Revised Again, Tax Bill Envisions Future Reforms

The possibility of additional future state tax reform or tax cuts improved Monday under a new version of the pending bill that puts Virginia into conformity with the federal Tax Cuts and Jobs Act.  The resulting tax revenue not returned by the modest policy changes in this bill are to be held in reserve for future action.

The language in the bill now better matches the earlier rhetoric about preventing a huge inflow of new income tax revenue.

The legal reality is no General Assembly can bind a future one, so the 2020 session could disband this new fund and just spend the money.  But it is a stronger statement of policy and intent, and perhaps will add focus to the debate over tax policy which is inevitable in the 2019 legislative elections. 

Both chambers of the Virginia General Assembly have now approved that new version, with only one more procedural vote required before it goes for consideration to Governor Ralph Northam.  He is expected to sign it promptly so it can apply immediately to tax returns now being filed.

The bill still calls for a one-time lump sum rebate to all taxpayers later this year to compensate for the additional revenue collected by the state for tax year 2018. It includes the 50 percent increase in the standard deduction for taxpayers who use that method starting in tax year 2019, plus the two deductions sought by large business taxpayers and that Virginia version of the Pease limit to cap itemized deductions by the wealthy.

The significant change that appeared Monday deals with any excess revenue generated by conformity over the next few years not returned by those provisions in the bill.

A language provision establishing a non-reverting “Taxpayer Relief Fund” will now hold any additional revenues collected up through 2025.  The fund is to be used “to effectuate permanent or temporary tax reform measures,” also a new phrase.  But those will likely be left for the 2020 or even a later General Assembly to decide.

There is no distinction in the language between additional tax revenue from individuals and from corporations, so the earlier concern that Friday’s version constituted a corporate tax increase may no longer pan out, depending on the actions of that future General Assembly.

The version of the bill that was approved by committees on Friday had a very different take on the “Taxpayer Relief Fund.”  It sought to capture and sequester only revenue from the first two years of conformity, and once the money was used to pay out those one-time rebates, the balance was to be deposited in a General Fund reserve.  From there it could be used for any purpose.  Revenue growth due to conformity beyond 2020 simply became General Fund revenue.

Since last summer the baseline data for this debate has been a consultant’s estimate that conforming with the federal tax law and not making any changes would produce $4.6 billion in net additional revenue for the state, an amount which was quickly called “the Northam tax increase” by Republicans and “the Trump tax increase” by Democrats.  Neither is true.

While the bill has now passed in both chambers, there still is not a fiscal impact statement on the final substitute.  The planned rebates and the policy provisions for 2019 and beyond may account for $2.2 billion or so of that $4.6 billion.  The estimated value of the rebates is now set at $390 million, however, not the initial $420 million.

The longer-range $4.6 billion estimate remains just that, with taxpayer behavior under the new federal rules hard to predict.  There was a reluctance on the part of some in the General Assembly to push to fully match their tax policy changes to that higher estimate for the years down the road.  The people making the tax policy decisions are the same ones responsible for the budget and for maintaining the state’s beloved AAA bond rating.

The new language on potential future tax reform that appeared today has some caveats. Not all revenue growth going forward ends up in the fund.  The Governor and his staff will seek to decide what additional revenue is due to the tax policy changes driven by the federal law, and what additional revenue is organic growth.  The Governor certifies by September 1 of each year what amount gets put into that account.

And the new substitute Monday added another provision which may make some taxpayers frown.  As those $110 per taxpayer, $220 per couple rebates go out later this year, they will be subject to “the provisions of the Setoff Debt Collection Act,” meaning they will be diverted to any unpaid taxes or court fines, the same as regular annual tax refunds.

The bill did not pass without some drama.  In debate Democrats on both sides complained it remains tilted toward upper incomes, and restated calls for Governor Northam’s initial proposal to create a refundable Earned Income Tax Credit, in effect a grant program for low-income taxpayers with no tax liability. Initially enough House Democrats voted no to prevent the super-majority needed to pass the bill as an emergency measure, but after a long break the revolt fizzled and the second vote was 95-4.  The Senate vote was 35-5.

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8 responses to “Revised Again, Tax Bill Envisions Future Reforms

  1. Well, if I understand correctly – saner heads have prevailed as there will be no direct changes in the 2018 tax computations for individuals so those organizations and online companies now doing taxes can continue without software mayhem ensuing.

    Further – they’re going to sequester the money so they can see what revenues are REALLY generated rather than some half-assed estimate/forecast.

    And I can see the fall election campaigns right now where the GOPpers will promise to give all that sequestered money back to taxpayers and claim that if Dems are elected – they will keep it and give it to folks who don’t deserve it – socialism on steroids!

    😉

    • They could have done more on the standard deduction. They didn’t. You are dead right, both sides are itching to make campaign promises and debating points, and a quiet, economics-based discussion about how Virginia’s tax system should be structured went by the wayside. If anybody were really paying me to work on this, I’d be thinking about the future fees! The thing about this Imperial Clown Shown, just like the real ones – the real money is in the concessions! People working those business provisions — kaching!

    • Larry can you confirm no changes to Va. 2018 Turbo Tax (etc.) for individuals? So we are not waiting for any changes in tax law to be implemented until next year?

  2. too bad they don’t have the same ardor to tell Dominion to give back that money, eh? 😉 .. geeze all this talk about pandering and hypocrisy… ick!

  3. Whatever else you say about the tax bill, you can’t describe it as “tax simplification.” It’s a bill that only lobbyists can love. The public may benefit from the changes Steve describes, but I doubt the public understands or appreciates anything about the bill.

  4. I disagree with Steve’s characterization of the tax revolt “fizzling”. According to newspaper reports, the revolting Democrats did win promises from Chris Jones to “find” money for additional appropriations to schools in poverty areas and for eviction issues. Jones has proven to be a man of his word in the past.

    Steve touched on a question I have had–how can one determine how much additional income tax revenue in the future was due to the conformity changes and not to Amazon, Micron, or other good economic happenings? The answer is you really can’t (all income tax money is colored green, no matter the source) and, so, the Governor will decide how much to put into that account.

    There are some other details that could factor into all this in the future. There is language in the Appropriation Act that allows that Act to override any other law. So, even if the new tax law says that “excess” revenue should be put into this special fund and spent for taxpayer relief, the Governor could, in his biennial budget proposals for 2020-2022 that he will submit next year, ignore this provision and propose spending all the “new” revenue. As Aubrey Layne said, “We have another bite at the apple.”

  5. Virginia has had problems with forecasts.. more recently on Medicaid but in prior years on revenue forecasts and given that history – better to be NOT counting eggs… until some actual experience is in hand.

    but any money not already locked in to something is at risk to be “used”

    By the way – Northam’s philosophy on EITC is not really “radical” or “socialist” as it is in line with the Trump tax cuts – they also see EITC as valid and useful.

    Some folks see the EITC as giving away “free” money but it’s not because in order to get that money – you have to have a job and earned income and to get more than a very small amount you have to have kids.

    EITC can and does pay for child care for working Moms and single parents and in the greater scheme of things – people who work – are eligible for less entitlements like TANF and other tax-funded money.

    Opponents often oppose it on the general idea of giving money to folks – as opposed to looking at what is the most cost-effective way to deal with folks who do get entitlements.

    This is why many in the GOP and Conservative think tanks support EITC.

    People who work simply take less entitlements but it’s the basic idea that taxpayers support them that sticks in the craw of many.

  6. Key points for me:
    > when Virginia lawmakers talk about “conformity” they are talking about conforming in the manner that they want to do it (which results in a big tax increase for certain middle income intemizers). For example, New York is apparently conforming, but still allowing itemized deduction on the state level. So Virginia lawmakers are asking for conforming plus blocking itemized deductions for some. I feel this tax increase may directionally impact taxpayers just over the the so-called low income threshhold.
    > With Federal Tax Laws now a moving target, “conforming” may not be the best approach anyways. We need to consider putting the state on a more even keel, and also consider if our tax system is “fair” . I realize taxes are arbitrary and each state is unique, but if Virginia is clobbering folks just over $80K income, which is my hypothesis, that hurts our growth potential.
    > I was interested in some recent Va. Dem comments about why it is important for Virginia to go easy on low income groups, and the justification was to use Va. tax system to compensate for Federal tax law unfairness. I just perceive we are very friendly to low incomes, and friendly to upper incomes, at the expense of middle income tax-unfriendliness. That’s why I eventually want to compare Va, MD, PA, NC, NJ when I get around it.

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