local observations. I am not mad at you, I am just trying to say what it feels like to me.

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