I got enough of importance wrong in yesterday’s post on state income tax policy that a real correction is required, not just a tweak to the existing previous post. Herewith what I know I got wrong:
- As Dick Hall-Sizemore pointed out, correcting me in a comment, the 2019 provision creating a new Taxpayer Relief Fund did not include the additional corporate income tax revenue generated by conforming to federal changes. If I understood that back when I last looked at the language, it certainly had flown my memory by the time I sat down to write Thursday evening. Only excess “windfall” revenue from individual taxpayers was to provide the top line in calculating the new fund balance.
- And in looking at the bottom line, I made a math error on the fiscal impact of two corporate income tax amendments mentioned on that Senate Finance Committee chart. The four-year impact of the GILTI and net interest deduction provisions is about $85 million over four years, not $210 million.
Look what they did here! This Senate Finance Committee slide from November shows only “conformity windfall” revenue from individual provisions, but then deducts individual and corporate tax relief against those totals to shrink the size of the Taxpayer Relief Fund, source of future tax reform. That’s not what the General Assembly ordered. How much corporate “conformity windfall” is missing from the top line of this chart?
By Steve Haner
Sometimes you have to start the victory lap, even if you only get halfway around the track. A year ago, on Bacon’s Rebellion and in Thomas Jefferson Institute for Public Policy organs, I was beating the drum for a proposal to double the state’s standard deduction, the amount of family income exempt from income tax.
When the smoke cleared, the legislature had made a start, increasing the standard deduction for a married couple from the ridiculously greedy (on the Tax Man’s part) $6,000 to a slightly less ludicrous $9,000. This at a time when the federal standard deduction was going to $24,000, meaning the state taxes Virginia middle-income families more far heavily than Uncle Sam.
To add insult to injury, the legislature delayed the impact of the change until the 2019 tax year, even though it could easily have made it effective for the 2018 tax year that was settled with last spring’s returns and refunds. But the good new is that the change, now in effect, will save Virginians $360 million this year and $236 million on next year’s taxes. Here is what I wrote about it Thursday for the Jefferson Institute.
The legislature agreed to one other major provision proposed by the Jefferson Institute, creating a Taxpayer Relief Fund to hold in abeyance any and all “windfall” revenue not returned by the changes made in that 2019 bill. Remember that as you read on, it is key. The state may be playing a deceptive game which I just figured out and explain below.
Income breakdown and average “windfall” tax in 2018 on the taxpayers who paid more. All averaged more than $220. Source: Secretary of Finance and Ernst & Young. Click to expand.
by Steve Haner
Virginia ended the last fiscal year with about $797 million more in revenue than projected, and the Northam Administration credits $455 million of that to higher taxes on about 30% of taxpayers caused by conforming to the new federal tax law. More than 700,000 tax returns stopped claiming state itemized deductions, accounting for much of that.
The tax conformity windfall amount was calculated by outside consultant Ernst and Young, Secretary of Finance Aubrey Layne told a meeting of the combined legislative money committees Tuesday. That is not the same firm hired last year to project the state tax impact of the federal Tax Cuts and Jobs Act. Layne said he wanted a different team looking at the results.
The E&Y report is the final 23 pages of Layne’s slide presentation to the committees, here. Continue reading
What will you do with your $110? Thanks to the conformity revenue flood, it’s coming.
Checks are expected to arrive in October for most Virginia taxpayers, the most important piece of campaign mail they’ll get before November’s election. The $110 extra refund, $220 for a married couple, is the General Assembly’s response to the huge influx of new state tax revenue created by conforming state rules to recent federal changes. Continue reading
Only $1.7 of $4.6 billion was diverted back to taxpayers by 2019 law. Final row includes $420 million for one-time tax rebates paid later this year. It was the addition of the Pease Limitation raising taxes on high incomes which reduced the final tax relief total. Sources: Chainbridge Solutions August 2018 report on revenue projections. Department of Taxation on tax reduction estimates. Click to open.
The 2019 General Assembly is a dust storm in the rear-view mirror, but the four state tax increases that were discussed in “Taxaginia” last November are still in the road ahead. This post revises and extends my reporting on their status in this morning’s Richmond Times-Dispatch, featured on the Commentary section front.
In a piece in June 2018 I saw signs the state would keep the state income tax revenue harvest produced by conformity with the federal Tax Cuts and Jobs Act. Turns out that prediction was 60 percent correct, with my calculations showing less than 40 percent of the expected revenue was diverted by tax policy changes. Continue reading
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. Continue reading
The compromise income tax bill hailed for preventing a tax policy train wreck in Virginia includes one new provision not included in earlier bills, not mentioned in any of the Republican press releases and not yet included in any fiscal impact statements. Democrats wanted it.
It is yet another departure from the new federal Tax Cuts and Jobs Act. The bill maintains a formula to reduce or cap itemized deductions known as the Pease limit. TCJA removed the Pease limit at the federal level but the substitute tax bill voted on in committee Friday restores it at the state level. Continue reading
Neither the House nor Senate Republican tax plan returns more than half of the TCJA windfall. The House GOP does propose to set aside another $517 million in the first year for some form of added tax relief, to be determined later this year.
The tax relief proposals advancing in both the Virginia House of Delegates and Virginia Senate return at most half of the estimated additional state revenue created by the federal Tax Cuts and Jobs Act (TCJA) over six years.
As Virginia leaders have debated what to do about the situation, all have been working off an estimate of the additional revenue provided by an outside economic consultant last year. It projected $1.2 billion in the first two years and more than $4.5 billion in the first six years as the addition revenue Virginia would collect from conforming to the TCJA, absent changes in Virginia tax policy. Continue reading
The Best Friends of the Taxpayer Face Off
The numbers to remember as the Virginia House of Delegates and State Senate start voting on income tax conformity bills, perhaps beginning tomorrow, have nothing to do with the hundreds of millions of dollars on the table or the millions of taxpayers waiting to file returns.
The key numbers are 32 and 80.
With an emergency clause on one of the two House bills, scheduled for debate Thursday, and on the only Senate bill that came out of committee today, a full 80 percent of the members of either chamber need to vote yes or they fail. Continue reading
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.
Senate Finance Committee data highlights the “conformity” tax impact on Virginia corporations. The Governor’s Office data lumps in all forms of businesses, implying a smaller impact on Virginia business. (Click for larger view.)
In proposals which would further distance Virginia from the tax reforms of President Donald Trump, the General Assembly is being asked to let Virginia corporations keep two major deductions no longer allowed at the federal level.
If the General Assembly agrees, the chance for a general corporate income tax rate reduction probably goes away. The protection of a well-connected few will outweigh a possible benefit to the many, which seems to be what always happens when Virginia tries tax reform.
The House Finance Committee will hold its first meeting of the 2019 General Assembly Monday morning, finally starting public discussion of Virginia’s response to a major federal tax overhaul from 13 months ago that will…
No! Belay that! All House bills dealing with how Virginia conforms to that federal change, and what other policy changes might follow, have been assigned to the House Rules Committee, chaired by Speaker Kirk Cox and meeting whenever the Speaker decides for it to meet. The one bill on the issue assigned to Finance is likely to also be referred to Rules tomorrow.
Are You In The Hugo Zone?
Delegate Tim Hugo (R-Centreville) is the point person for a state income tax proposal centered on less-than-full conformity with the federal Tax Cuts and Jobs Act. It only helps a narrow subset of Virginia taxpayers, those in The Hugo Zone. We will now try to take you there. (If you want to imagine Rod Serling’s voice in your head, feel free.)
Under straight conformity, as proposed by Governor Ralph Northam, a taxpayer taking the federal standard deduction would be stuck with the state standard, as well. Under straight conformity, deductions for local taxes on either return would be capped at $10,000. Hugo, standing Friday with several key House Republicans, announced a bill to put Virginia out of conformity on those two points.
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.
The Northam Administration’s plans to spend most of the additional revenue created by federal tax reform may not prove popular if the public understands the alternative plans for real tax relief under consideration.
Three weeks ago, I complained that a poll from the Judy Wason Ford Center at Christopher Newport University didn’t ask the right questions, so the Thomas Jefferson Institute for Public Policy paid Mason-Dixon Polling & Strategy to add a private question to its recent poll of 625 Virginians. We added just the one question to clarify one aspect of the debate, with the results announced today.
The poll was in the field nearing its end when Governor Ralph Northam released his budget, which did indeed call for spending most of the federal tax change windfall over the next several years. One way he proposes to spend it is by expanding the existing state Earned Income Tax Credit into a program which pays cash grants to low-income Virginians. Is that expanding an existing program? Close enough.