Just Give It Back and Here’s How

Senate Finance Committee chart separates the impact of business-related conformity provisions on individuals and corporations, key information for designing a response. TCJA = Tax Cuts and Jobs Act

A joke making the rounds Wednesday had Governor Ralph Northam agreeing that Virginians did deserve a return of the windfall tax increase flowing to the state due to conformity, but we’d have to take it as Amazon Prime memberships.  Don’t expect laughter if the 2019 General Assembly votes out a massive multi-year incentive package for a super-wealthy corporation and refuses a simple and broad-based tax reform proposal for almost everybody else.

Give it back.

In the past few days the General Assembly’s key money committees have discussed what to do about the gush of new revenue the state will garner when it conforms to this year’s new federal tax regime.  They should give it back.

After wrestling with different approaches over the last few months and consulting stakeholders, the public policy group I’m affiliated with, the Thomas Jefferson Institute, has settled on two basic steps that have always been on the options short-list.

1) For individual taxpayers, the state should double its standard deduction to $6,000 for individuals and $12,000 for couples.   That removes up to $6,000 from the taxable income of an estimated 2.8 million Virginia tax returns, the vast majority of Virginia taxpayers.

2) For Virginia’s incorporated businesses, the corporate income tax rate should be cut from 6 percent currently to 5.5 percent for 2018 and 5.0 percent for 2019.

Both steps should be retroactive to tax year 2018 so they would reduce the taxes you compute for the state in a few months.

Both steps are first steps, because all indications are the state tax increases created by the federal tax changes will accelerate in future, by the state’s own estimates.  Even a standard deduction of $12,000 is too low for a family and should rise more.

Neither step squeezes the state budget.  The amount of “windfall” revenue returned by these changes is still lower than the estimated new revenue conformity creates.  On an individual basis there will still be winners and losers, but the current state budget is not among the losers.  No spending need be cut.

The drumbeat on this issue started by multiple posts on Bacon’s Rebellion has spread, sparking only a few comments at a recent House Appropriations Committee meeting and a  presentation in front of the Senate Finance Committee Thursday.  The tone of the Senate meeting, which I did not attend, may be reflected in this Richmond Times-Dispatch account where any effort to prevent the tax increase is framed as a loss of state revenue.

The Senate Finance staff produced the slide used above which slices the conformity revenue projection a new and useful way.  It separates the business tax impacts into two measures, those that show up on individual returns because the business is not incorporated and those that show up on corporate returns.  With that split you can see that the state impact of conformity is immediately quite positive to pass-through businesses and immediately a substantial tax increase on corporations.

The way the Northam Administration had packaged the same data implied the impact on business in the first year was minimal.  Not so.

That extra $157 million hit to corporations in the first year represents about a 17 percent increase over the base projection for corporate income taxes and (don’t you love it when a plan comes together?) we propose a 17 percent cut in the rate.

The idea of increasing the standard deduction for individuals must also have great appeal, because the Senate is considering a temporary substitute – a tax credit that would have a similar impact for taxpayers (perhaps not as substantial) but would not be a permanent change in the rules.  What Virginia needs, and what taxpayers should demand, is a permanent change.  The idea that Virginia would continue to stand on its ridiculously low standard deduction deeper into the 21st Century is troubling.

People who have large mortgages, second homes, large local property tax bills, large charitable deductions and other ways to lower their taxes will continue to use them as itemized deductions.   Low income and middle-class workers who don’t have those deductions have been stuck with the same inadequate standard deduction for decades.  This is the best opportunity to change that since 1987.

State revenues are finally growing again, at least in part because of the economic activity resulting from the federal tax changes.  In the first four months of the fiscal year (July-October) revenue shot up ten percent, blowing past a 1.5 percent growth estimate.  Both the Senate and the House committee staffs this week projected hundreds of millions in new dollars that are not due to conformity, and not yet committed to any spending requirement.

Both committee staffs were quick to add long lists of unexpected bills showing up, the largest due to errors in Medicaid cost forecasting that are embarrassingly large, large enough to question the competence of the forecasters or the diligence of overseers or both. These Medicaid cost overruns will be among the first things cited by people arguing Virginia cannot afford to offer any tax relief and must keep all the “windfall” dollars.

 

 

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15 responses to “Just Give It Back and Here’s How

  1. Your blog tomes continue to be quite good.. I’m sure others will agree!

    And you make some seriously persuasive arguments here!

    Just remember – people start doing their taxes in January and the folks that do software typically can’t make substantial changes quickly and errors often result – which very well could drive people back to calculators and paper to get their just rewards!

    In terms of giving Amazon money and “giving it back” – how about we use that same standard with Dominion – both the excess profits and their tax windfall?

    You guys at Thomas Jefferson ought to be all over that also, right?

  2. Haner, you just hit a home run, out of the park!

    The score is now tied. One run for you, the other for the Governor.

    Question: Are we in the second inning? Or is it, the end of the ninth?

  3. I will certainly be pissed if I have to pay $1000 more to Virginia, after saving maybe $800 on Federal taxes.

    As of today, Turbo Tax 2018 and other tax software is coming out, so I will soon be able to check the estimates I gave in my Virginia Gothic article a few weeks ago.

    For senior citizens, I think the current tax code is probably out-of-date. Virginia allows tax-free Social Security but fully taxes IRA withdrawals. But these days a common recommendation is to delay taking Social Security and instead convert Traditional IRA to Roth IRA (which means you have to show the IRA conversion as income). But the state tax bite on this strategy after conforming is a bit painful, and may tend to discourage the IRA conversions. Virginia has a humongous tax discount for seniors under about $75,000, which quickly phases out to zero discount over $75,000 income.

    • Remember the money we spend on taxes is largely wasted.

      However, the public money paid out on the Amazon’s deal is extremely well spent. That money will earn very high returns. That money will substantially raise the wealth of all citizens in Virginia. Like the Rossyn-Ballston Corridor has done over many years. It will be a gift that keeps on giving for generations. That is how good the Amazon deal is for Virginia.

  4. I feel like middle income $100k-$200k folks who itemize are being asked by Virginia to cough up a lot more $dough. That cohort tends to get over-taxed all the time. I’d rather see state allowance of itemized deductions, as New York has done, at least as a stop-gap. That still gives Va. more tax income, because the new Fed laws reduce the allowable itemized deductions.

  5. {please ignore upper post}
    I feel like middle income $100k-$200k folks who itemize are being asked by Virginia to cough up a lot more $dough. That cohort tends to be over-taxed, in the effort to favor lower and higher income folks. Also, those citizens do not know yet Va. GA/Gov decided they need big (secret) kick in the tax-butt.

    I’d rather see state allowance of itemized deductions, as New York has done, at least as a stop-gap. That still gives Va. more tax income, because the new Fed laws reduce the allowable itemized deductions.

    • TBill: No question, that is not the approach we are recommending, although what we recommend will soften the bite somewhat on those (like you) who do better with that approach. We opted for a broader reform, but I’m sure there will be advocates for that position. The goal for VA should be to get that VA standard deduction all the way equal to the federal standard deduction.

      • That sounds good re: standard deduction to Fed level…>>currently Virginia is opting for what I would call “selective” or “lop-sided” conformity: we accept those Fed changes that result in an increase in Va. tax revenue, and reject those Fed changes (like standard deduction) that are in tax-payers favor. So heads we win, tails you lose.

        Of course, this approach is very tempting to the left side of the aisle, who would like to have a way to increase taxes silently without needing to ask for an increase in taxes.

        • the “left” and “right” side of taxes is, in general, that the urban areas that vote blue do have additional/higher taxes on top of the States and in general more people support the more/better amenities that taxes pay for.

          Those folks have also gotten hurt by the caps on the SALT deductions and I see no big effort on the part of those who want to increase the standard deductions to also deal with that issue.

          Which if you think about it – works a little like this. Those folks who live in Blue Urban in Va will end up actually paying more taxes especially because of the SALT cap which will make it harder for them to itemize.

          That, in turn, cascades into the State returns and if you think about it – it’s the more prosperous urban areas taxpayers who will be hurt substantially more than the Red voting rural taxpayers in Va.

          The rural areas with much more modest incomes probably don’t itemize as much as the urban areas anyhow… and thus are not going
          to be affected that much.

          My suspects are that this is part of an ongoing analysis – which is looking at how the tax changes affect urban and rural and whether or not changes make the urban areas – net losers who end up bearing the brunt of the impacts if the State makes no changes.

          One would think that if that is true – it would motivate the “left” that mostly represents the urban regions ar more than the right which largely represents RoVa. No?

          Tell me where I’ve got this wrong.

          • Larry- I think you are saying directionally that NoVA/Hampton Rds residents are more impacted by the SALT limits, and those are Blue areas, so why wouldn’t the Blue side of the GA aisle be more upset about Virginia’s tax profiteering off the Federal tax law changes? In New York for example, their legislature tried to make taxpayers more whole, by allowing itemizing on the state tax return.

            I do not have the answer, except to say that Gov Northam took the Dem lead, and said this situation presented an a good opportunity play Robin Hood and take the money from the richer and give to the poorer. As if we do not already do that in Va.

  6. I was curious if anyone has done an analysis of what happens in Va if we just adopt the higher standard deductions.

    Also – if not mistaken, any non-ROTH IRA is basically untaxed money set aside then taxed as it is withdrawn – both Fed and State.

    The argument can be made that it ought not be taxed anyhow but that’s an entire separate issue from conformity in my view.

    At any rate – knowing how the Va GA “works” – there is no way in hades that legislation will make it’s way through and get signed by the Gov (or override) before some folks start doing their taxes and using tax software to do it.

    I keep saying that in when the Federal Law passed in late 2017 – we KNEW at that point the conformity implications and if we were going to do something about it -we would have had to move early in 2018 and I’m flummoxed that the folks who now want that – did not do that in the 2018 GA session – and waited until now.

    Just how serious were those folks statements about protecting Virginia taxpayers if they did not act back then?

    I’m persuaded that Northam’s initiative is not going to fly but I’m thinking he also has some veto leverage like he did with MedicAid so it boils down to whether we’re going to see some real effort at a compromise 0r just setting up a political fight for the next election.

    The GOP spend a lot of money in the past election in Va trying to tar the Dems as left wing tax and spend socialists – and judging from the results – it was not a big success so I’m wondering if that strategy still has juice.

  7. re: ” Larry- I think you are saying directionally that NoVA/Hampton Rds residents are more impacted by the SALT limits, and those are Blue areas, so why wouldn’t the Blue side of the GA aisle be more upset about Virginia’s tax profiteering off the Federal tax law changes? In New York for example, their legislature tried to make taxpayers more whole, by allowing itemizing on the state tax return.”

    I agree with you! My bet is that if they actually identified the income ranges and number of affected on a geographic basis – it would show a much bigger impact in the urbanized job centers of the state – that typically vote “blue” yet most of the rukus seems to be coming from the GOP and their supporters!

    • If some in Va. GOP are liking the idea of Virginia profiteering from the Federal tax law changes, yes, it is because they are rural-oriented and relish the idea of punishing NoVA which is already over-taxed in the Virginia tax methodology (not good). But the Gov wants to take the profits too so, where is he from?

      If I was Gov I would try to move to less bifurcation of taxes.

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