If No Better Ideas Emerge, Go With These

By Steve HanerFirst published Tuesday by the Thomas Jefferson Institute for Public Policy.

In 1972, a Virginia taxpayer needed a taxable income of $12,000 before the state’s maximum income tax rate kicked in. Adjusted for inflation, that threshold should be $78,000 today.

There has been one adjustment since, to $17,000 in income before the maximum rate is now applied. Adjusting that for inflation since 1987, when last amended, that should now be $40,000. In Virginia today, even a lower middle-income couple can be paying the same maximum tax rate as the richest Virginians on parts of their income. 

That is an illustration of the impact of inflation over time on Virginia’s tax code. It is a built-in bonanza for the government, effectively raising taxes constantly as more and more income is pushed up over those frozen breakpoints. With inflation about to kick in again, the Thomas Jefferson Institute for Public Policy continues to recommend that all elements of our tax code be adjusted annually for inflation. That is already done at the federal level.

Step two of our plan, which actually represents a massive cut in income tax for Virginia citizens and unincorporated Virginia businesses, involves the standard deduction. Virginia is now benefitting from another sneaky tax increase it implemented in 2019 by failing to make a serious change in the state’s standard deduction when it had the chance.

In 2017 Congress raised the federal standard deduction above $24,000 for a couple, which meant far more Virginians switched to the standard deduction on their federal taxes. If you use the standard deduction on your federal taxes, you must do the same on your state taxes. Millions of Virginians who used to itemize deductions began to use Virginia’s penurious (cheapskate) standard of $9,000 for a couple.

That one fact is the single biggest explanation for Virginia’s pending $2.6 billion surplus, even larger than previously expected. Correcting the problem is easy: Simply raise Virginia’s standard deduction, perhaps in phases, eventually equaling the federal amount. Once you get there, the companion decision to index for inflation will keep Virginia in line with the federal amount.

The fiscal impact of suddenly going to the full $24,000 standard deduction for a couple would be major, perhaps in excess of the pending surplus funds. A 2019 bill introduced in the state Senate produced an estimate of $1.25 billion in lower taxes in the first year, and about $1.8 billion after six years. The General Assembly that year did increase the standard deduction for a joint return from $6,000 to $9,000, so the impact of going further would be less.

For the 2018 tax year, about 3.25 million individual or joint returns were filed using the standard deduction. Each additional $1,000 in standard deduction per return would produce an aggregate tax cut of at most $186 million. For argument’s sake, assume 40 %of those are joint returns and an additional $1,000 in standard deduction per person might cost the state (and save the taxpayers) $260 million. Again, compare that to the pending $2.6 billion surplus.

To estimate the revenue loss (from our point of view “tax cut”) produced by indexing the tax code to inflation would require an estimate of future inflation. It actually produces no revenue loss, but merely slows the growth in future taxes. At one or two percent per year, the state can absorb it easily. If we do reach 1970s-level inflation again, the change will be substantial.

But where the people who spend tax money see a revenue loss, the rest of us are correct in seeing lower taxes, putting more money into consumer or business-owner hands, even more important when their own costs are spiking.

Ending Virginia’s income tax entirely, either for individuals or also for corporations, is challenging because that really could blow a hole in Virginia’s basic budget. Another tax increase somewhere else may be needed to compensate. Politically, ending the income tax on the wealthy and funding it with a broader tax hike on everybody would not fly.

Using the $2.6 billion surplus we now see and the likely revenue growth the next forecasts will provide, both of the proposals discussed above could be implemented starting in Tax Year 2022 without cutting the budget. The standard deduction increase could easily be phased in, as other states have done with income tax changes. Indexing would start slowly and build.

If a new and indexed standard deduction eventually removes $10,000 from a family’s taxable income, that saves them up to $575 per year. If Virginia could (within five or six years) reach the federal level of $24,000, the savings climbs to $862.50. This would benefit individuals with income either from salary or wages or from an unincorporated business. It does not cut corporate taxes.

One argument against using the consumer price index to adjust the tax code in the past has been that other key economic measures were not adjusted in that manner by the state. But the 2020 General Assembly blew that precedent to smithereens by applying automatic inflation hikes to both the state’s gas tax and its minimum wage law. Now indexing should be applied to help the taxpayer, not just the tax collector.

Share this article


(comments below)


(comments below)


21 responses to “If No Better Ideas Emerge, Go With These”

  1. LarrytheG Avatar

    Scary stuff when I found myself agreeing with Steve and TJ! 😉 The problem is when we hear that the state does not have enough mental health facilities and staff, that prisons lack facilities and services to reduce recidivism, when schools need more teachers for kids with learning needs, ESL, and we have a shortage of State Police to name just a few, how do we reconcile the steady drumbeat of ” the taxes are too damned high” ?

    Would better mental health, prison, schools, police funding benefit Virginians and possibly even function like an investment and produce more productive citizens and taxpayers?

    Conservatives don’t typically “think” that way – right? They inherently think govt and govt spending is bad, not good!

    But perhaps this TJ narrative is the perfect thing for Youngkin to pick up and carry?

    I think I’d be more convinced if Conservatives ALSO talked about HOW they would improve things like mental health and year-round schools, etc, as part of their “cut cut cut” mentality.

  2. LarrytheG Avatar

    Having been to Canada a few times and very impressed in a not good way with the bite of their general sales tax,I wondered if their policy was more like TJ and Steve seem to advocate , i.e. low income taxes and higher sales taxes.

    So asking Steve, would you favor a Canada style approach to taxes in Virginia?

    here’s an FYI :

    ” U.S. federal income tax brackets range from 10% to 37% for individuals. In Canada, the range is 15% to 33%. In the U.S., the lowest tax bracket for the tax year ending 2019 is 10% for an individual earning $9,700 and jumps to 22% for those earning $39,476. The corresponding bottom Canadian bracket stays at 15% until $47,630. This is the bulk of the reason that lower-income Canadians are often better off than their American counterparts.

    1. Super Brain Avatar
      Super Brain

      Actually the rate for business income reported on 1040’s is 80% of the regular ordinary income rate with the 20% Section 199a deduction.

  3. Steve Gillispie Avatar
    Steve Gillispie

    What have I missed that you believe the controlling Democrats would regard tax cut recommendations for any current taxpayers with anything other than humor or derision?

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      An inconvenient fact for you is that Republicans were in control of the General Assembly for most of the last decade and they failed to put forth any of these proposals. Even in 2019, which was their best opportunity due to the changes in the federal tax code, they were in the majority in both houses and could not get their act together.

      1. Baconator with extra cheese Avatar
        Baconator with extra cheese

        Very true. The GOP can’t ever seem to get their act together. I abhor most Democrat policies, but at least they circle the wagons and don’t apologize for it.

  4. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    These are ideas that deserve serious consideration. I wonder why the Republican candidate for governor is not proposing them.

    Folks now are focusing on the $2.6 billion year-end balance and using that as a justification for cutting taxes. They seem to forget that it was not always a matter of budget surpluses. It was not that long ago that the state was suddenly facing a $2 billion shortfall in its revenue estimates. Most of my last years at DPB were spent asking agencies for proposals to cut their budgets. Prisons were closed due to budget cuts. Folks lost their jobs.

    Maybe the increased revenues will continue, but maybe they won’t. The best thing to do with the budget surplus is to use it for one-time expenditures–capital projects, shoring up the Unemployment Fund, upgrading the IT functions of some agencies, renovating old school buildings, etc.

    At any rate, the GA is not going to take any action on changing the state income tax until the JLARC study of the state’s income tax structure is completed next year. https://lis.virginia.gov/cgi-bin/legp604.exe?212+ful+HJ567ER+pdf

    1. vicnicholls Avatar

      Suggest it to him Dick. I’m sure going to.

  5. Paul Sweet Avatar
    Paul Sweet

    The federal standard deduction increase was partially offset by deleting exemptions, which really hurt larger families. If I remember correctly, federal exemptions were about $4000 per person the last year they were in effect. Virginia’s exemptions are much smaller.

    1. Stephen Haner Avatar
      Stephen Haner

      Yes, exactly, state taxpayers lost the same itemized deductions and I think the exemption but did not get the higher standard deduction producing (wait for it) this big fat surplus.

      1. Super Brain Avatar
        Super Brain

        The TCJA of 2017 made Corp tax cuts permanent but actually begins to raise individual taxes for everyone in 2026 besides the 20% that had increases from the actual act.

  6. Super Brain Avatar
    Super Brain

    I do not want a Tennessee deal where the sales tax on everything is 9.25%.

    1. WayneS Avatar

      Tennessee does not have state income tax. I’d trade a 9% state sales tax rate for eliminating Virginia income tax.

  7. LarrytheG Avatar

    One area where I have had in the past, confidence with the GOP and Conservatives (including some rare fiscally-conservative Dems) is more focus than just on money/budget but rather how to improve govt, improve it’s services and functioning to do more with less, i.e. cost-effectiveness.

    That’s more important than ham-fisted hatchet-type budget and funding approaches. Tax money spent should be viewed in terms of bang-for-the-buck, even investment, rather than money lost and wasted.

    That’s what I expect from fiscal conservatism. And I’ll point out two instruments in Virginia that supposedly motivate that and that is JLARC and the Auditor of Public Accounts – two agencies that are supposedly institutional and transcend elective figures but both can be and sometimes are ignored and at one point, I heard that JLARC had become politicized. I wonder if Dick knows anything about that.

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      JLARC may have become “politicized” in that the topics that it is asked to examine may be different now than they were in the past when a different party was in power. But that has always been true. But, the staff is not political and I would be greatly surprised if their recommendations are political.

    2. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      JLARC may have become “politicized” in that the topics that it is asked to examine may be different now than they were in the past when a different party was in power. But that has always been true. But, the staff is not political and I would be greatly surprised if their recommendations are political.

    3. Stephen Haner Avatar
      Stephen Haner

      Larry, I completely agree that a major focus should be improved service delivery and basic competence, and the current administration has demonstrated weakness on both. DMV. VEC. Lowered school standards. Etc.

      Steve, FYI both the standard deduction increase and indexing have shown up in D-sponsored bills.

      Dick, I know it is debatable, but IMHO tax policy created these surpluses in large part and the response should be to adjust tax policy. The lack of legislative interest in prior years was not for lack of trying on my part (ask Emmett Hanger or Vivian Watts how often I’ve bugged them!). This is my last soapbox and soon I will get off it.

      1. Dick Hall-Sizemore Avatar
        Dick Hall-Sizemore

        That last sentence concerns me.

        1. Stephen Haner Avatar
          Stephen Haner

          Told myself I would stay engaged through one more election.

        2. LarrytheG Avatar

          He’s said it before. But he knows that his voice is appreciated. So a little conflicted.

  8. One of the advantages of indexing Virginia’s income tax brackets for inflation is that everyone can understand it. Very little requires explaining, as opposed to changing how the standard deductions work.

    Another is that the lack of indexing is so obviously punitive to lower-income households. With inflation ramping back up, the status quo amounts to a stealth tax increase — with the biggest impact on lower-income households.

    Indexing the tax brackets would seem to be a no-brainer for the Youngkin team.

Leave a Reply