Games Still Played with “Conformity Windfall”

Look what they did here! This Senate Finance Committee slide from November shows only “conformity windfall” revenue from individual provisions, but then deducts individual and corporate tax relief against those totals to shrink the size of the Taxpayer Relief Fund, source of future tax reform. That’s not what the General Assembly ordered. How much corporate “conformity windfall” is missing from the top line of this chart?

By Steve Haner

Sometimes you have to start the victory lap, even if you only get halfway around the track. A year ago, on Bacon’s Rebellion and in Thomas Jefferson Institute for Public Policy organs, I was beating the drum for a proposal to double the state’s standard deduction, the amount of family income exempt from income tax.

When the smoke cleared, the legislature had made a start, increasing the standard deduction for a married couple from the ridiculously greedy (on the Tax Man’s part) $6,000 to a slightly less ludicrous $9,000. This at a time when the federal standard deduction was going to $24,000, meaning the state taxes Virginia middle-income families more far heavily than Uncle Sam. 

To add insult to injury, the legislature delayed the impact of the change until the 2019 tax year, even though it could easily have made it effective for the 2018 tax year that was settled with last spring’s returns and refunds. But the good new is that the change, now in effect, will save Virginians $360 million this year and $236 million on next year’s taxes. Here is what I wrote about it Thursday for the Jefferson Institute.

The legislature agreed to one other major provision proposed by the Jefferson Institute, creating a Taxpayer Relief Fund to hold in abeyance any and all “windfall” revenue not returned by the changes made in that 2019 bill. Remember that as you read on, it is key. The state may be playing a deceptive game which I just figured out and explain below.

Nobody else was talking about the standard deduction before the issue was first raised here, and a number of legislators – including the Democrat who will now chair the House Finance Committee – reported they had seen the Jefferson Institute proposal. Saving taxpayers $600 million over two years is certainly not a bad outcome. And if lightning can strike once….

This all came about because Virginia was going to capture a major revenue windfall by conforming to new federal rules on taxes, while continuing to use Virginia’s existing tax rates and silly standard deduction amount. Other states had used that opportunity as a time to raise their standard deductions, which helps all taxpayers going that route but helps the lower income taxpayers proportionally more.

According to a Senate Finance Committee report on November 21, which provided the tax savings estimates, the state now predicts that “conformity” produces a smaller windfall than first expected. A summer of 2018 estimate put the first three years (Tax Years 2018, 2019 and 2020) of revenue windfall at almost $1.9 billion. That included growth in both personal and corporate income taxes.

But the Senate Finance Committee estimate ignored (totally) the corporate income tax windfall and mentioned only individual income taxes, setting the expected take at less than $1.4 billion for those same three years. It also claimed that all but $195 million of that was being given back by the larger standard deduction and other tax rule changes.

Here’s what just struck me: What the Senate Finance Committee slide shows is the state is deducting two corporate tax changes from the individual income tax windfall, thereby shrinking the Taxpayer Relief Fund. It shows zero revenue from higher corporate collections, but that’s wrong. This is nothing short of sleight of hand. The individual changes should be deducted from the individual windfall, and the corporate changes from any corporate windfall. But as predicted here first, the state really doesn’t want to part with this money at all.

If you look at that 2018 report, the real growth expected was in corporate income taxes. We at the Thomas Jefferson Institute proposed dealing with that with a corporate tax rate cut. According to many legislators, no corporate income tax paying company endorsed that. Fine. Every single dime of that should now be diverted to individual income tax cuts instead. Under the law as I read it, even the corporate income tax “windfall” belongs in the Taxpayer Relief Fund.

Your correspondent, the former chief lobbyist for the Virginia Chamber of Commerce and the state’s largest industry, hereby recommends that the “windfall” millions the corporations don’t want back should go to the people (who are their customers and employees after all.)

Even ignoring the corporate tax windfall, which may be substantial, and even after the accounting legerdemain, the Taxpayer Relief Fund is expected to hold $378 million after the first four years of “conformity,” according to Senate Finance accounting. That is a good basis for additional tax reform. The first recommendation would be to further increase the standard deduction, looking to get closer and closer to the federal level (already matched by many surrounding states.) A second idea, also from last year’s bill, is to index all tax provisions for inflation.

Step one will be to see what the Governor proposes on December 17, and then to see what the General Assembly disposes over the winter. It could abolish the Taxpayer Relief Fund and absorb the revenue. It could ignore and keep all the corporate income tax growth.

One step it might take is to follow the path initially proposed by Governor Ralph Northam, to make the existing Earned Income Tax Credit a “refundable” credit, meaning some of the low-income recipients would actually get checks from the state if their credit exceeded their tax liability. The policy goal is commendable, but the method inferior to a major increase in the standard deduction. That shows up immediately as more money in every paycheck.

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18 responses to “Games Still Played with “Conformity Windfall””

  1. LarrytheG Avatar

    dumb question – if individuals can choose standard deduction or itemized and the higher standard deduction moves many away from itemized to standard – which then, because of conformity does the same for State Taxes… right?

    Do corporation taxes work the same way – i.e. standard deduction or itemized? I thought they had a whole different process… no?

    now .. just a nice answer – no snark………

    1. Steve Haner Avatar
      Steve Haner

      There is no standard deduction for corporate income taxes. Corporations deduct the actual expenses that they are allowed to, leaving their taxable profit. The new federal rules eliminated or limited many of those allowed deductions and cut the tax rate to compensate. But the state didn’t cut its tax rate, which produces the windfall: Higher taxable income and the same old rate.

  2. djrippert Avatar

    I went to look up the members of the Senate Finance Committee on Virginia’s Legislative Information System. It shows Tommy Norment and Emmett Hanger as the co-chairs. Both are Republicans. Is it fair to assume that LIS has not been updated?

    1. Steve Haner Avatar
      Steve Haner

      Not until the new General Assembly is sworn in next month. The old members are still on the payroll and the committees remain as is until then.

  3. djrippert Avatar

    This is very much in keeping with the article I wrote yesterday. The new Democratic majority wants your money but does not want you to know they are taking it. New regulations that increase prices, fees and budgetary sleight of hand will be the order of the day under the leadership of Governor Northam. What a disgrace.

    1. Exactly. That was my response to Steve’s article as well. The problem for taxpayer advocates is that the issues here are really complex and take significant effort to understand. If the G.A. said, we’re lowering the top tax bracket from $17,000 to $10,000, or said, we’re increasing the top tax rate from 5.75% to 6.5%, they’d get it, and they’d be irate. But most people won’t even be able to understand what Steve is explaining. They certainly wouldn’t be able to explain it to someone else.

      Modern-day tax hiking strategy is to hide the increase in complexity or to break up the tax increases into such little pieces and spread them around so much that no one notices.

      1. Exactly. Dems feel strongly we are paying 2-3x too little tax, but they are scared to death to admit that, and to implement direct tax increases. So for example, in California they now have a extra carbon tax on oil companies for gasoline, but the politicians did not want to show this as a pump tax, so they send the tax bill directly to the oil companies. In turn, the oil companies increase Ca. pump price to account for the added taxes. Meanwhile for many decades in the USA it is illegal to show gasoline pump taxes on the receipt, for the same reasons.

    2. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Shouldn’t we wait until the actual proposals are made before jumping all over the legislature and the Governor?

      1. LarrytheG Avatar

        wait before the criticism.??? Au Contraire! Guility they are – NOW!

  4. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    The provisions of the 2019 tax reform legislation (HB 2529; Chap. 17) clearly stipulate that the deposits into the Taxpayer Relief Fund are to come from the additional revenue resulting from individual returns. Here is the relevant language:

    5. That there is hereby established a special nonreverting fund to be known as the “Taxpayer Relief Fund” (the Fund). Any revenues generated by the INDIVIDUAL REFORM provisions contained in Subtitle A of Title I and §§13611-13613 of the federal Tax Cut sand Jobs Act, P.L.115-97(2017), from the collection of taxes during Fiscal Years 2019 through 2025, estimated to be approximately $450 million annually, beyond those revenues reasonably expected to be collected due to general economic growth and absent the federal policy changes, less the estimated reduction in revenues needed to implement the tax policy changes set forth in the first enactment of this act for the relevant fiscal year, shall be transferred to the Fund. (emphasis added)

    It would seem that the Senate Finance chart accurately reflects the intent of the legislation. Of course, one could always argue about the estimates of “those revenues reasonably expected to be collected due to general economic growth and absent the federal policy changes” and the “estimated reduction in revenues needed to implement the tax policy changes set forth in the first enactment of this act for the relevant fiscal year.” I always thought those areas were the ones inviting mischief.

  5. Steve Haner Avatar
    Steve Haner

    No, they are still playing games, because while they are counting only revenue from individuals, they are deducting the tax reform measures for both individuals and corporations. Backing those out would add another $210 million to the Taxpayer Relief Fund over the first four years, even more going forward.

    Yep, I didn’t spot that limiting language you highlighted last spring. Sneaky move on their part, and I’m sure the corporate lobbyists signed off on it, to get the very specific corporate loophole provisions they wanted. But those provisions should not then turn around and be taken out of the hides of working families. The clever drafting might authorize this fraud, but fraud it remains. You are just getting me more worked up!

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Obviously, I do not understand the chart. Where are they deducting tax reform measures for both individuals and corporations?

      1. Steve Haner Avatar
        Steve Haner

        GILTI and the subtraction for disallowed net interest are both corporate provisions, desperately lobbied by the corporate interests. They are right on the chart, which helped with my confusion that the Taxpayer Relief Fund was to include both sides….I know what they will come back with but it is horst schist.

        1. Dick Hall-Sizemore Avatar
          Dick Hall-Sizemore

          Ahh, I wondered what those line items were for. I vaguely remembered GILTI being discussed in BR, but I didn’t take the time to track it down. Surely, these two items do not represent all the increase from corporate taxes. I wonder why this two were included in the Senate Finance analysis.

  6. Good work Steve. We are in a period of change which means it is hard to do year end tax planning. Not sure I am totally happy but it’s a moving target so I do not know where I stand yet.

    Meanwhile, a few weeks ago I reported to Virginia Dept of Taxes that I did not seem to receive my $220 refund for 2018. Have not heard back, but they verified that we should have received the full $220 around early October-ish. They indicated my rebellious comments on BR was not shown on my record, and this was not held against me. They are supposed to get back to me with a replacement check or explanation that the original check was already cashed.

  7. LarrytheG Avatar

    If some of us cannot understand the complexity being discussed here in BR, I doubt very seriously that the average voter will.

    Most taxpayers pay more attention to how much they got back or owed – year to year…

    There’s another change at the Federal level – the Medical deduction now only nets you what remains after 10% of your AGI (instead of 7.5%) for some older. That’s going to drive even more back to the standard deduction.

    And the nightmare scenario is that the Federal code is supposed to REVERT back to what it was – at some point – unless extended or made permanent. And right now, it’s NOT sustainable as the refunds are basically being paid for with about a trillion a year in debt! the deficit and debt are exploding. It’s all going to end.

    1. Steve Haner Avatar
      Steve Haner

      I admit I’m not trying to reach the average voter, but the tax professionals and the key legislators. And I’m about to post again to clarify and correct some things I got wrong in my haste….and to try to reach them again.

  8. […] fact, the legislation that passed in 2019 set up a segregated fund to hold the additional income tax “windfall” for future action, and during the fall it was […]

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