Tag Archives: Conformity

Virginia Should Double Its Standard Deduction

In 1987, as part of its response to the conformity issues created by President Reagan’s tax cut, the Virginia General Assembly increased the standard deduction available to Virginia taxpayers to $3,000 for an individual and $5,000 for a couple. At some point since the joint filing amount went up to $6,000 to eliminate any marriage penalty.

Faced with a similar problem in 2019, that’s what the Virginia General Assembly should do as a start:  Increase the state standard deduction.  Double the amount of income a Virginia couple can shield from tax under that method, with no itemized deductions necessary.

Virginia also allows personal exemptions to provide a bit more tax-free income.  The personal exemption is now $930 each.  A couple with one child gets $6,000 in standard deductions and $2,790 in personal exemptions for a total of $8,790 pre-tax income.  Compare that to where surrounding states are on that score and to the new federal standard deduction of $24,000.  Even if Virginia doubles the standard deduction, its only a step in the right direction, as you can see below.

Taxable Income Threshold
Couple Plus One Child
Virginia Current $8,790
Virginia Proposed $14,790
Maryland $13,600
District of Columbia $24,000
North Carolina $17,500
South Carolina $24,000
West Virginia $6,000
Tennessee No Income Tax
Federal Taxes $24,000

I’ve been drawn to this idea from the start but when I saw that surrounding states (except West Virginia) were already there, this suddenly struck me as imperative.

It would be only a good first step toward preventing the personal income tax increases which will result when Virginia conforms to the new federal tax rules and definitions.  The idea is further explored in a briefing paper published today by the Thomas Jefferson Institute for Public Policy.  It is neither creative nor comprehensive tax reform, but creative and comprehensive make people nervous and will take time so let’s start with something simple and familiar we can do quickly.

It is better than doing nothing, which is what the Virginia Society of Certified Public Accountants is recommending.  It wants to adopt conformity and let the revenue accumulate, hoping later next year some consensus on reform will emerge.  Hope is no substitute for cash.  This is a very attractive idea that might get consensus now and could be adopted in the same bill that accepts conformity.

It is also a better approach than breaking conformity and allowing Virginia taxpayers to itemize on their state taxes while taking the standard deduction at the federal level.  The whole idea behind federal tax reform – and many surrounding states clearly agree – is to move people away from deductions driving their economic behavior.

Finally, this is a better idea than giving low income workers grants through the Earned Income Tax Credit system.  The grants come once a year and you must apply.  They reduce to nothing on a sliding scale.   This is a clear-cut tax reduction of $345 ($6,000 x 5.75%) for almost every family taking the standard deduction.  With withholding tables adjusted, the money shows up in every paycheck.

Many in the political class remains focused on spending the windfall money.  This takes away about $440 million of that possible spending, according to the Department of Taxation’s modeling.  This is an accidental tax increase, a windfall not approved by the General Assembly or (despite some of the rhetoric) caused by the Governor.  Any tax increase has economic consequences as people lose spendable income, so if you can reduce that impact there is economic benefit.

People with a pile of itemized deductions, which would usually be people who also have high incomes, taxes, interest payments and charitable giving, didn’t take the standard deduction before and will not do so going forward. This idea does nothing for them.  This also does nothing to address the corporate income tax increases which are coming.

VA CPAs Say Conform, Hold Tax Funds for Later

The Virginia Society of Certified Public Accountants (VSCPA) Monday called on the 2019 Virginia General Assembly to conform Virginia tax with recent federal changes, to track and sequester the hundreds of millions of dollars in higher taxes thus generated and to hold those funds for a future tax reform effort.

Nobody knows these issues better than the people who prepare tax returns, and the CPAs cite continued uncertainty over the full impact of the federal changes, especially with several issues still awaiting guidance from the U.S. Internal Revenue Service.  The society’s position is detailed in a white paper.  It offers no firm advice on what policy changes should eventually be adopted.

“VSCPA leadership and the VSCPA Tax Advisory Committee considered and discussed numerous policy options in an effort to make a recommendation, considering extensive input from VSCPA members and tax professionals, and determined that there was no member consensus on any single policy prescription,” Vice President Emily Walker wrote in an accompanying news release.

The VSCPA has enhanced its clout on this issue by hiring former Senate Finance Committee Chairman Walter Stosch as an outside lobbyist.  Stosch’s message to conform in full and then hold the money for later decisions is likely to carry greatest weight with his former colleagues in the Senate.

On the same day the CPA’s position was announced the first piece of proposed conformity legislation was filed, a House bill seeking to allow one major deviation from conformity.  It would allow Virginians to take the standard deduction on their federal returns but still itemize deductions on their state returns.  The deductions they can take will be under the new federal rules, however.

In previous Republican-generated statements pledging to allow Virginians to keep state itemized deductions while taking the federal standard deduction, the question of which deductions – new or old — has not been addressed.  The new federal law places limits on state and local tax deductions, eliminates the moving expense deduction, and make many other changes.

Delegate Richard Bell (R-Staunton) is not on either the House Finance or Appropriations Committees and it is likely other bills will emerge, probably many of them, before the session starts in January.  To apply retroactively to tax year 2018 any bill will have to pass with 80 percent super-majorities in both chambers, requiring a bipartisan consensus.  A bill changing policy for tax year 2019 needs just the usual majorities plus the Governor’s signature.

Secretary of Finance Aubrey Layne was back discussing the issue before the House Appropriations Committee Monday, at the end of his regular presentation on the state’s finances.  A CPA himself, he probably helped influence that society position paper.  The Northam Administration is resisting efforts to make immediate tax policy changes in response to conformity but has not ruled out a tax reform effort next year.

That approach has its own challenges.  By the administration’s own estimates, conformity with no policy changes produces almost $600 million in additional revenue for tax year 2018 from individuals and businesses.  To hold the funds in reserve for a future tax policy debate would require great discipline on the part of the elected leaders.  And if done in special session next year that debate would take place during the run-up to what is likely to be a bitter primary and election season for both House and Senate.

Layne has access to the revenue model produced for the state by Chainbridge Solutions LLC and added a data tidbit yesterday:  While some people will see a tax increase if Virginia adopts full conformity, others will see a tax increase if the state does not.  The individual tax hike from non-conformity is more than $181 million.  That’s far less than the other way around but demonstrates the complexity of all this.

Speaking of complexity, an effort to explain this in easier-to-understand language led to the production of another white paper, this one mainly written by me and distributed Monday.  You can find it on the Thomas Jefferson Institute website here.