Love The Middle Class? Index Virginia’s Taxes

Virginia’s most effective tax collector is inflation.

Virginia’s long refusal to adjust any element of its income tax for slow but constant inflation means that each year, a slightly higher percentage of your growing income is taxed, and the rising costs of living shrink the value of the standard deduction and push more of your income into the top tax bracket.

In 1990 Virginia’s income tax looked like it does today – an $800 personal exemption, a $3,000 standard deduction for a single taxpayer, and income above $17,000 was taxed at the maximum rate of 5.75 percent.

Had the 1990 tax code also included a provision to adjust those amounts annually for inflation, today the personal exemption would be $1,578, the individual standard deduction $5,916 and the top tax rate would not kick in until $33,524.   The higher personal exemption and standard deduction combined would eliminate the tax bite on almost $9,000 income for a family of four – saving over $500.


Virginia’s Standard Deduction Over The Years

Those figures come from a simple on-line calculator, with the baseline of January 1990 and the amounts adjusted to December 2018, a period of about 97 percent inflation.   Call it indexing, call it a cost of living adjustment, the bottom line is the same.  Such annual adjustments are widespread in the economy, and the federal tax system adjusts annually.

In 1990, the federal personal exemption was $2,050 and by 2017 that had risen to $4,050.  The 1990 federal standard deduction was $5,450 and was $12,700 in 2017.  That’s indexing at work.

The Virginia General Assembly has consistently refused to recognize the impact of inflation on our tax code, doing the most damage to those working middle class families who dominate campaign rhetoric.

It has another chance during the 2019 debate over how to respond to recent changes in the federal tax system, which are producing a $600 million or more annual boost in state revenue.  Several pending bills pick up on a Thomas Jefferson Institute for Public Policy call to start indexing in 2020, with the next state budget cycle.  They would use the same measure used by the federal IRS.

Those bills would also make one of the key inflation adjustments immediately, a 100 percent increase in the standard deduction to $6,000 per person or $12,000 per couple.  Technically, that is just the 1990 amount adjusted for inflation.  A failure of the legislature to at least do that, to make that one fair adjustment, would be hard to explain given this opportunity.

But the beauty of slow and steady inflation, to the Tax Man anyway, is most people don’t notice it.   These aren’t the days of the 1970s, with double digit annual price increases.  And the most politically-aware and connected taxpayers have a strong protection against the erosive power of inflation – they take itemized deductions.

When inflation increases their home value and local tax bill, when they buy a new house (or second house) and get a larger mortgage or buy a new car and get a larger car tax bill, the tax system subsidizes those costs.  They get some of it back by deducting it off their state tax bill.  If they have high medical costs, again, those can produce some tax savings.  Since 1990 most of those people have seen those costs and other costs rise, but the tax code has shielded the full impact.

Not so people taking the standard deduction.  They pay higher rents than in 1990 (with their landlords deducting taxes and interest), they also pay higher car tax and medical costs, but the state standard deduction today is worth half what it was in 1990.  Half.  It will continue to drop in real value if nothing is done.

Protecting people who take itemized deductions, especially people who pay the highest local real estate and car taxes, is an incredibly important priority to a short-sighted group of Virginia legislators.  We sort the members of the General Assembly by party, gender, and note which have rural and urban districts.  Perhaps we should also ask all 140 which way they do their taxes:  using Virginia’s frozen and eroded standard deduction, or using the itemized method which protects them from inflation?

Itemized deductions with their automatic inflation protection show how the tax code is written by the well-off to benefit the well-off.  The federally-driven economic safety net system for low-income families is also adjusted for inflation, including the Earned Income Tax Credit grant program that Governor Ralph Northam is promoting.

Will the General Assembly leave town without giving the same protections to everybody in the middle?

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21 responses to “Love The Middle Class? Index Virginia’s Taxes”

  1. LarrytheG Avatar

    You make a good argument but would have to also ask – would you do the same for things like sales and gas taxes?

    Also to note something about marginal tax rates not widely understood and that is in the higher tax brackets – not all of your income is all taxed at the bracket you are in. Parts of your income are taxed at the lower bracket rates:

    I assume Virginia’s marginal rates works similarily.

  2. Steve Haner Avatar
    Steve Haner

    Well, the sales tax is inflation proof, by its nature. As the prices goes up, the taxes goes up. Yes, I have advocated for indexing the fuels taxes, and yes, Virginia’s tax brackets work that way – everybody pays the same low rates on the first few thousand.

  3. Thanks Jim. Those of us who have no other deductions than a home (single one bought 18 years ago) are the ones who itemize. Its not just the rich. Its those of us who barely made it into the middle class who bought a home to be able to get a tax deduction. Itemizing it made my life easier to the point where I could pay off credit cards, and do some work on the house. This makes me more self sufficient. Doing the screw up that the state is doing now is going to make it so I can’t pay things off faster (1 credit card left) or get things fixed on my home. That means putting money into the hands of small business contractors, and increasing the value of the home.

    Itemizing isn’t only for the rich.

  4. LarrytheG Avatar

    There is a significant subsidy for being able to itemize a mortgage. It’s called imputed rent and it is booked in the budget as a tax expenditure.

  5. NorrhsideDude Avatar

    Does anyone here actually believe one person on that hill in Richmond cares about the middle class? They care about their rich cronies and/or their pet project handouts to the poor to essentially buy votes. That’s the whole game kids.
    It’s both protect big interests, who give donations, and then virtue signalling/ vote buying with “free stuff”.
    They know only middle class dumb@sses who still believe in the American Dream, they sold us decades ago, pay taxes….
    And if you vote for increased taxes you get to feel virtuous paying those taxes because then you are helping those who aren’t as privileged as your blessed family. And if you don’t want to pay the taxes you are evil for not wanting to help those less privleged and maybe even racist or a climate change denier (stupid).

    1. djrippert Avatar

      True, true.

  6. LarrytheG Avatar

    For giggles and grins, I did a prospective computation on how much Virginians pay right now for transportation (all taxes, not just the state gas tax)

    I took the DMV CTC data that shows that the total of State and Federal and other taxes devoted to transportation generated about 5 billion a year ( 1/2 of which is dedicated to maintenance and operations).

    So one COULD divide the population into that number and get about $600 per capita or divide the population over 18 and get about $800 but what I did was go to the VDOT site and get the total vehicle miles driven number and divide 5 billion into that ( actually divided the 5 billion by 365 (about 14 million per day) since VDOT reports in Daily Vehicle Miles Driven = 233,597,109 ). Yes Virginians all of us, drive 233 million miles a day. That’s a LOT of gasoline – at 20mpg it’s about 12 million gallons a day… and we used to tax it by the gallon but now we tax it by percent of sale – which in a way accounts for “inflation” but more realistically – fuel does not “do” inflation in the “usual” way.

    So what I got was about 6 cents per mile… that is paid in transportation taxes – all of them both Fed and State plus the others sales tax, vehicle sales and use tax on the sale of vehicles, etc.

    if this was done JUST for Virginia gas taxes…

  7. As they say 65 is the new 40, however for tax purposes, dang-it we are still 65. I was just checking NJ taxes: on 65 and older, Virginia is much harder on middle class 65+ers. Believe NJ excludes first $100k of retirement income. On the other hand, Virginia would be essentially tax-free for me if I was under $80k, but as soon as I get to $90k , most of the senior discounts wear off.

    So it seems to me (without a scientific analysis) Virginia’s overall approach is to go extremely easy on those under say $80k, and then clobber the middle class just above that amount of income. My proposal is to compare against neighboring states (MD, NC) for tax bite on say the $80K to $150k crowd and see how Virginia compares. I suggest it is a heavier burden here compared to other income groups.

  8. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    I guess it depends on how one defines “middle class”. Kirk Cox defines it as those with incomes of $125,000 to $150,000. But, according to Census data, the 2017 median household income in Virginia was $71,535. If you want to look at median family income, it was $86,279. Those numbers are a far cry from $150,000.

    I like the idea of indexing. The same logic would apply to indexing the minimum wage, as well.

    By the way, the General Assembly better get moving. There is not a lot of time left for it to make changes in the tax code so as to be effective for the filing of returns for 2018. This is what comes from their failing to take up these tax issues during the Special Session they were officially in for most of the year. They knew what the issues were then and would have had the time to work them out without all the distractions of a regular session.

  9. LarrytheG Avatar

    re 2018 tax returns. hmmm…. all these companies like Turbo Tax have already sold their software to folks who are already doing their taxes!

    This does not end well……….if the GA makes changes…. now… that applies to 2018 taxes.. geeze….

    1. TooManyTaxes Avatar

      Turbo Tax updates its federal and state files constantly over the tax year. I’m guessing the other software products do the same.

      1. LarrytheG Avatar

        If the changes are complex though – such changes are problematical.

        Folks have to remember – Virginia has no rules for things like itemized deductions – they’ve always taken whatever taxable income was on the 1040. Does anyone think we’re going to re-write that and get it through the GA and get the Gov signature on it?

        Whoever is telling Virginians that this is going to get done is more asshat than honest injun.

        The reality is that we MIGHT get tax credits for next year – presuming the GA can agree and the GOV signs it.

        I’m prepared to eat my hat if wrong but I just don’t see a path.

    2. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Turbo Tax (and others, I presume) update their software regularly. However, there is a deeper problem that goes beyond the companies’ abilities to incorporate tax changes into their software. Under the state constitution, any legislation becomes effective on July 1. To become effective before that date would require a four-fifths vote in each house (80 in the House and 32 in the Senate). That is why the GOP-sponsored bill has provisions that folks could get special credits or something on their 2019 returns to recoup their savings for 2018.

      1. LarrytheG Avatar

        so………Virginia is going to take this windfall in this year…put it in a lockbox and give it back next year?


        well… this is going to be interesting… for sure!

      2. I assume 2018 is fixed now. As you note, there could be a credit next year if they decide 2018 was not the way want it for the future.

        So it will interesting to see how 2018 approach is greeted by the greater public. If I was an elected official, I’d be inclined to make a tweak for 2019 just to say we did a token something to address the issue.

  10. LarrytheG Avatar

    It would be a significant thing for Virginia to write it’s own tax code for itemized deductions…. It was much easier to work off of the Fed taxable income because they did not have to forecast how much people would itemize.

    The “deductions” are essentially money the state does not get – that it would have with the standard deduction.

    Given their competence in forecasting revenues over the last few years and this year with Medicaid – they’re gonna have to up their game… to get good numbers… because if they come up short on revenues… it’s actually as bad and maybe worse than coming up short on expenses – because you can always figure out how to cut NEW costs but having to cut into base budgets is ugly.

    This is why I think the GOP is not so Gung Ho on this…. much more muted and cautious.

    1. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      Actually, the state tax people do a pretty good job at forecasting revenues. A different set of folks forecast Medicaid expenditures. Traditionally, the state revenue forecast tends to err on the conservative side; that gives the Governor and the legislature a chance to brag about a surplus at the end of the fiscal year. There were a couple of years in the recent past when the forecasters missed badly, however, and there were large unexpected revenue shortfalls and the Governor had to institute budget cuts in the middle of the fiscal year and not just new costs.

      By the way, if the state did decide to set up its own deduction and credits schedule, you would really see the lobbyists swarming then!

  11. Members of the political class are getting smarter. They realize that people hate paying higher taxes — especially taxes that they can readily see and understand. They have discovered the tactic of (1) slicing and dicing the tax increases into small pieces and spreading them around so hardly anyone notices, (2) embedding the tax increases in transactions like real estate recording fees or cell phone bills where the tax is obscured by larger bills and transactions, and (3) making the issue so complex, as with the Virginia income tax conformity issue, that no one understands the tax.

    1. Exactly. Probably more than 60 years ago they outlawed the act of showing taxes on gasoline when you fill up.

  12. […] bill adjusts the corporate income tax downward, as the federal tax bill did, or indexes future tax rules to adjust for future inflation, another standard feature of federal taxes.  Both […]

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