Full Conformity Raises $3.6B In First Five Years

Projected State Income Tax Revenue Increases if Virginia Conforms With No Adjustments. Source: Secretary Layne’s Presentation

Assuming the Virginia General Assembly conforms the state’s tax rules to the IRS code as it exists now, adopting intact the recent federal changes, the state will reap an additional $3.6 billion in revenue over the next five years.

Almost $2.5 billion of that will come from personal income taxes, with an additional $1.1 billion collected from business tax returns.  By the sixth year, 2024, the total new state revenue attributed to conformity with the Tax Cuts and Jobs Act of 2017 reaches $950 million per year.

Those figures were revealed Friday by Secretary of Finance Aubrey Layne, having been forecast by a new proprietary revenue model developed for the state by Northern Virginia-based Chainbridge Software LLC.  Layne’s presentation went into detail on the state’s revenue results for the fiscal year just ended, the official revenue forecast for the year that just started, and the federal tax conformity debate.

There are two key assumptions behind those Chainbridge projections.   The first is that the state makes no changes in state tax brackets or rates or state-specific exemptions, all of which could be changed to reduce the impact on individual or business taxpayers.  The second is that taxpayers take full advantage of the new federal rules when the federal benefit exceeds any tax cost at the state level.

While state taxes are projected to grow, federal taxes paid by most of those individuals are projected to decline by far higher amounts.  Aggregate federal income taxes on individual Virginia residents are projected to drop by almost $4 billion for 2018, more than ten times the expected state income growth on the same earnings.   These are projected totals, and to borrow a common disclaimer individual results may vary.

Governor Ralph Northam, who opened the meeting Friday with his own remarks, has proposed taking advantage of the revenue surge to amend Virginia’s Earned Income Tax Credit (EITC) making it refundable, meaning taxpayers who qualify would get any excess credit – more than their state tax liability – given to them as a tax refund.

He used the example of a lower-income family with a state tax liability of $800 and an EITC of $1000.  Right now, Northam said, “Virginia keeps that additional $200.”  Under his proposal “we’re giving that $200 back.”   Critics of the idea would argue the $200 in question is coming from other Virginians as an income transfer payment.

Previous efforts to make the state EITC refundable have been estimated to cost up to $250 million per year.  For tax year 2018, according to Layne’s data, individual taxpayers declaring incomes above $50,000 per year would be paying the state an additional $290 million, only slightly more than the cost of the EITC refunds.

Layne forcefully argued for full state conformity with the federal changes, adopted in early 2019 so the rules can apply to tax year 2018 in full.  If Virginia stands still and does not conform, individual taxpayers will have to deal with as many as 20 major differences between their state and federal returns, and for business filers it is more like 30 provisions which would differ.  For decades Virginia has traditionally conformed fully or almost in full with the Internal Revenue Code.

Passing an emergency conformity bill at the start of the January session, which would need an 80 percent vote, would not preclude a later debate about adjustments Virginia might want to make to rates, brackets, or other provisions.  In statements outside the meeting, but not stressed Friday, many Republican legislators have discussed allowing Virginia taxpayers freedom to itemize deductions on their state returns while taking the standard deduction at the federal level.

The policy combinations are endless, and Layne pledged to work with the legislators who have ideas they want to test with the new revenue projection model.

(Note of apology – earlier versions used the wrong name for Chainbridge Software LLC.)

 

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13 responses to “Full Conformity Raises $3.6B In First Five Years

  1. software can easily handle either choice but the trick is – getting the changes
    into the tax software – before January – and that means the Va Code has to be changed forthwith so that companies can make those changes to their software by the time folks start doing their taxes in January.

    The GA .. _could_ have anticipated this as the Tax Cuts and Jobs Law Bill was signed into law on December 22, 2017. They actually DID anticipate the internet tax issue when they changed the way that fuel is taxed … they put a provision in the law to increase the Va tax if Congress failed to allow internet taxation.

    So .. some of this is basically due to the slothful way the GOP does business in the GA… they just let this get by them.. which allow Northam to pick up the ball and run with it.

    I’d favor a change to hold everyone harmless… leave it up to them to decide. Failing that I’d support refundable tax credits that are only available for health insurance or HSAs… etc.

    Lots of hypocrisy floating around. I’m NOT hearing the GOP – in one strong and unified voice saying – NO to ANY “spending” of the windfall… Instead I’m hearing some discussion of HOW to spend it, instead – from the GOP no less!

  2. Well, deciding to fully conform is the easiest for compliance, since almost all taxpayers do their federal returns first. A bill passed and signed in January 2019 that sets the rules for tax year 2018 is taking things down to the wire, but causes no real problems.

    • well people start doing their taxes in January, right? You make legislative changes in January and it basically kills all the software programs that people use to do their taxes.. no? You have to make those changes now – if you want the tax software to do it right in January…

  3. This: “Critics of the idea would argue the $200 in question is coming from other Virginians as an income transfer payment.”

    I’ve already transfered enough of my hard earned paycheck to others. All I’m getting is the run around and mess from local and state govt. Frankly, a friend has it right: stop paying for people’s “mistakes” and “bad judgement” and you’ll see their judgement turn around or else we won’t be paying for multiple peoples’ “mistakes” and “bad judgement”.

    Sad to say but true.

    • BINGO!

      This is all modern American government can do these days: fiddle-fattle with itself, moving numbers and words around, handing out favors for political advantage. Busywork.

      But ask them to solve a real honest to God problem. It’s like like asking them to lay an egg! Nobody has got not a clue.

      Reminds me of all those folks a few years back holding a conference, among themselves, all highly educated experts on the government payroll, trying to figure out how to keep Richmond’s schools in good repair. Schools were falling apart, Nobody had the courage to demand that folks do their job.

      • Here is some commentary on Richmond leaders ineffective efforts to maintain city’s schools from 3016:

        “I suspect that all concerned are still debating the wrong subject here.

        Why cannot the capital city of the Commonwealth of Virginia maintain its public school buildings so that they do not collapse around its kids?

        Obviously the problems in Richmond Virginia runs far deeper and far wider than a debate over accounting terms! Or even a debate over how the ‘City Fathers of Richmond’ allocate “resources per those definitions in the City Budget!

        No, these sorts of problems run far deeper. To arrive at the point described in the article, one requires a deeply dysfunctional culture, deep habits of gross neglect, and corruption of ethics. A collapse of simple competence. A collapse of Governance. A collapse of society and its leadership, a gross dysfunction on the most base level.

        Can’t anybody down there repair and maintain the bricks, mortar, rooftops and plumbing of the common everyday buildings that house your own children? Does now anyone in an entire city even know where to look and what to ask to fix this problem? Or know who to ask and hold accountable.

        What an embarrassment! Have we all been struck blind and dumb! Reduced to act like the three monkeys that headlined a recent article – Hear no Evil. See no Evil. Speak no Evil.

        It’s frightening, what is happening to this country. It’s why we got Trump! At least he could fix this particular problem. This is no joke.

        Remember that old refrain from the 1930s’ before Weimar fell. Well, at least he will make the trains run on time. And get a roof over our kid’s head.”

        See post and commentary from July 27, 2016 post published July 27, 2017 labelled Debating the Wrong Stuff found at:

        https://www.baconsrebellion.com/wp/debating-the-wrong-stuff/

  4. Wow, that averages out to $700 million a year. If the G.A. fails to act and the state income tax revenues increase accordingly, how would that rank in the history of “biggest tax increases” in Virginia history?

    • Tax increase? I left it out of the story but Layne batted that back by saying the state is changing nothing, conforming in full, so how can it be the state’s tax increase? The big bucks will come from people who CHOOSE to switch to the federal standard deduction and surrender their itemized deductions at the state level as well, but they could CHOOSE to stay with itemization on both returns and see no change in their state tax. “It’s not the choice I would make,” he said. The camera wasn’t on him so I didn’t see if he was grinning. (It was about the only time I think he lapsed into sophistry.)

    • But they KNEW this in December 2017! And they’ve waited til now to do something… And it will take 75% of the GA to agree on what to do if they want to do something now.

      It’s HARD TO BELIEVE the GOP did not know this was going to happen – AND to get their ducks in a row on how to deal with it. The Dems only had to wait for the GOP to do nothing – until it was too late – which is what they DID!

      Now Northam and the Dems have them in a box – and their response is to cry / demonize “mother of all tax increases”. That’s pretty sad. There was a lot of potential CONSTRUCTIVE things that could have been done had they acted… Politics these days sucks … we seem bound and determined to poke each other in the eye no matter what.

    • Well, as you said, “It’s like like asking them to lay an egg!”

  5. re: ” “Critics of the idea would argue the $200 in question is coming from other Virginians as an income transfer payment.””

    No.. this is just further demonization of the issue IMHO.

    the most fair outcome – is for everyone to get treated equally in the impact AND for the progressive tax system to continue to function the way it was intended.

    Beyond that – people in the lower income tiers – ALREADY receive “transfers” and there actually is an opportunity to reduce that transfer by requiring any increases in refunds to be dedicated towards spending on things that are now subsidized.

    We are so bound up on the ideology these days – that we can’t even make changes that reduce subsidies and increase the ability of those who don’t pay as much in taxes – to become more self-reliant and not need subsidies.

    We PRETEND that people in the lower economic tiers are not subsidized already – and so we oppose ANYTHING – even those things that could actually work to reduce the subsidies and help people become more self-sufficient.

  6. Pingback: Virginia Should Double Its Standard Deduction - Bacon's Rebellion

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