Republicans Retreat From Trump Tax Successes

Virginia’s House Republicans on Friday rolled out proposed changes in the state income tax which backpedal from the signature accomplishment of President Donald Trump’s first year, his tax reform package which supercharged the economy.  They would conform Virginia’s taxes to the new federal law only in part (more details here).

One of the best policy provisions of that 2017 Tax Cuts and Jobs Act (TCJA) is a $10,000 cap on the deduction for state and local taxes (SALT).  No longer will the federal government subsidize out-of-control local and state taxes, and the state of Virginia should do likewise and cap the deduction for local taxes.

Virginia’s House Republican leadership disagrees, wants to remove that cap and allow unlimited deductions on state tax returns for high local taxes. This restores a subsidy for increases in local real estate and personal property taxes.  The good thing Trump did, they would undo, at least at the state level.

Another major improvement in the federal tax reform is a much higher standard deduction for those who lack enough expenses to itemize deductions, which is most people.  People who rent their housing, people who lack a big mortgage (or a second home), usually take the standard deduction.  The Trump bill doubled the standard deduction at the federal level to $24,000, and fewer people are expected to itemize deductions now.  That’s a good outcome.

But instead of matching that with a 100 percent increase in the Virginia standard deduction, this new proposal would increase it by only one-third.  The overwhelming number of Virginia taxpayers would benefit all of $57.50 (or less) if they file as individuals, $115 (or less) if they file a joint return.  This is the first increase in the standard deduction since the 80s, and it’s a pittance.

No, these Republicans are more worried about people who use itemized deductions.  They want to allow Virginians the option of continuing to do so while taking full advantage of the higher federal standard deduction.  They sweeten that deal for the highest incomes by removing the SALT cap, so some family with a $1 million house in Arlington, a vacation home at Virginia Beach, and a couple of luxury cars can keep deducting all those local taxes.

Finally, the federal tax bill lowered the federal corporate income tax rate by 40 percent but coupled that with ending several tax preferences that benefited business taxpayers, the dreaded “loopholes.”  More than a year later the Virginia House Republicans have no business tax proposal at all, not yet, even though with conformity to the new federal rules state business tax receipts will soar.  The business community is busy lobbying to get its loopholes back (and may yet succeed, which would be another retreat from TCJA.)

As was demonstrated in an earlier article, the Earned Income Tax Credit grant process that Governor Ralph Northam is promoting provides substantial cash benefits to low-income workers, but the benefits disappear once income reaches $25-30,000.  Despite the way it is being sold, it does nothing for the middle class.  Zip.

This new GOP proposal has the same problem: It is not really aimed at that vast number of Virginia taxpayers who take the standard deduction, who do not have large mortgages, large local real estate tax bills, or car tax bills on late model SUVs.  Once again, those folks – stuck with the same standard deduction for 30 plus years – are ignored by both political parties.

Better proposals are in the queue.   Last week Delegate Chris Peace (R-Hanover) dropped House Bill  1851, and similar bills are being drafted for other legislators.  Peace’s bill closely follows the recommendation of the Thomas Jefferson Institute for Public Policy, a tax reform outline endorsed by several business and conservative advocacy groups.

Peace’s bill does increase the standard deduction 100 percent.  It does include a business tax rate reduction, although not as large a reduction as the Trump tax plan provided at the federal level.  It adds something else missing from the House Republican plan, provisions to index Virginia’s tax brackets and standard deduction so they increase with inflation, the same way the federal tax code adjusts annually.

Peace’s proposal is tax reform.  The other Republican plan is a tax retreat, an effort to negate the higher taxes conformity would impose on a small subset of taxpayers who have less than $24,000 in federal tax deductions, but more than the $12,000 in state tax deductions (the new standard deduction in Peace’s bill) and/or those with local tax bills over $10,000.  Status Quo Ante Trump.

The GOP House leadership proposal is better than doing nothing.  It does return much of the higher individual taxes generated when Virginia conforms to the federal changes.  But it is not tax reform.

There were four tax policy elements in the Thomas Jefferson Institute reform proposal and the House GOP leadership plan ignores two of them and partly accepts two of them.  It does not index the tax code for future inflation, it does not include any business tax cut, it provides only a nominal hike in the standard deduction, and it does not fully conform Virginia’s tax code to the new federal system.  The proposal to dump the SALT cap is a highly significant deviation from the new federal regime.

The SALT cap has been hugely unpopular with people in high-tax blue states such as New York, New Jersey and California.  The new Democratic majority in the House of Representatives in Washington is already taking aim to remove it. The conservative Tax Foundation is seeking to preserve it.  It makes no sense that some Virginia Republicans are rushing to abandon it.

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38 responses to “Republicans Retreat From Trump Tax Successes

  1. I beg to differ. I take itemized deductions for a 1150 square foot home. Why should I be paying MORE to people who made bad choices and I’m struggling to keep my head above water as I EARNED that money? I paid off credit cards last year, have 1 more I’m working on. Stopped going out to eat but rarely, dont have new clothes, cell phone, cable TV, etc. so someone explain to me why I am being penalized for the bad choices of others on EIEC? Why am I being lumped in with “rich people” when I have an 8 year old American car, a 24 year old truck?

    No, these Republicans are more worried about people who use itemized deductions. They want to allow Virginians the option of continuing to do so while taking full advantage of the higher federal standard deduction. They sweeten that deal for the highest incomes by removing the SALT cap, so some family with a $1 million house in Arlington, a vacation home at Virginia Beach, and a couple of luxury cars can keep deducting all those local taxes.

    • Truthfully, VN – will your VA itemized deductions for 2018 (remember, you have to back out the state income tax amount) really exceed the $12,000 standard deduction I’d like to see? Do the math – I doubt it. Don’t forget Congress took away a bunch of other deductions that will NOT be restored. (Ideally, the state standard deduction should match the federal 24K and this process of increasing it should continue.).

  2. Steve continues to produce excellent and thoughtful , thought-provoking commentary!

    but I have to say – his opposition to the keeping the cap on the SALT is inconsistent with his position on the EITC.

    The SALT – CLEARLY is aimed at the middle class -the same folks who have and use the mortgage deductions …. the idea that we use that tax policy to fiscally penalize local and state services – LIKE education and public safety is profoundly dumb as dumb as the car tax refunds are in a perverse way.

    Note also the concept of imputed rent – where those who get mortgage deductions get deductions that folks who rent do not. Why do folks who
    buy get to deduct housing costs but not ones who rent? Why? Because it benefits the housing industry – AND actually works against affordable housing …….

    what if EVERYONE could deduct the cost of their basic (capped) rent and food and utilities and only paid taxes on the amount of income above that? Would that be more fair?

    In my view our tax policy should be progressive – the more you make the higher the rate AND it should allow everyone to deduct the basic costs of their one house – NOT other additional homes.

    Such deductions for rent would work the same way as EITC does which is incent people to work in the lower economic tiers – everyone we incent to work – gives us for more back than if we give them entitlements like TANF, Medicaid, housing, etc.

    We WANT people to work and in my mind the EITC helps them pay for childcare which allows them to work while their kids are being cared for – and to be honest – if the child care provider does a little “good” parental-type training – even better.

    Our fundamental goal with tax policy should be to reward work and treat everyone fairly on basic costs like housing and not give tax breaks to luxury assets like multiple houses, RVs, boats, etc. One tax deduction for one median priced home or one median rent no condos, etc. Period.

    • Larry, I SUPPORT the SALT cap. Very much. Look at the final sentence! Ouch, if that was not made clear….but your job on BR, of course, Larry, is to just throw sand.

      • Steve: ” Virginia’s House Republican leadership disagrees, wants to remove that cap and allow unlimited deductions on state tax returns for high local taxes. This restores a subsidy for increases in local real estate and personal property taxes. The good thing Trump did, they would undo, at least at the state level.”

        from your last sentence, I got that you supported what Trump did – to cap SALT.

        perhaps I read it wrong?

        • But then your comment (look up there) was that I opposed the cap. You just s0w confusion on purpose some times, I thinks.

          • Sorry about that – … but the bottom line here seems to be that you SUPPORT the SALT Cap – and that cap actually targets middle income taxpayers..by reducing what they can deduct …. right?

          • The SALT cap targets high income taxpayers AND also is unfavorable to upper-middle income homeowners in very high tax states and localities. Hence the angst North of the Rappahannock (see TBill). Few middle income taxpayers pay more than $10,ooo in real estate and personal property taxes.

  3. Excellent summary, Steve. You outline some complex ideas in plain language.

  4. VN has made a valid point.
    Get rid of the tax games. Everyone should pay a set equal percentage. Equal percentages means everyone would have the same interest in seeing government being accountable. Isn’t the big push for everything to be “fair”, “equitable”, and “inclusive”. How are income taxes inclusive when approximately 51% actually pay taxes? I am in favor of even increasing benefit checks enough to take the extra back in taxes. Just so that group sees what it’s like to have taxes taken from your check. The equitable part of the argument is contrary to the progressive tax structure that punishes the successful.

    • You make an excellent point. Our tax system, like much of our education and entitlement systems, are building a caste system within America, a place where fewer and fewer Americans feel that they have any skin, responsibility, or power in the games that America plays.

      And, in fact, they are right as more and more power, wealth, and privilege shifts annually to fewer and fewer people, now about 5% of the population at most. These are the elite lodged in the upper reaches of government, law, medicine, non-profits, finance and corporate world, all of them now working as crony capitalists who build systems that serve themselves, while they neuter their fellow citizens no matter their color, race, or class.

      This is why this tax refund business is so hard to understand and resolve. All these special interests are fighting over money that does not belong to them at all, but instead belongs to the American people who paid it into the system, and now deserve its return. This, along with the tax code, is a disgrace.

  5. I believe in the progressive tax system. I honestly don’t see viable alternatives but am willing to listen.

    But tax policy should not be to REWARD loopholes and gaming to get the lowest tax owed possible – as much as it should be to REWARD work, saving, pension building – things that reward self-reliance and responsible behaviors and draw people away from entitlements and govt-financed subsidies.

    That’s why I do support the EITC and would extend it , for those who work – at the lower economic levels to basic expenses for food, rent, etc – as opposed to programs to give them money/entitlements.

    We want folks to work in their own behalf……….even and especially in the lower economic tiers..

  6. Steve- You finally showed your cards, as I imagined you must favor kicking Va. itemizers in the butt with a tax increase of historic proportions. Which hits NoVA hard as usual. Interesting that NoVA’s Tim Hugo is the Bill sponsor.

    I do not necessarily disagree with your tax policy, but why isn’t the correct process?
    Step-1 : move temporarily to keep Va. tax payers mostly status quo
    Step-2: Debate what Va. future policy should be
    Step-3: Phase into a new state policy

    A true conservative would be not making changes willy nilly. Conservative means holding to current policy unless there is a need to change it. In this case, holding to current practice means allowing state itemized deductions.

    I am not the least bit sure, in the overall Va. tax scheme, that Va. itemizers are “getting away with murder”. But if so, they need their “day in court” before “hanging” us out to dry.

    • I never used the phrase getting away with murder. The problem with your steps is it will never happen – been waiting, waiting, waiting. Now is the time.

      I give you the same challenge I gave VN. Just how much over $12,000 will your itemized deductions be once you’ve backed out your state income tax amount (which was never an allowed deduction?) Now, I admit with the added wrinkle that they also want to remove the SALT cap, more folks in NoVa suddenly do jump well above that $12K, and when we designed our proposal we assumed the SALT cap. With the SALT cap, I bet a $12K standard deduction does you just fine. And if it doesn’t, you will probably itemize federal anyway.

      • well the question on the SALT cap is this – does it help or hurt the Middle Class as per the stated concern with EITC?

        it appears to be a double standard but perhaps I am confused..

      • Having distaste for the Va. tax bite, in the end, I took a lot less retirement income in 2018 than I thought I should. Unexpectedly, being a lower middle income couple (12% tax bracket) bumped up my Medical itemized deductions. I will update my Virginia Gothic example later for what I actually did, but I tentatively took evasive action to avoid the “Virginia Tax Jam” pending real numbers.

        However we cannot do the same trick next year because Trump’s plan phases in lower Medical itemized deducts (going to 10% of AGI) . Looks like TurboTax now has Va. tax forms.

        PS- I know you did not say “get away with murder” but I ran out of seconds remaining to delete the quote marks. Sorry about that.

        • PS- I also decided to start taking part of our Social Security benefit since that is tax free in Va.

          • Oh Tbill.. but it’s BAD for the Fed side. They WILL TAX IT if
            you have other income…

          • Larry- Well I am the last birthday year allowed to “double dip” on Social Security (take a spousal). So it’s known by tax experts that it’s pretty hard for that not to be attractive, and my spouse is not at a high PIA level, so we are not talking big numbers.

  7. re: ” A true conservative would be not making changes willy nilly. ”

    yup – nailed it.

    friendly amendment – Conservatives lead by True Conservatives would not make changes Willy Nilly.

    reality -those days are gone… true conservatives are rapidly becoming extinct.

    True Conservatives do not change tax policy such that even greater deficits add to greater and greater debt.

    Tax cuts without spending cuts is not “Conservative”

    • Let’s cut spending. Amend the LCI to include a minimum local tax effort by each jurisdiction receiving state aid for public schools. Just measuring the ability to pay is insufficient. Real estate taxes based on that ability to pay should be required. Many other states require a minimum real estate tax levy as a part of their state aid to education formulas.

      Northam is just one more Virginia politician who wants to scam money from NoVA because he knows the residents of NoVA are too stupid to understand they are being ripped off. Fairfax County Democrats in the GA should absolutely beat the crap out of Northam until he stops his plans to rob Fairfax County residents.

      • Where is Chap when we need him?

      • TMT – localities are ALREADY REQUIRED to pay a computed share of the costs:

        ” Each local school division is required to share in the cost of K-12 required programs and most of the optional programs, if they choose to participate. On a statewide basis, the state assumes responsibility for funding 55% of the basic programs and the localities fund 45%. Localities must pick up a percentage of costs based on their ability-to-pay or Local Composite Index, calculated on the local adjusted gross income, real estate values and sales tax revenue. ”

        http://www.veanea.org/assets/document/finance-2010-04.pdf

        • Larry, they are not required to maintain a specific tax load. Several years ago, BR contained a post that showed the year after then-Governor Mark Warner’s tax increases took effect, 49 localities reduced their local support for public schools.

          Further, at a public meeting, then Delegate Vince Callahan and Senator Janet Howell stated that it was regular practice for a number of local jurisdictions in Virginia to reduce local taxes once state aid to education increases.

          There is a difference between having an ability to pay and taxing at or above that level to fund public schools.

          • Dick Hall-Sizemore

            In my long experience in Virginia government, this is the first time I have heard of a proposal to require localities to have a minimum real estate levy. That is interesting and I think I like it. Many rural counties brag at home about their low real property rates, while their lobbyists in Richmond (I was once one) go hat in hand to the General Assembly lamenting how poor they are. Of course, such a proposal would fly in the face of traditions of local autonomy (such as it is in a Dillon Rule state) and I doubt if it would stand a chance of getting approved.

          • I like it too — and unfortunately also agree with your last sentence.

      • Funny how nobody in the General Assembly seems to be thinking about cutting spending at all. Raise taxes as real state per-capita GDP falls. Is our capital Richmond or Caracas?

        • You seem to have forgotten that, in the past ten fiscal years, there were several in which agency budgets were cut and hundreds of positions eliminated due to shortfalls in revenue. For example, in October 2016, the Governor announced a savings plan that included the elimination of scheduled employee raises and across-the-board general fund reductions of $73 million. For FY 2015, there were GF cuts of $92.4 million and the elimination of 711 positions. If you look at the 2012-2104 budget document, you will see budget cuts for almost every agency. In addition, state employees went several years without pay increases.

  8. TBill – in your comment above about your own situation, you highlight a key point. The SALT cap is hardly the only change in the deduction rules which is putting the squeeze on Virginians who itemize! Watch this space for my next missive….probably tomorrow AM.

    • I eagerly await your next Chapter.

      But note that although Trump moved to minimize the importance of itemized deductions, he did not hurt me with higher taxes…rather he gave me lower Fed tax rates and bigger standard deduct. I was whole over there, or ahead. It’s Virginia that wants to say Trump forced us have an enormous state tax increase in Virginia…not true!!

      • Trump did not hurt you but he paid for the tax cuts by increasing the deficit since he did not cut spending – and he sunsetted it so that in 2014 – it all comes crashing down… on Virginia too if they just follow along and don’t anticipate.

        Basically what Trump did was stimulus – he cut taxes but not spending and added it to the deficit/debt. In theorh, you normally do that when there is a recession to goose the economy – then you pay it back when the economy recovers and generates increased revenues.

        None of what Trump is doing will reduce the deficit. It’s voodoo economics… supply-side, Laffer theory stuff.

  9. re: TMT , composite index.

    TMT – the composite index determines the amount of the required local amount. They have to set a tax rate that will generate enough tax revenue to pay that required amount.

    The Composite index uses these measures to compute how much they have to pay:

    True value of real property (weighted 50 percent)
    Adjusted gross income (weighted 40 percent)
    Taxable retail sales (weighted 10 percent)

    Even if you made them set some particular tax rate – on what basis would you determine how much of the revenues that tax rate generated – that they should actually pay if not the composite index?

    When you say they don’t pay “enough” how do you determine how much is “enough”?

    • Larry: “TMT – the composite index determines the amount of the required local amount. They have to set a tax rate that will generate enough tax revenue to pay that required amount.” vs. TMT: “Larry, they are not required to maintain a specific tax load. . . . it [is] regular practice for a number of local jurisdictions in Virginia to reduce local taxes once state aid to education increases.”

      Interesting discussion but you can’t both be right about this and it’s a pretty important point.

      • Acbar – the Composite Index calculation – mandates how much the county has to pay toward education in their county. If they do not pay the required amount, they do not get the State aid.

        So the amount the composite index requires – each county has to generate from it’s taxes.

        If you look at page 5 of this document, you will see, for each county, the exact amount they must provide from local taxes to qualify for the State aid:

        http://www.doe.virginia.gov/school_finance/budget/required_local_effort/2015-2016.pdf

        So if you think about it – the local country is REQUIRED to set a tax rate that is sufficient to pay their required local share – shown in this doc.

        So what TMT is advocating – seems to be redundant or I don’t understand.

        Some people claim that the Composite Index calculation itself is “not enough” – that those other counties should have to pay “more” but I’ve never seen anything that actually says how much more – i.e. a cogent argument that would be uniformly applied to all counties that would result in higher required local efforts – in effect requiring them to increase their tax rate ( if the current was not enough to do that).

        But the reality is that most counties not only have to fund schools, but public safety so more than likely they all do at least the minimum needed to fund the school part.

        If on that same page – you look at the last column on the right – you’ll see they actually computer how much OVER the minimum that most all of them actually do.

        This basic argument that the State collects money from urban and rural and then gives more of it to rural – takes places in many states besides just Virginia. The SCOTUS ruled many years ago that the States had to equivalently fund each child – the same – no matter where they lived and that has led to the richer parts of the states subsidizing the poorer parts -usually the urban subsidizing the rural.

        but go read that Doc to see how Virginia actually does it. Virginia, in essence, through their required local effort does mandate how much they must tax to get sufficient revenues to meet that required match.

  10. Other localities also argue that the Composite Index ought to be changed because it does not give them “enough”.

    https://www.dailyprogress.com/news/local/composite-index-change-could-extend-albemarle-schools-funding-gap/article_3335b9b6-24cd-11e8-8af1-6b85b1dcd2f1.html

    Excerpts:

    ” Every two years, the state recalculates the composite index, a metric used to determine how much money is given to school divisions. Virginia has a goal of contributing an overall 55 percent in state funds to meet the Department of Education’s Standards of Quality, the minimum requirements that must be met by all schools and divisions in the state. The value of real estate, taxable retail sales and adjusted gross income all are weighed when determining the composite index for a locality, according to the DOE.

    Albemarle’s composite index rose significantly in the latest calculation, Acuff said. Personal income rose 28 percent, which Acuff attributes to a few individuals who account for more than $1 billion in additional income.

    “It is kind of interesting how a handful of extremely wealthy residents in Albemarle can swing the composite index,” said Diantha McKeel, a member of the Board of Supervisors.

    Throughout the state, 34 school districts have will receive less funding because of composite index recalculations, but Albemarle is affected the greatest in terms of dollar amount, said School Board member Jonno Alcaro.

    “We’re coming up with some ideas to propose to the legislature, like instead of basing the composite index on gross dollars to do it on median income,” he said.

    The district is expected to receive between $2 million and $3 million less a year because of the recalculation, according to Acuff.

    “We think that this number is skewed, and if we can survive the next two years, it’ll come down a bit,” she said.

    The school division’s current budget request is $188.5 million. About $130.8 million could come from the county’s general fund, and the rest would come from state, federal and other sources. ”

    So they advocate a change from Gross Income to Median income in the composite index because they say gross income skews that metric.

    It might be interesting to look – across the state for all localities if it swtiched to median income but my suspects are it might actually favor even more the poor rural counties where median income is very low compared to the richer counties.

    It boils down to what is the proper/fair way to calculate local “ability to pay” which is somewhat arbitrary and arguable.

    But as the above article shows most localities are not really interested in how changes would affect all counties in the state – they’re only interested in their own locality and so they never really generate a statewide chart with their proposed changes.

    But for TMT’s argument – virtually ALL counties in Virginia actually have tax rates that generate MORE money for education than the state mandates. Look at the chart.

    But his argument is like others – that HIS locality pays MORE than it should and others pay less than they should but again what specific changes would be advocated? It seems to me that you’d have to start with the metrics used in the Composite Index that are calculated to determine how much is locality is Capable of paying. And as the article says, those numbers are recalculated every two years – using the same metrics and percentages so you’d have to come up with a new/different composite index and as I said, I’ve never seen that done, I’ve never seen any locality make a prima facie case for changing it.

    To bringt this back to the actual subject – tax conformity. My guess is that NoVa and most urban region taxpayers are going to be disadvantaged by the conformity issue than rural, i.e. they’re going to end up paying an even higher overall percentage of the State budget than before.

    Which is an interesting dilemma for those in the GA who represent the rural geography of the state and who will actually benefit more if they don’t ‘fix’ the conformity issue? That along with Northams EITC proposal and the Medicaid expansion is going to be an enormous benefit to rural and much of that cost will be borne by the richer urban taxpayers.

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