Conformity: Option on Deductions Saves $370M

Allowing a split choice on deduction methods provides 87,000 taxpayers with a tax cut and reduces the conformity tax hit for 456,000. Source: Secretary of Finance.

If Virginia were to allow its taxpayers to keep taking itemized deductions at the state level, even though they take the new higher federal standard deduction, almost 550,000 more would be expected to itemize at the state level, Secretary of Finance Aubrey Layne told state legislators Thursday.

Almost 90,000 would be people who were not claiming itemized deductions before.

That idea is popular with some legislators, many of them House of Delegates Republicans, who are hearing from taxpayers who face a difficult choice.  Under current Virginia law, which would remain in place if Virginia simply adopted straight conformity with the new federal rules, the decision on standard deduction vs. itemized must be the same on both state and federal returns.

When Layne reported on an earlier projection that Virginia would gain $532 million in new individual income tax revenue during 2019, and $3 billion over six years, much of that would come from that situation.  More than 600,000 Virginia taxpayers were expected to switch from itemized to standard deductions, lowering their federal tax but increasing their state tax.

Along with the number of returns that might split their method, he also estimated the amount of tax dollars involved as $370 million.  That estimate was for 2020, and its not clear what the more immediate impact would be.  Layne presented that as lost revenue for the state but turn the coin over and it’s a tax cut for those families.

Why does this matter?  It puts a price tag on that proposal being discussed in some circles, and that price tag is less than the estimated revenue gain from conformity.  The idea could be implemented without blowing a big hole in the state’s already-adopted budget – a big point in its favor.  The budget was written with no conformity tax gains included.

Also, the price tag Layne announced (probably working with that new tax model the state has developed) is a bit lower than the revenue loss/tax cut value on the other big idea.  Previously Layne had estimated that if the legislature doubles the state’s standard deduction (to $6,000 per person or $12,000 per couple) that would cost (or save) $440 million.  He repeated that number Thursday in an interview with Bacon’s Rebellion.

The information is in a slide that Layne prepared for the monthly meeting of the Senate Finance Committee, but according to the Richmond Times-Dispatch the committee didn’t want to take up the topic today.  The newspaper story, at least the first iteration, seemed to characterize the $370 million as the state revenue impact if the state doesn’t conform to any of the federal changes.

That number would be far more complicated.  A failure to conform at all would involve a state-specific addition or subtraction on more than 20 individual and 30 business provisions and would remove from Virginia returns many highly positive changes – changes taxpayers would be furious to find they lost on their state returns.  Layne confirmed that his number was just focused on the proposal to let people split their decision the deduction method.

Layne also reproduced some pages of the forms that Minnesota taxpayers will use to accomplish just that, to back out all the various federal changes when they prepare their state returns.  That is a nightmare that no Virginia leader is promoting for here, but it is a very possible outcome if the General Assembly fails to act in early 2019 after having failed to act through all of 2018.  Conformity will require a positive vote by a super majority in both chambers to be retroactive for tax year 2018.

In his un-given presentation Layne continued to discourage the General Assembly from doing anything to remove the conformity tax bite for tax year 2018.  He argued against both proposals circulating, to double the standard deduction or allow the option state itemized deductions.

“Such responses will not only impact taxpayers whose state taxes were increased as a result of the (Tax Cuts and Jobs Act) but will also impact taxpayers whose tax liability did not change as a result of the TCJA,” Layne said.  That is correct. For tens of thousands of Virginians, they would not be revenue neutral removal of “conformity tax” but would be real tax cuts.

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16 responses to “Conformity: Option on Deductions Saves $370M

  1. I think the thing that strikes me is how complicated this is and how the General Assembly apparently has done basically nothing to this 11th hour – and seem to be getting revelations from Mr. Layne and the Gov.

    You can’t sit on your chubby butt this whole time – then want a quick and dirty fix or blame the Gov?

    sorta reeks of incompetence….. in a way.

    the other thing – less revenues = more tax cuts for taxpayers

    yep – but then you got a budget issue

  2. Those of us itemizing are taking a double or triple whammy. Due to the $10k SALT limit, we have less to deduct and we will have pay more to Virginia in any case. So it would be helpful if we could take the Fed Standard Deduction to cut our losses. Layne is saying he cannot give us that relief, because a hypothetical 90,000 tax payers, not currently itemizing, will itemize. I am a bit skeptical of that claim. Somebody should make up a scenario of who those 90,000 are?

    • Mainly people with less than $12,000 in potential deductions (the old federal standard deduction) but more than $6,000 (the state standard deduction). Those in that narrow band would be able to elect to take itemized state deductions for the first time. Previously they took the standard deduction on both returns.

  3. Wow, my brains are totally fried. I think I’ll read your post again in the morning and hope I understand the trade-offs better!

    • I had a little trouble reading/understanding it all also but Steve seems to have it all well in hand!

      I STILL think:

      The GA had ample time to do a competing analysis and get their ducks in a row and it appears they did little or nothing and now want to do “something” – “quick”. I’ll take Layne analysis over theirs at their half-assed efforts.

      Hoping that the GA would have seen this as an opportunity to ALSO revamp the tax code – a built-in- excuse for doing it – was very wishful thinking if they can’t even get a cogent approach to conformity itself!

      I think Layne is right at this point – don’t be screwing around tinkering at the last minute – the unintended consequences will be out the wazoo.

      The GA needs to get their act together for changes for next tax year. Do it right. Use the excess money to fully fund VRS and build up the rainy day fund to the level the rating agencies prefer.

      This is the time to get several things done that need to be done but it should not be a rush job.

  4. Complexity and confusion are the Tax Man’s best friends. Within a few years this grows to a $1 billion tax increase if the paralysis continues.

  5. I read the story again this morning. It takes a lot of effort to understand the issues involved. Most people have no idea whether they would be better off with one option or the other. I certainly have no idea how my household would benefit. My guess is that those who are pressing for state-level itemized deductions will find it difficult to get much traction. It’s not as simple as saying, “We’re cutting tax rates. A family of four with household income of $100,000 will save $1,500.” There is no way to predict what any given family will save because it all depends.

    Like you say, Steve, complexity and confusion are the Tax Man’s best friend.

    From a purely political perspective, look how Democrats are painting the Trump tax reform as tax cuts for millionaires and billionaires with a pittance for the middle class. (Joe Scarborough was making that rant on TV this morning.) If they can say such things with a straight face when it is abundantly clear that the Trump tax cuts benefit the middle class, how much easier will it be for Democrats to downplay the significance of state-level itemization, which will have a much more varied impact?

    • “Most people have no idea whether they would be better off with one option or the other.”

      Nobody really knows yet (except a few insiders), because we do not have a handy dandy Virginia 2018 Tax Estimator app. I do have an app for 2018 Fed taxes.

      >>Maybe Steve could get his contacts to make a prelim app for us on Excel.

      I am really wating for TurboTax 2018 to come out, maybe mid-November, and I am hoping TurboTax will have both Fed and Va. forms so I can check my numbers.

  6. Steve- Seems to me there is room for a compromise.

    Virginia is going to lose some money to the Feds per Option-2 in my Virginia Gothic article. Those are the people like me who keep itemizing, even though their itemized deductions are below the Fed Standard Deduction, so they incur a penalty on Federal Taxes, but pay less to Virginia.

    >>If the Virginia Standard Deduction is increased by some amount less than doubling, let’s say +$1000 for everybody and another +$1000 Age 65 and over, seems to me that might minimize Option-2 loss of money to the Feds, and the overall financial windfall Layne is hoping for is mostly saved.

    • Another way to say this:

      Virginia’s refusal to adapt state tax law to the new Federal tax law is forcing middle class Virginian’s to pay (1) $500 million more in state taxes , in addition to (2) an extra $250 million? to Uncle Sam.

      So when Sec. Layne is talking the wonderful windfall tax increase Virginia is getting, that does not count the additional unintended windfall he wants to give to the Feds also, by forcing some of us to itemize.

      There may be a way to minimize the $500M to Va + $250M to USA to something like $400M extra to Va., significantly reducing the tax bite on the middle class itemizers including middle class seniors who are shouldering the burden, as it currently stands.

  7. re: ” There is no way to predict what any given family will save because it all depends.”

    and is that because the tax code is a swiss cheese of special breaks?

    re: ” Nobody really knows yet (except a few insiders), because we do not have a handy dandy Virginia 2018 Tax Estimator app. I do have an app for 2018 Fed taxes.

    >>Maybe Steve could get his contacts to make a prelim app for us on Excel.

    This is the problem. I’m pretty sure that Layne and the GOV – DO have a model and could easily have a “calculator” created for taxpayers.

    The GOP could create a calculator showing current then a calculator showing what they want to do.

    The thing about Commercial tax software – they cannot show anything except the current law – AND, more important, they cannot make changes in days or even weeks if the State makes changes. If the state waits until Dec or Jan to make changes – people are going to be doing their Virginia taxes on paper. That’s why Layne is saying it’s too lane to change … it will result in chaos.

    • Turbo-tax can find a way to reprogram its product, even at the last minute, by on-line updates. But that is a reaction to what the GA does; we all need this information now for the GA reps themselves to sort through these tradeoffs on their own and reach a deliberate, not an accidental, conclusion. Or for that matter, for us ordinary citizens to do so, in order to give our GA reps any sort of meaningful constituent input at this late date. It’s been the better part of a year since the federal law went into effect. What a mess! As you say, “Layne is right at this point – don’t be screwing around tinkering at the last minute – the unintended consequences will be out the wazoo.”

      • Well.. I do volunteer taxes and we use tax software – this year it’s TaxSlayer but my experience is that it’s not quick AND it usually ends up with errors.

        Software is what I did in my previous life and quick/dirty changes to software usually result in disaster.

        The GOP is maximizing the political advantage on this issue but the PROOF of what can be done realistically is quite telling – they don’t have a plan other than to demonize.

        The simple truth is – and Layne said it – “it’s not as simple as one thinks”. but don’t let that keep the pols from stirring up folks with lies about how easy it would be to make a “simple” change and the Dems would rather keep the taxes!

        Our politics has become so screwed up that things like this- that used to get common-sense from both sides – now – everything like this becomes a new bomb to blow up.

  8. I feel a few tweeks might be able to minimze the pain and maintain a nice tax increase for Virginia.

    Maybe increase Va. standard deduction a little bit, and for the Age 65 credit, phase it out to $1000 instead of $0.

  9. Interestingly, we get lots of mail from the Democrats complaining that federal tax reform restricted the amount of SALT deductions. Why aren’t they pushing for unlimited SALT deductions on the state income tax?

  10. For any proposed changes – would like to see a full analysis of the effects of it BEFORE we do it so we actually do know what will happen.

    “small” tweaks should not be a purposeful part of more comprehensive changes as opposed to something down once that then has to be undone/changed again when the bigger changes are done.

    In terms of SALT – I’m just not seeing the Dems talk much about it myself but the Dems are rightly worried that tax cuts done first that then necessitate spending cuts are cart before the horse. In Virginia if we do tax cuts with no plan for what spending we’re going to cut – it’s not an intelligent process. It just promotes fiscal chaos and intense lobbying from everyone to try to not be the entity that take the biggest budget hits.

    So you’ll be pitting Higher Ed against K-12 against public safety in a budget free for all rather than a careful budget process.

    Some folks – actually want to blow up the process on purpose .. burn it down – and start over… what we used to hear “zero-based budgeting” where each thing funded has to start all over and justify every expenditure. I’m actually not opposed to doing that – if it is done as a systematic process rather than ad hoc chaotic free-for-all.

    The thing that often comes across is that we really do have a part-time citizen legislature with all the pluses and minuses that accrue from folks who are tinkering with stuff they are usually not professionals at – getting “advice” from various interest groups and staffers – who these days as Steve can probably attest to – also are divided along partisan lines and the result is about what one would expect if your or I went to Richmond and proceeded to fiddle with legislation. It really does reflect how much of our citizenry would act – and gets the Ire of folks like DJ who calls them an incompetent Clown Show.

    So – yes… in this context – fiddling with the tax code at the last minute to make “tweaks” is a high wire act – whether you’re a Dem or a GOP or in-between.

    At the end of the day – after the legislature gets done doing their thing – we all still expect the highways to work, police nabbing bad guys, schools taking kids to educate, the electric grid still providing electricity – etc….

    There actually ARE some folks in Richmond that do know what they are doing but they have a lot of “followers”… who don’t and just see where the herd is headed.

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