by Steve HanerFirst published this morning by the Thomas Jefferson Institute for Public Policy.

The argument now dividing the General Assembly on partisan lines is not whether to cut the state income tax, but for whom. The House of Delegates goes big with a broad tax cut that brings Virginia into line with other states, but the Senate only wants small changes aimed at smaller groups of taxpayers.

More than 80% of the 4.1 million state tax returns filed in Virginia take the standard deduction, currently set at $9,000 for a married couple. In general, the 3.4 million returns represent the middle and working class, with the poorest Virginians not filing any tax return and many of the wealthiest using itemized deductions.

Increasing the standard deduction by 100%, to $18,000 for that married couple, is a benefit aimed at that large group in the middle, which pays the vast majority of income taxes. They are at the center of the legislative struggle now underway between the Virginia House of Delegates, which supports the increase, and the Virginia Senate, which does not. The controlling majority in the House is Republican and in the Senate it is Democratic.

The Virginia Senate has instead approved a state income tax reduction that applies only to the lowest and lower middle income groups, those eligible for something called the Earned Income Tax Credit. It has also endorsed a new tax subtraction for military retiree pay, passing in both chambers.

Two years ago they jointly projected $46.4 billion in state General Fund revenue for the two-year budget. After accounting for the doubled standard deduction and several other tax changes, the House is still projecting a 26% increase for the next two years, to $58.3 billion. The Senate, offering fewer changes to the tax rules, expects a 33% increase, to $61.7 billion.

About two-thirds of the $3.4 billion revenue gap between House and Senate is the standard deduction change.

The Senate considers the House’s 26% increase in revenue and spending not adequate to the state’s needs. Activists inside and outside the legislature are busy painting the House’s proposal, despite its growth of $11.9 billion, as a series of cuts, reductions,  a “defunding” even.

A university poll getting widespread attention this week from a news media hostile to Youngkin implied that the House budget, 26% larger than two years ago, leaves education, public safety and social services “underfunded.”

The tax policy differences will need to be reconciled in about two weeks, when the Assembly is set to end. The playing field will be the conference committee negotiations over the budget, and perhaps over the House bill that raises the standard deduction. The Senate committee changed the Earned Income Tax Credit with a bill embedded in the budget document.

The increased standard deduction was a campaign promise by Governor Glenn Youngkin but is not a new idea. It has been adjusted up several times over the years. Most states that have personal income taxes allow a standard deduction higher than Virginia’s, and the federal amount is $25,100 for that same married couple.

Allowing those 4 million households to exclude another $9,000 from tax would save the vast majority of taxpaying couples $517.50. Those that have tax withheld from pay would see that go down. Pegging the future standard deduction to inflation for automatic increases would be better still but is not on the table.

Advocates for low-income citizens are correct that if a worker pays no income tax because they fall below the filing thresholds or EITC eliminates their tax liability, then increasing the standard deduction is of no value to them. That is likely a few hundred thousand Virginia households. Make the EITC into a refundable program, meaning any credit not used to cancel taxes becomes a payment, and then those folks come out ahead.

As an example, a married couple with $30,000 in income owes no income tax because of the EITC. Make that refundable and they also get a check from the state for $339. (The federal EITC is refundable, too.) Couples with children earning over $50,000 would see an EITC refund payment, although as income rises, the amount shrinks toward zero.

Here’s something most don’t mention. The two approaches are not mutually exclusive. The General Assembly could do both, double the standard deduction and turn the EITC into a refundable benefit. The EITC change only reduces revenues about $200 million more per year. If that is how to get to yes on the standard deduction, it should be considered.

Both the Senate and the House have approved one-time modest cash rebates to individuals who paid income tax for last year. Those are not lasting tax changes, also provide no benefit to those who paid no tax, and also go to richer taxpayers who used itemized deductions. Reconsidering that might be another path to yes.

Something is going to have to give to reach a compromise. When the smoke clears the standard deduction increase is the most important element, the income tax provision of broadest benefit, and should be adopted.

Share this article


(comments below)


(comments below)


19 responses to “Last Stand for a Higher Standard Deduction”

  1. Kathleen Smith Avatar
    Kathleen Smith

    Couldn’t agree more. If the GOP can pull this through, it would be a credit to the Commonwealth.

  2. Democratic Party fundamentally does not understand how to govern when given the opportunity.

  3. James McCarthy Avatar
    James McCarthy

    Virginia should simply embrace Sen. Rick Scott’s plan. “All Americans should pay some income tax to have skin in the game, even if a small amount,” the plan states. “Currently over half of Americans pay no income tax.” Scott’s idea of equity echoes Romney’s 2012 comment. Tax ’em all, the long (itemized) and the short (standard). That’s a kitchen table notion to reduce inflation – less money to spend, fewer purchases. No skin in the game by not paying taxes? No problem. Declare them ineligible to vote. Republicans and tax policies have never been a good mix.

    1. Stephen Haner Avatar
      Stephen Haner

      Yeah, that stuff is gonna happen….

      Everybody pays federal taxes, just not everybody pays income taxes. And I’m fine with a fairly progressive income tax system, given how hard the excise and other hidden taxes hit the lower income workers, and the percentages of gross they pay into FICA. The underappreciated 2017 changes, boosting the standard deduction so high, worked in that direction.

      But too many folks have a hard time grasping the concept of the standard deduction. “No car tax” and “no food tax” are easy to grasp, fit for slogans. And a fair number (too many) of Republicans want poor and lower income folks paying income tax on their minimum wage or barely above minimum wage jobs.

      1. LarrytheG Avatar

        re: ” And a fair number (too many) of Republicans want poor and lower income folks paying income tax on their minimum wage or barely above minimum wage jobs.”

        at the same time they sometimes talk about “regressive” taxes adversely impacting the”poor”!


        As you pointed out. Working people pay FICA, sales taxes, fuel taxes, property taxes and real estate even if they rent – it’s incorporated in the rent.

      2. James McCarthy Avatar
        James McCarthy

        Lotsa good ideas on this thread but, then, the decision makers don’t listen to the proponents.

      3. tmtfairfax Avatar

        I could see imposing a nominal $50 income tax payment on everyone. But every bit of income, including government payments should be considered as taxable income. Raise the standard deduction but income is income. If the receiving class saw potential tax consequences, they would not be so ready to stick out their hands.

  4. Nancy Naive Avatar
    Nancy Naive

    Set SD according to median income to be proportional to the fed and state tax rates at that income. Kind of a pivot point.

    1. Stephen Haner Avatar
      Stephen Haner

      Gee, even more simple to explain.

      1. Nancy Naive Avatar
        Nancy Naive

        Beats just arbitrarily doubling. But, in retrospect, not a good idea. It halves it.

  5. Nancy Naive Avatar
    Nancy Naive

    Set SD according to median income to be proportional to the fed and state tax rates at that income. Kind of a pivot point.

  6. energyNOW_Fan Avatar

    Virginia and Maryland were the only 2 states to use the Trump Tax cuts as a sly way to increase state taxes, by disallowing credit for itemized deductions. Others blue states like Ca. and NY did not allow that to happen. Basically for Virginia it was an “unauthorized” middle class tax grab, where Virginia’s strategy is basically to hit middle class harder than most states do (in order give rich and lower incomes the tax preference). So in my view they should try to make amends – bigger standard deductions.

    1. Stephen Haner Avatar
      Stephen Haner

      “Unauthorized” in that it didn’t need a direct vote. But the legislators understood exactly what was happening, and many in both parties were fine with it.

  7. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    I like your idea for a compromise: get rid of the one-time cash payments, adopt the higher standard deduction, and make the EITC refundable. Everyone except the rich win.

    1. LarrytheG Avatar

      or you could make the lower income pay income taxes but then add it back into the refundable EITC! 😉

    2. Stephen Haner Avatar
      Stephen Haner

      I’d happily throw in the military retiree provision. I mean, really, you want to explain to the CIA retiree or the cop with 40 years on the force why only military retiree pay gets the extra break? Not sure they’ve thought that through.

  8. […] Youngkin has called for doubling the standard deduction, but the Senate doesn’t include that in its proposal, instead including a targeted income tax reduction for low income groups, Bacon’s Rebellion reported. […]

  9. […] Youngkin has called for doubling the standard deduction, but the Senate doesn’t include that in its proposal, instead including a targeted income tax reduction for low income groups, Bacon’s Rebellion reported. […]

  10. tmtfairfax Avatar

    Virginia has pushed the “Virginia Way” to a higher level of corruption. The state authorized collective bargaining for public sector employees, which, in and of itself, is not wrong by national standards (even though I wouldn’t support it based on FDR’s critique). What’s wrong is that bargaining labor unions and their PACs can make campaign contributions to the elected officials that are approving the agreements and setting the funding to pay for them.

    It would be an unfair labor practice if a labor union made payments to management or if management made payments to a labor union. This is out and out bribery. Democracy Dies in Darkness.

Leave a Reply