Conformity Article Errata, Semi-Mea Culpa

I got enough of importance wrong in yesterday’s post on state income tax policy that a real correction is required, not just a tweak to the existing previous post.  Herewith what I know I got wrong:

  • As Dick Hall-Sizemore pointed out, correcting me in a comment, the 2019 provision creating a new Taxpayer Relief Fund did not include the additional corporate income tax revenue generated by conforming to federal changes. If I understood that back when I last looked at the language, it certainly had flown my memory by the time I sat down to write Thursday evening.  Only excess “windfall” revenue from individual taxpayers was to provide the top line in calculating the new fund balance.
  • And in looking at the bottom line, I made a math error on the fiscal impact of two corporate income tax amendments mentioned on that Senate Finance Committee chart. The four-year impact of the GILTI and net interest deduction provisions is about $85 million over four years, not $210 million.

But here is what I got right:

  • Looking back at that language amendment on the creation of this fund, intended to keep the opportunity open for additional tax reform, there is no clear justification for mixing the individual and corporate provisions. If the corporate tax revenue gain is excluded from the top line, then the corporate tax revenue reductions should be excluded when calculating the bottom line.
  • Taking that step means there are more dollars available and a better argument to push for additional reform. Over four years the total in the relief fund could approach $460 million.  It should grow over time.  The General Assembly should look at this again, especially because Virginia’s existing standard deduction is way too low.  That cries out for additional correction.

I can plead distraction or blame the excellent pre-tariff Bordeaux, but I just didn’t double check – and even in an opinion piece, the facts matter most.

Those two tax provisions for corporate deductions return very little of the extra revenue the state should collect from corporate income taxes under conformity. Apparently, the business community’s army of lobbyists was satisfied with just those tiny tweaks, leaving the rest of the money for the state to spend.  So, I will give myself a half-right grade on my earliest prediction, that the state would keep the money.

I know this may be clear only to tax policy wonks.   I return you now to your other social media distractions.  My goal, despite what others may think, is simply to keep the focus on how the lack of a reasonable standard deduction is highly regressive.  Why argue about raising the minimum wage if the state just taxes it back?  There should be zero income tax on minimum wage workers.

Steve Haner

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19 responses to “Conformity Article Errata, Semi-Mea Culpa

  1. re: ” ……If the corporate tax revenue gain is excluded from the top line, then the corporate tax revenue reductions should be excluded when calculating the bottom line.
    Taking that step means there are more dollars available and a better argument to push for additional reform. Over four years the total in the relief fund could approach $460 million. ”

    Two sentences but makes it sound like it’s the Corporate tax that is going to generate 460 million. Can you say how much of the 460 is individual and how much corporate? How much could the standard deduction potentially be increased per taxpayer to give this back? Is it 5, 50, 500 dollars?

  2. IMHO, that $460 million would all be coming from individual taxpayers. In the out years it works out to about $200 million per year, with steady growth. You will notice on the same chart that the cost to the state (and gain to the taxpayer) of the modest standard deduction change is about $240 per year. So you could probably double down, go from $9K per couple all the way to $12K. That would save that couple another $150-175 per year. Worth doing.

  3. Is the argument that without increasing the standard deduction that individual taxpayers will end up paying MORE in taxes than before OR is it because the economy is good that there is more revenue coming in and any that is above the prior budget should be given back so taxpayers will end up paying LESS than they did before?

  4. Steve, you’re forgiven. You’re probably one of only 40 or 50 people in the state who understand the tax issues. (Luckily, Dick Hall-Sizemore is another one of the select few.)

    • Steve and Dick understand it more. Steve tends to also hold a strong view as to taxes , i.e.”give me my money back”!

      I’m not advocating the opposite – i.e. that if there are excess revenues that they should keep them all, however, we do have needs and priorities that need to be dealt with also.

      Then we have what caused this issue and that is changes to the Federal Taxes which purport to give tax refunds to many but also fundamentally changed the way that many itemized and pushed them back to the standard deduction.

      So the tax cuts at the Federal level are not paid for with spending cuts nor have tax revenues increased more than the tax cuts gave back (per supply side beliefs). So right now, the tax cuts are basically being paid for with more deficit/debt – and hardly a whimper from the ” lower my tax liability” folks … who used to go ballistic over deficit/debt… crickets now.

      In fact, folks at the Tax Foundation say: ” While nothing is currently set to expire in 2024, December 31st, 2025, will be a significant day for most taxpayers. Twenty-three provisions from the Tax Cuts and Jobs Act directly relating to individual income taxes will expire, meaning most taxpayers will see a tax hike unless some or all provisions are extended.”

      Now – if you think about this – by 2024 without any changes, continuing the “TCAJA” will ADD about trillion a year to the deficit/debt.

      So at some point, some one in Congress , in the past it’s been Conservatives, will say that the tax cuts cannot be sustained … if increased tax revenues are not happened as a result of tax cuts.

      In the meantime, because of “conformity” forces Virginians who changed from itemized deductions to standard deductions at the Federal level – ended up paying more – and between that and a better economy, Virginia has received more revenues than is needed to fund the current budget.

      But what happens if Congress unravels the TCJA tax cuts? It may not happen because the Conservative types who used to insist that an ever increasing deficit/debt was fiscally irresponsible – have gone quiet.

      But if Congress DOES “undo” the TCJA – then what happens to the changes Virginia has made to compensate for conformity?

      Will those changes also have to be “undone”?

      Is anyone in the Va GA or the Governor or Aubrey Layne thinking about this?

      The anti-tax hawks don’t want to hear this.. but the reality is that the Feds make changes, it will cause changes to the Virginia tax code also and not in a good way because Virginia, unlike the Federal Govt, cannot run a deficit or debt – at least not overtly.

      So, giving refunds to taxpayers in Virginia right now – may well result in having to increase taxes later on if TCJA is changed and the tax cuts go away but the shift from itemization to standard deduction does not.

      A prudent person would, at the least, see this potential and fold that possibility into any longer term tax changes and planning in Virginia.

      That’s why I asked the question whether people in Virginia are actually paying higher taxes or the increased revenues are taxes from increased economic growth (or both)?

      So what should Virginia do IF we believe the TCJA tax cuts are going to go away at some point?

  5. Steve, keep trying. You’ll get it right!

    • With a newspaper the error goes away, but the blogosphere lives forever, Peter. That is the curse along with the blessing.

      Larry, it is impossible to imagine that a future Congress will let these individual provisions expire. That’s why the authors of the bill put the sunset on them, and not the business provisions. There is nothing I’m proposing for the VA tax rules that I was not interest in seeing a decade ago. Good policy stands on its own. I know you are not going to cut me any slack and will stick with your “conservatives favor the rich” talking points, but what I’m pushing here really is aimed at middle income and down.

      The most likely thing a future Congress would do to roll back TCJA would be to play with the tax rates, not the rules. If it wants more revenue, it will raise the rates, start taxing capital gains and implied interest differently, and if it does — Virginia should conform.

  6. Steve – not sure where you got the “Conservatives favor the Rich” idea.

    What I say is that many Conservatives think that any/all taxes are somewhat north of evil and any/all tax cuts, rebates, etc are more than warranted – rich and middle class – e.g. “starve the beast”.

    that doing that will FORCE the govt to figure out what to cut……..

    the problem is that, that does not work. Look at the TCJA. The tax cuts were not funded by spending cuts and the basic premise was that the govt would be FORCED to cut spending or suffer more deficits. But they did not have so much confidence in their theory so they did the
    TCJA so that the tax cuts would “revert” which is a tax-increase – which makes the whole TCJA – bogus – it gives people a few years of easy tax refunds – funded by debt which pushes it on their kids and grandkids.

    Is that a “Conservative” ethic that you defend – and would support that kind of approach also be done in Virginia?

    That’s why I said that Virginia should be looking at the bigger picture and especially the potential downstream, i.e. don’t configure Va tax code permanently so that it adheres to the TCJA as if it is permanent.

    What should Virginia do right now – if they believe the TCJA may revert back to higher tax rates to control the deficit/debt?

    No, I’m not a hard-core anti-tax Conservative but if you think I’m an all-in tax & spend guy – you got that wrong. I support spending for things that have to be done plus investments for things like education and health care – if doing so has the potential to reduce downstream entitlement costs. When it comes to VRS – I do question how much of the shortfalls should be paid for by taxpayers versus employees. I support transitions to hybrid systems where there is a tax-advantaged 401K and incentives but at the same time – you have to pay employees a fair market salary or you won’t get the better employees.

    I’m just not a ” any tax is a bad tax” guy if that tax is delivering value in services or infrastructure. I don’t “like” taxes any more than I “like” paying for car insurance but … reality is……… and it has nothing to do with taxing the rich though if I were King, I’d prefer a VAT to an income tax.

  7. so this is from the Tax Foundation:

    Tax Reform Isn’t Done (excerpts):

    In December 2017, Congress passed the Tax Cuts and Jobs Act (TCJA),

    A number of major provisions in TCJA are scheduled to expire over the next eight years.

    In 2021 and 2022, several policy changes are scheduled to take place which would raise taxes on U.S. business investment.

    vast portions of the bill are set to expire or change over the next eight years. In 2021 and 2022, several provisions are scheduled to take effect which would raise taxes on business investment in the United States. Then, at the end of 2025, nearly all of the individual income tax changes in the bill are set to expire, meaning that most U.S. households would owe more in taxes the following year. ”

    So – with that recognition – what should Virginia do AND should Virginia ALSO set it’s provisions to expire at the same time – as opposed to making permanent changes that would have to be undone by a future GA?

    There’s apparently a belief that Congress would not allow tax rates to rise again when the provisions expire.

    I argue that in the absence of concomitant spending cuts that the deficit and debt will continue to go up and there will be pressure to not stop the reversion.

    If that actually did happen, what would happen to Virginia taxpayers and state budget?

    I would not be surprised if Aubrey Layne and others are considering this and other possible scenarios over the longer run and using that analysis to inform them on what is prudent policy right now.

    My impression from afar of the Va General Assembly is that only a few of them are real budget wonks and the rest are “followers”.

    Perhaps Steve or Dick have a different, more informed take.

    • At the federal level, I completely concur that Congress and the Administration are whistling past a financial graveyard when they cut taxes and grow spending. The discussion often notes that the trade conflicts are impeding economic growth (which I think correct) and thus diminishing the impact of the tax cuts, but I wonder if it isn’t the other way around: Trump and Congress pushed through the tax cuts so the trade wars would not crash us into recession.

    • You are right that very few GA members are either budget or tax wonks. The biggest budget wonk on the House side was Chris Jones, who was defeated and that is a loss to the GA. Time will tell regarding the new Appropriations chairman, Luke Torian. The biggest tax wonk on the House side, by far, is Vivian Watts, who is the incoming chair of the House Finance. I can’t think of any others that I would consider “wonks”, but, of course, I am not as familiar with the newer members.

      On the Senate, there are more old hands that have been around for many years who are really familiar with tax and budget matters, but none that I would put in the class of a couple of former members: Hunter Andrews and John Chichester.

      The remainder take their cues from these “wonks” or from lobbyists.

  8. The Virginia legislation anticipates the expiration clauses of the TCJA. The increase in the standard deduction is effective only through 2025. Also, deposits into the Taxpayer Relief Fund are required only through 2025. So, yes, unless there are changes made, Virginia residents will pay more taxes, beginning with tax year 2026.

    The actions of Congress regarding taxes are so deceitful and hypocritical. It is common practice to include expiration clauses in legislation cutting taxes, either to avoid other provisions that would impose limitations if the revenue reductions exceeded certain amounts or for political reasons. Then, the proponents of such legislation howl at the moon when those expiration dates approach, decrying the direful effects of such “tax increases” (which they arranged).

  9. How soon is Walter Stosch forgotten…..but few have been focused on the revenue. All are experts at spending.

    No way will the standard deduction retreat, federal or state. They put the sunset on that to get the bill through on reconciliation, knowing it was a third rail.

    • America’s political class lives in a sewer, relishing its filth daily, breeding ever more filth therein, thriving on their filth, engorged.

    • How can it be a “third rail” when it’s existence has been so short?

      It would be something like a Pyrrhic victory anyhow given the fact
      that Govt can and does effectively claw back additional taxes by changing the rates and altering/reducing tax-advantaged provisions like how much of health insurance is not taxed or how much is tax-deferred, etc.

      There are a zillion ways to effectively increase taxes.

      But the whole idea of “small-govt” and low taxes is bogus to the bone if they do not cut spending and in fact, tax reductions are paid for by accumulating higher and higher levels of deficit/debt.

      What Conservative today would come up and say: “I’m totally in favor of lowering our taxes and billing it to our kids and grand kids”?

      That’s why I call them Faux-Conservatives. They’re basically social conservatives without scruples when it comes to fiscal issues and probably the worst combination of fiscal and social that is possible!

    • Ah, “rec0nciliation”. That is the reason or term I couldn’t remember.

  10. We finally got our $220 Va. Tax relief check in the mail today…we had to ask for a replacement check because we did not seem to receive the first check.

    Steve is there something add’l new for next year, about being able to deduct property taxes?

  11. What increasing the Standard Deduction at the Federal Level has done is essentially set the conditions for a tax increase by taking away the means by which many lower their tax liability by utilizing deductions for Medical, Charity, Mortgages and State/local taxes.

    The first step was to take the itemized deduction away (effectively) and make sure the tax rates were set so most came out ahead.

    The next step is for the rates themselves to revert to previously higher rates unless Congress acts to prevent it and guess what – doing nothing is the preferred approach and the current Congress surely cannot be blamed for what the prior Congress did!

    Of course by the time that happens in 2024 – the deficit and debt will have doubled…. but who is counting and truth be known, people hat taxes more than they hate the deficit/debt which will be someone elses’ problem , i.e. their kids and grandkids. How many years, decades have we heard from Conservatives this fairy tale about kids/grandkids and debt and those dratted tax & spend Liberals who cause it! 😉

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