Back to Taxaginia: Add A New Wealth Tax

Only $1.7 of $4.6 billion was diverted back to taxpayers by 2019 law.  Final row includes $420 million for one-time tax rebates paid later this year.  It was the addition of the Pease Limitation raising taxes on high incomes which reduced the final tax relief total. Sources: Chainbridge Solutions August 2018 report on revenue projections. Department of Taxation on tax reduction estimates. Click to open.

The 2019 General Assembly is a dust storm in the rear-view mirror, but the four state tax increases that were discussed in “Taxaginia” last November are still in the road ahead.   This post revises and extends my reporting on their status in this morning’s Richmond Times-Dispatch, featured on the Commentary section front.

 In a piece in June 2018  I saw signs the state would keep the state income tax revenue harvest produced by conformity with the federal Tax Cuts and Jobs Act.  Turns out that prediction was 60 percent correct, with my calculations showing less than 40 percent of the expected revenue was diverted by tax policy changes.  

Almost 25 percent of that is a one-time rebate to be mailed in time for the taxpayers’ positive vibes to last until the November election.  For individual taxpayers taking the state’s standard deduction, the only lasting tax relief is a whopping $172.50 annually for a couple filing jointly.  And they won’t get that on this year’s returns, but only on the tax returns they file in 2020 and beyond.

Start with the revenue projection produced for the state last summer by a consultant and subtract the tax policy impacts reported in the Department of Taxation analysis on the House bill, the Senate bill and the final bill.  That produces the chart above.  The chart below from that analysis breaks the tax changes down a bit.

Revenue reductions from the final signed version of SB 1372.  The individual tax impacts are on the top row, with rows two and three being business provisions. This does not include the $420 million in rebates to be paid this year.  Source: TAX

Just before the end of the General Assembly session I checked with Secretary of Finance Aubrey Layne to see if last summer’s revenue estimates from Chainbridge Solutions were still the state’s best projection.  He said yes, so that’s the only baseline we can work with.   To have less than a third of that translate into tax reform  – even less for middle class families –  is a disappointing outcome.

That wealth tax provision, a new state-only version of the Pease Limitation,  is not as dramatic as increasing the tax rate on the wealthy, the proposal causing debate at the national level.  The result is the same, a higher effective tax rate on higher incomes.  It produces close to a half a billion-dollar tax increase over that six-year period I’m using.  Long term tax relief of $2.2 billion shrank to $1.7 billion.

Before the Assembly acted, the Pease Limitation was going away at the federal and state level, repealed by TCJA.  Putting it back for state taxpayers starting this year was a tax increase, the only element of the bill which directly increased taxes on somebody.  It doesn’t cap all deductions, but one category it does cap is charitable giving.  Since the cap is gone at the federal level, however, Virginia taxpayers may not change behavior.

I doubt more than a dozens of people in either chamber really understood it, but Secretary Layne and Fairfax Delegate Vivian Watts did.   If the House majority flips in November, Watts may be chairing the House Finance Committee in 2020 and it might get very interesting.

Oh, sure, the tax legislation and the state budget include language setting up a Taxpayer Relief Fund, intended to hold any additional “conformity” revenue not diverted by the rebates or the tax policy changes made this year.  The money is earmarked for future tax reform. Both political parties will campaign on what they promise to do for some of you with that money.  More good things could happen.  But nothing prevented a more aggressive tax policy response this year.

Briefly addressing the rest of the “Taxaginia” package, the headline there is the language the Republicans inserted into the budget dealing with future revenue from the Regional Greenhouse Gas Initiative, an amount still to be determined.  When Governor Terry McAuliffe started the process to join RGGI, he said the carbon tax dollars would flow back to ratepayers, preventing electricity price increases.

But instead of cementing that promise with a bill or language directing the State Corporation Commission to follow that path, the General Assembly grabbed the dollars for the state’s general fund.  Again, that’s a positive step creating a new tax increase.  Your electric bill will go up (again) and the legislators will spend the boodle (again.)  Watch for some action on this at the veto session, however.

The tax hike already in place is the new set of medical provider assessments imposed on hospitals to fund the state match for Medicaid expansion and higher Medicaid provider payments.  The amount of money involved is finally becoming clear.  It estimated at $994 million in the current biennium, with the total for 2021 projected at $862 million for one year.  You haven’t seen those totals before now.

And finally, the fourth tax increase previously mentioned and the one with the strongest policy rationale is widening the sales tax net on remote sellers.  As everyone expected, the General Assembly made the necessary changes in state law for compel more remote sellers to register, collect the state tax and remit it.  We all owed tax on those transactions, whether we paid it or not, so arguably that wasn’t a tax increase.  It will feel like one, though, and have the same economic impact.

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19 responses to “Back to Taxaginia: Add A New Wealth Tax”

  1. LarrytheG Avatar

    I don’t know if this has been superseded or not – read below – and then go down to where it explains – that the “refund” is NOT a blanket refund but instead only to the extent of tax liability. In other words, my reading is that if you don’t owe the state money – you may well not get that rebate.

    (excerpt – go to link to read the entire guidance):

    ” TAX BULLETIN 19‐1 Virginia Department of TaxationFebruary 15, 2019

    Under emergency legislation enacted by the 2019 General Assembly (House Bill 2529 and Senate Bill 1372), Virginia’s date of conformity to the terms of the Internal Revenue Code will advance from February 9, 2018 to December 31, 2018.

    This legislation allows Virginia to generally conform to the Tax Cuts and Jobs Act and the Bipartisan Budget Act of 2018 for Taxable Year 2018 and after.

    In addition, this legislation provides a refund of UP TO $110 for an individual or $220 for married persons filing a joint return.

    In order to receive a refund, taxpayers need to file a complete return for Taxable Year 2018 before July 1, 2019. A refund is allowed

    …… up to the amount of a taxpayer’s tax liability after the application of any deductions, subtractions, or credits to which the individual or married persons are otherwise entitled. ……

    Such refunds are required to be issued on or after October 1, 2019, but before October 15, 2019.

    1. Steve Haner Avatar
      Steve Haner

      Correct – no refund for those with no owed tax. No refund in excess of the tax owed. What happens in the month following October? Hmmmm.

  2. LarrytheG Avatar

    A report from tax preparation midway through.

    We’re seeing more and more people who used to itemize who cannot now that the std deduction increased to 12K/24K … and this pretty much doing away with Federal itemization except for higher income folks with hefty mortgages, high dollar real estate tax and charitable.

    On the other hand – those that depended on the $4K exemptions for refunds are getting clobbered – that’s folks with kids. Even though they expanded the child tax credit, it’s only $1000 and the exemption was 4K. In addition – the child tax goes away at age 17 and older kids and parent dependents get only a $500 deduction. Even low income taxpayers that qualify for EIC (earned income credit) are getting lower refunds this year than last.

    For others – the Federal Tax law automatically “adjusted”, in most cases reduced withholding so we are seeing folks who owe because they had less withheld than last year and they never requested that it be lowered.

    Overall – to this point – we are seeing more people owe and lower refunds… only a few are coming out ahead.

    1. TooManyTaxes Avatar

      The amount of refund a person receives can be addressed by having higher withholding and/or making larger estimated tax payments. My son did not claim the personal allowance and, as a result, got a bigger tax refund. His girlfriend, on the other hand, did claim the personal allowance and, essentially, broke even. Life is about choices.

  3. In the past, I kept asking: what other state could possibly be doing this cruel deed to us poor itemizers? I say “poor itemizers” are impacted most, because rich itemizers would still be able to itemize.

    I now see Maryland is the answer. So at least we probably know where our lawmakers found a precedent for the idea. But Maryland has a little graduation of tax rates with income, so “poor itemizers” are a little more protected there. I will plan to do a calculation…I am working my real taxes so I do not want to do test calcs until I finish up.

    Thanks to Steve, I am very happy with my personal tax approach this year. Realizing in advance from my Virginia Gothic tax blog post that Virginia was hot-dogging and substantially increasing my taxes, I changed my Roth IRA conversion strategy to take less income. I stayed in the 12% Federal tax bracket, which allowed me among other things to itemize medical deductions. Next year will be a challenge though.

    I will have more to say after some sample calcs and comparison to MD.

    I am thinking elderly couples like us (both over 65 in 2019) are more severely impacted. Let’s say an elderly Virginia couple only has $22000 in itemized deductions for 2019. They are going to get hit harder, because they need to come up with $26400 of itemizied deductions to take the Federal Standard deduction. Had they been younger at 64 years old instead of 65, their $22000 itemized deductions would be closer the $24o00, and they could itemize without as big of a loss.

    As Steve has pointed out, middle income seniors are already hit pretty hard in Virgina, so we are heaping more pain on the tax brackets already getting hit hard in Virginia, seems to me.

    1. LarrytheG Avatar

      Most older folks don’t have a mortgage and if their house is modest – no big real estate bill… so that leaves medical and charity.

      If you do charity and you must take an RMD from your tax-advantaged IRA – you may be able to direct all or part of the RMA to a charity but it has to be done directly by the IRA trustee.. you cannot take it out then donate it.

      but if it is a ROTH, it probably won’t make much sense since you’ve already paid taxes on it.

      also – if you are “close” on the Federal – it may – depending – be better to itemize on the Federal – and take a hit – then come out better on the State – overall better. Try it both ways.

  4. Steve- Sounds like the rural repubs are favoring tax increases if it impacts NoVA and Dems mostly, but why are voices like Grover Norquist letting the repubs get away with that behavior?

  5. Steve- Sounds like the rural repubs are favoring tax increases if it impacts NoVA and Dems mostly, but why are voices like Grover Norquist letting the repubs get away with that behavior?

  6. The chart shows that the really large tax revenue gains are in the out years:
    $ 799 million in 2022, $ 943 million in 2023, $ 951 million in 2024, and (presumably) $1 billion or more in 2025 in later years. How realistic are those out year gains in light of the possibility/probability of significant changes in the federal tax law after the 2020 election?

    It seems to me that a good argument in favor of the GA’s actions is that if they had zeroed out the windfall tax revenue gains to VA in 2019, and were then faced with revenue shortfalls in 2021 (say) due to a reversal of the 2017 federal tax legislation, the GA would be excoriated for raising taxes and a crisis/deadlock could arise. Is it fair to ask Steve if he would give the GA a pass for enacting an income tax increase in that situation?

    1. LarrytheG Avatar

      I think I’m with WKJ on this. If Virginia makes substantive changes now in response to the TCJA – I would not give a plug nickel that when they expire that they will let some provisions lapse and probably use that as an excuse to make more changes and where would Virginia be then?

      The problem for Virginia is the uncertainty of the effects of changes.

      Yes – it can go either way – but what if it ends up with a revenue shortfall – then what?

      The thing is that the TCJA cut taxes but not spending and the result of that is an increasing deficit – despite all this stupid talk about more revenues coming from lower taxes. It does not work that way – except in the fervent minds of those who live in LA LA Land.

  7. Steve Haner Avatar
    Steve Haner

    Long term projections can go either way, WKJ, and odds are the same that Chainbridge underestimated the state harvest from TCJA. The business provisions in the federal bill do not automatically expire in 2025, and the odds are low to zero that Congress will ever go back on the $24,000 standard deduction, which technically could expire. It might tick up some of the federal rates, but that wouldn’t have no impact on the state revenue.

    No, WKJ, they blew a great chance for a better package. And I don’t have to wait until then for a state tax hike because RGGI is a now state tax hike, and the Medicaid assessments are a state tax hike.

  8. Steve Haner Avatar
    Steve Haner

    Sure Larry, WKJ, you’re right, a shortfall would be TERRIBLE. It is the government’s money, after all, not our’s. Much more important to protect future government spending than to let the silly taxpayers have their money to spend as they wish.

    1. LarrytheG Avatar

      Well no, it’s NOT the government’s money but we don’t get things for free either even if we’d like to.

      I don’t like Federal Deficits that come from tax refunds.. bad karma…and I don’t like getting tax refunds then the State coming back and saying they have a revenue shortfall and have to take the refunds back.

      I’m not saying tax me all you want but here’s the thing – fiscal conservatism and fiscal responsibility are more than low taxes no matter what.

      Fiscal Responsibility at the govt level means not running a deficit and not having fiscal crisis from revenue shortfalls. I want a competent government that does not screw up on it’s expenses… more than I want one that gives me rebates then has a “crisis” as a result.

      Maybe I’m alone on this.. eh?

      1. vaconsumeradvocate Avatar

        Nope. I agree with you. I don’t want crumbling infrastructure, unenforced pollution and safety rules, and such just so a few can make more money while most of us have a lower quality of life or lose our lives.

  9. vaconsumeradvocate Avatar

    My professional business expenses, which I used to be able to itemize, are greater than the increase in standard deduction. Many educators are in that position. Then they cap the credit for donations, which will also negatively affect us. These changes are a big negative hit for us. I suspect that many educators are going to be participating less in professional organizations – and I mean real organizations that provide opportunities for critical networking and other supports not organizations some might categorize as unions. Those who’ve been more generous donors may find it impossible to continue. We were told that most would benefit from these changes but we’ve been hit hard. It’s really discouraging, on top of what is being stolen from us by the pipelines. I am honestly wondering how anyone is motivated to work hard any more. Whatever you build is going to be taken from you by someone who has a lot more than you and you’re just out in the cold. No one cares as long as they aren’t the ones hit.

    1. Steve Haner Avatar
      Steve Haner

      This “Pease Limitation” cap on deductions doesn’t apply until your AGI is three hundred grand or higher, so not many teachers need worry about that. It is indeed the very upper end.

  10. As a carbon tax RGGI is simply a tax on electric customers, not a tax on the utility (and therefore an incentive to the utility to change its generation performance), unless the ratepayers receive the offsetting benefits from the RGGI revenue to Virginia. Ratepayers will automatically reimburse the utility for its direct RGGI costs and for its indirect cost due to less dispatch in the wholesale electric markets; they (not the utility or a third party) should get the offset too. Allowing RGGI to become a general fund revenue source would be terrible, and terrible precedent.

  11. […] There came a point late in the game on this tax issue when it was clear Governor Northam and the Democratic legislators were going to demand something in exchange for their votes on the conformity bills, which needed supermajorities.  This is what I expected them to demand, but instead they talked the Republicans into higher effective taxes on the wealthy by restoring a cap on deductions known as the Pease Limitation. […]

  12. […] the richest, the coup de grace was General Assembly approval of a state-level wealth tax, a form of Pease Limitation to cap […]

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