Senate: “Trust Us This Time on Tax Reform”

One of Charles Schulz’s most iconic and useful images.

by Steve Haner

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

Virginia government is flooded with cash — tax revenues far in excess of what is needed to maintain its current level of services and a fair reserve. Key votes have now been taken and the House of Delegates is poised to return much of the excess money back to taxpayers. The Senate of Virginia wants to keep the money and continue growing government ever larger.

Yet another monthly financial update showing surging tax receipts was released Friday.

Governor Glenn Youngkin (R) campaigned on and has introduced a series of tax reductions, most (but not all) of which will likely receive approval by the full House by today or tomorrow. Some of them (but not all) have received bipartisan support during their consideration in committee.

But the Senate Finance and Appropriations Committee, meeting late Thursday, voted to stay with the minor tax cuts/more spending approach proposed by outgoing Governor Ralph Northam (D). Some committee Republicans joined in voting against Youngkin’s proposals, delaying others for a promised study.

That means that when the two bodies consider their amendments to the state budget week after next, the Senate version will contain billions of dollars in additional spending and its leadership will assert that any failure to approve every dollar is harmful to the Commonwealth. They will claim that the House budget, also bound to include record spending, is unfair compared to theirs.

The amazing financial surpluses already seen last year and expected for the next two result from the economic juicing of consumer spending by COVID-related relief programs, and the (usually unmentioned) long list of tax increases imposed under Northam. This unique opportunity to cut taxes, improve cash reserves and still grow the state budget will not be permanent.

Where are the key points of difference between the chambers? The House of Delegates is poised to double the standard deduction most Virginia taxpayers claim on their income tax, from $9,000 to $18,000 for a couple filing jointly.  That saves joint filers up to $518 per year and will reduce tax receipts about $2.1 billion in the next two years. It saves them about $900 million per year after that.

The Senate, on the other hand, sent its version of the standard deduction bill to be studied, part of a promised comprehensive tax reform study. Many of the same senators made the same promise just three years ago, claiming they would look at tax reform in response to the federal Tax Cuts and Jobs Act. It never happened. Remember the Taxpayer Relief Fund? It got spent.

The Senate’s proposed budget, to be revealed next weekend, will likely spend that additional $2.1 billion on very popular items, supported by large interest groups willing to fight to keep it. Forgotten will be the interest group called “taxpayers.”

It will be the same on the Governor’s proposal to remove the sales and use tax from the purchase of groceries and necessary personal hygiene products. The sticking point there has been that the tax is also imposed and collected by local governments, dedicated to schools. The House is poised to fully remove the 2.5% tax but replace the lost local revenue out of general sales tax pot.

The Senate is moving to repeal only the 1.5% state portion of the tax and would leave the local 1% tax in place. Its bill delays implementation of the state portion cut until 2023. The change gives the Senate budgeteers another $700 million to spend over the next two years, widening the gap with the coming House budget.

The third major point of difference involves Youngkin’s campaign pledge to suspend for one year part of the motor fuel tax increases imposed under Northam. The House is about to pass a bill to accomplish that, which reduces transportation funding about $380 million over two years, with a lingering impact into future years. The Senate committee simply killed that bill outright, no amendments, no study.

Any or all of those outcomes may change. They are just the position of the parties at halftime, with the annual negotiations between the House and Senate following. Assuming the General Assembly agrees on a compromise tax and budget package by the session deadline of March 12, Governor Youngkin gets one more chance to offer amendments at the reconvened session in April.

One proposal that continues to advance with unanimous bipartisan support creates a subtraction for military retiree pay, although it no longer would go into effect for this year. Beginning in 2023, the subtraction is created at $20,000 and then grows to $40,000 in future years.

There have also been outright losses for the Governor, although they too are issues that could be revived later in negotiations.

The House Finance Committee had endorsed Youngkin’s promised tax credit for small businesses, basically a one-time exclusion for $250,000 in taxable income. But it was not on the list of tax proposals that emerged from House Appropriations late Friday to advance to the floor today. The Senate committee had already voted to send it to that promised study commission.

That was something sought for small business taxpayers. The other defeat involved mostly larger business taxpayers, those that received federal Payroll Protection Program grants for 2020 in excess of $100,000. Youngkin sought to give them a retroactive deduction of up to $1 million but sought to do it in the annual bill creating conformity to federal tax code. That bill needs to pass as an emergency measure with a four-fifths vote, meaning it would need Democratic votes. It was getting none until the retroactive business tax break was dropped.

The 2019 General Assembly was another fleeting moment when real tax reform was possible, as the state saw a surge of revenue on the horizon created by conforming to the federal tax changes. Instead, legislators approved a one-time cash rebate, an election year sop, and a minor bump-up in the standard deduction. A repeat of that outcome remains very possible.

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29 responses to “Senate: “Trust Us This Time on Tax Reform””

  1. James Regimbal Avatar
    James Regimbal

    Yes Steve, there surge in GF revenues has been breathtaking. The growth surge should moderate in the last 3 months of the fiscal year due to tougher comparisons to last year – still leave much higher revenues than even expected a couple months ago. I also believe we have plenty of reserves set aside. One area I think the state needs to address is its adequate commitment to funding K12 education. The state only helps fund about 2/3 of school division employees. Two glaring areas of underfunding from the state is in its SOQ coverage of teacher aides – 21,000 employed by school divisions, only 2,800 covered under the state SOQ. The other is removing the 2009 support cap that was instituted to save money during the Great Recession. Funding these properly would cost the state about $800 million per year and take pressure off locality budgets. Another area that needs to be funded properly is jails. The state pays only $12 per day for STATE responsible inmates. That rate was cut in 2009 also, and has not changed since – regardless of the surge in mental health and substance abuse problems of jail inmates.
    All that being said – I also believe there is sufficient revenues for doubling the standard deduction, eliminating the food tax while also keeping localities whole, using one-time revenues for improving the unfunded liabilities of the VRS, and state funding for a school modernization fund.

    1. Stephen Haner Avatar
      Stephen Haner

      I agree that this does provide an opportunity to review the responsibility and cost split on education and some other areas of joint state and local funding. And I will admit coming into this I suspected any changes in the standard deduction would have to phased in. I’d still trade that to get McNamara’s indexing bill.

  2. Bi-partisan support in the Senate and sounds like both houses have made some good points. Hence, let the compromising begin.

  3. David Wojick Avatar
    David Wojick

    An outsider question: when does the session end for bills like HB 118? You mention March 12.

    1. Stephen Haner Avatar
      Stephen Haner

      That is the scheduled full adjournment, “sine die,” but in recent years there have been several extensions beyond that deadline. Usually it is disagreements over the budget that cause the impasse.

      Meant to add a link to this in the article. WSJ piece by Virginia’s own Grover Norquist pointing to all the other states moving to end their state income tax. Might not get there, but they have that as a goal. Our stubborn Senate, with the House Democrats voting along, won’t even adjust the standard deduction. Sorry, a high tax AND high energy cost state will continue to lose jobs to elsewhere.

  4. Super Brain Avatar
    Super Brain

    Need s special session to look at taxation in total. Too many crazy give away credits. I agree indexing is the way to go. It was a hallmark of the 1986 Federal tax reform act until the GOP and Trump scaled it back for individuals in 2017.

    1. LarrytheG Avatar

      At the Federal level, the biggest tax credit/subsidy if for employer-provided health insurance.

      1. Super Brain Avatar
        Super Brain

        Excluding employer health insurance was a work around to wage controls during WW2.

        1. LarrytheG Avatar

          yep. there are all kinds of reasons but the bottom line is that it’s one of the biggest tax breaks in the code. Totally unjustified nowdays – and part of a reason why health insurance is not competitive and does not respond to market forces.

          of course the other reasons are that the Feds require that employer provided cover you , no matter your health or age and they force them to cover you for the same price as others.

          but I digress… big time…

          There are others – like the lower tax rate for investments and the stepped up basis for inheritances.

          So we do tax cuts but not spending cuts at the Federal level.

          At the state level we cannot do that but we CAN set a budget based on ignorance with respect to whether revenues are one-time and not recurring and/or budget analysis and forecasts that recognize temporary increases in revenues that some will advocate for permanent tax cuts that ultimately come a cropper when the revenues fall back to more typical levels.

  5. Eric the half a troll Avatar
    Eric the half a troll

    “The amazing financial surpluses already seen last year and expected for the next two result from the economic juicing of consumer spending by COVID-related relief programs, and the (usually unmentioned) long list of tax increases imposed under Northam.”

    The majority came from increasing the federal standard deduction driving many more away from itemizing and then not increasing the state deduction. If you don’t itemize on your federal, you can’t itemize on your state. The increased federal deduction, however, is temporary. I would be good with increasing the state deduction as long as when the federal deduction reverts back so does the state.

    1. LarrytheG Avatar

      Haner “thinks” they won’t go back. I think that’s a bit problematical given that those tax cuts do not, in fact “pay for themselves”. In other words, they contribute to the deficit and debt, which if you think about it – Conservatives like Haner and JAB have argued vociferously is fiscally irresponsible.

      But really, no more so, that counting chicken eggs in the Virginia budget that may not be there either.

      It’s all about “cutting taxes” as an ideology – without regard to practical budget realities.

      It’s the “starve the beast” idea. You cut the taxes and revenues and then you force govt to cut spending.

      In other words, not a cogent budget process. just a “let er rip” approach.


  6. LarrytheG Avatar

    I’m with the Senate and some of the GOP in the senate who want to know how much of this money is one time and/or somewhat transitory, i.e. will the “surge’ in revenues – continue.

    Then the other point made by Regimbal below and also to do with the idea that the state will keep the localities whole when the grocery tax is repealed. There’s some significant money in that.

    Finally, I don’t think it is a good idea to cut transportation revenues, especially with more and more cars needing less and less gasoline.

    So a proper study is in order and I’m a little surprised that Layne did not
    proactively provide some forecast info (maybe he did?).

    At any rate, the advocacy to cut is ahead of some hard data that is needed to make informed decisions.

    1. Stephen Haner Avatar
      Stephen Haner

      I just got notified by Henrico that my home value is up 21% in two years and I await with eagerness the rising tax value of my cranky old Camry. I am losing no sleep over Henrico’s ability to live without the little bit of food tax.

      1. Nancy Naive Avatar
        Nancy Naive

        See, now wouldn’t you rather pay a constant RE tax and a gains tax when you sell than pay tax on unrealized gains?

      2. LarrytheG Avatar

        Mine too and I want to see those comps! But this is why we have elections. I’m NOT in favor of mindlessly imposing tax cuts just because we don’t like paying taxes – especially at the local level. Some folks apparently would happily destabilize government – over an ideological belief without regard to realities.

        1. how_it_works Avatar

          I once challenged my assessment because most of the other houses in the neighborhood assessed similarly were larger with finished basements and a deck, which my house didn’t have.

          They knocked my assessment down by about $15k without even making me appeal to the Board of Equalization.

          1. LarrytheG Avatar

            We did a version of that also …. in the past. but Now… a single family LOT without water/sewer is being assessed at
            over 100K. In other words, before you spend one penny on the house, you’re into it by 100K…. ouch!

          2. how_it_works Avatar

            Really? That’s what my lot was assessed at, $135k, no water/sewer, 2.8 acres, in PWC.

          3. LarrytheG Avatar

            yeah, but is NOT PWC – this is out in the county where there are cows and goats! 5 acres but
            it cannot be subdivided – one single family structure IF the land will perk.

          4. how_it_works Avatar

            There are cows and goats in PWC…..just up the road from where I live in fact….

            and if the land won’t perk, about $40,000 will fix that problem in the form of an advanced treatment septic system.

          5. LarrytheG Avatar

            but do you have 5 acre parcels for sale in PWC and if so what do they sell for?
            This parcel in Spotsy was purchased more than 40 years ago – when the total population of
            the county was 30-40K. Now, we are 140K.

  7. energyNOW_Fan Avatar

    My HUF tax was up to $45 this year vs. $35 last year . This is my penalty for owning a 40 MPG car.

    1. LarrytheG Avatar

      and you SHOULD pay your fair share of the roads you do use!

      1. energyNOW_Fan Avatar

        I over-paid. Much of my gas was bought in MD where I traveled to Pittsburgh. Then I paid a HUF tax to Virginia for estimated use of Virginia roads, which I did not use so much. So my effective state gaso tax paid was very high to MD+VA.

      2. energyNOW_Fan Avatar

        I over-paid. Much of my gas was bought in MD where I traveled to Pittsburgh. Then I paid a HUF tax to Virginia for estimated use of Virginia roads, which I did not use so much. So my effective state gaso tax paid was very high to MD+VA. Also gaso/hybrid cars get no subsidy, only get taxed. EV’s may pay HUF tax but get many $thousands of subsidies, so they should darn well pay a use fee.

        1. LarrytheG Avatar

          Well, no matter what kind of car, nor any subsidies (which is a different thing) – each of us should pay for our use of the roads. Your car “uses” the roads no different from other cars no matter their means of energy/power. It causes wear and tear and the use itself results in needs like traffic lights, widening, new roads, etc.

          The “subsidies” are not for the roads, its for using lower polluting vehicles and that subsidy favors the least polluting vehicles these days as more and more lower-polluting vehicles are the norm.

          I actually would prefer electronic tolling instead of gas tax – and would especially put toll cameras up at the cut-throughs and other routes that folks use to evade the main tolls.

          IOW, everyone should pay their equal share including the would-be scofflaws!


          some folks have misconceptions of the costs of roads. The initial cost of building them is not the bigger costs over time. It’s maintenance and operations. Every time you see a road getting re-paved, think big bucks.

          VDOT spends most of the Va fuel tax on maintenance and operations. It uses the Fed tax for new construction and improvements.

  8. […] the Senate.  Steve Haner has very able compared the different approaches to tax cuts on this blog here, here, and […]

  9. […] HB 90 (McNamara, R-Roanoke)—Repeals sales tax on groceries. [See general discussion on tax legislation in BR here.] […]

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