Tag Archives: Conformity

Back to Taxaginia: Add A New Wealth Tax

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

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.  Continue reading

State Cap on Deductions Added To Tax Bill

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

TCJA Remains A Big Revenue Gain for State

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

House, Senate Tax Policy Shootout Starts

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

Love The Middle Class? Index Virginia’s Taxes

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.

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GILTI And Other Tax Provisions Of Great Interest

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.

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Tax Conformity Bills Buried in Rules Committee

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.

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Are You In…The Hugo Zone?

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.

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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.

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Higher Standard Deduction Popular With Voters

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.

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Governor Hints At Local Business Tax Reform

On Friday, after skirting the topic in a major address to a business conference in Williamsburg, Governor Ralph Northam told a reporter that “he’s planning to ask the General Assembly to tackle business tax reform,” adding it would be “comprehensive.”

The reporter asked about it because of other comments made by Secretary of Finance Aubrey Layne and the President of the Virginia Economic Development Partnership, Stephen Moret.  Since his arrival in Virginia, Moret has from time to time mentioned local business taxes as a hindrance to economic recruitment and business start-ups. He did that again Friday in his own presentation to the Virginia Chamber of Commerce.

For more than a decade local business taxes, especially two of them, have been the focus of the Thomas Jefferson Institute for Public Policy, among others.  The taxes are generally despised by the business community, but local governments are highly attached to them, because they are a revenue source other than residential real estate taxes.

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To Get Useful Answers, Ask Correct Questions

It’s all in how you ask the question.

The Judy Ford Wason Center for Public Policy at Christopher Newport University has done a pre-General Assembly poll testing various issues that may dominate the 2019 session.  The headlines are driven by the favorable and unfavorable rankings (ask me about President Tariff Man this morning as I survey my portfolio) and the apparent openness of Virginians to ending restrictions on gambling.

The poll’s authors took a dive into the complex world of tax policy, as well, seeking to tease out how voters view various moves related to the windfall tax conformity revenue.  It could have been more useful.  To start the discussion, here is the question they used:

Q8: Virginia is expected to receive as much as $600 million in additional tax revenue as a result of the recent federal tax reform. There are several ideas about what to do with this additional money. I’m going to read two of them and I’d like you to tell me if you support it or oppose each one.

  1. Provide an across-the-board tax cut to all Virginians who pay state income taxes.
  2. Provide a fully refundable tax credit to low and moderate-income Virginians regardless of how much they pay in state income taxes.
  3. If only one of these options could be done, which one would you most prefer to see done, an across-the-board tax cut to all Virginians who pay state income taxes or a fully refundable tax credit to low and moderate-income Virginians regardless of how much they pay in state income taxes?

The results were ambivalent, with a healthy portion of voters liking either approach.  There were predictable partisan divides, with Republicans preferring the idea of a broad-based cut for all taxpayers and the Democrats leaning towards a tax credit targeted to the lower and middle income.  But 59 percent of Democrats were positive on Q1 and 49 percent of Republicans were positive on Q2.  Forced to choose by Question 3, the partisan divide appeared again.

The problem is those are not the choices, at least based on the discussions so far.

First, missing from the mix was the idea which may yet prevail, taking no steps to return the money.  A fair additional option to give the poll respondents would have been: “Retain the money to increase the state’s financial reserves and spend it on other pressing state priorities.”  Listing especially popular priorities would have pumped up the positives on that question.

That is the biggest and most important question:  does the General Assembly keep the money or give it back?  They didn’t ask it.

Second, nobody has proposed an across the board tax cut to all those who pay the income tax.  We at the Thomas Jefferson Institute have come closest to that, with a proposal to double the standard deduction that might reach 70 percent of taxpayers, and we may tout the Wason result as supporting our case.  But that is not a tax cut for everybody who pays, so they didn’t poll our idea.

Third, I doubt if more than a handful of people polled know what a “fully refundable” tax credit is (or a partially refundable one, for that matter).  It sure sounds nice; everybody loves a refund – the word by itself may inject a bit of question bias.  Which of course is why it has always been used to describe the Earned Income Tax Credit grant payments.

But imagine the answer to this question, which more accurately describes the proposal around the Earned Income Tax Credit: “Provide an annual cash payment to low- and moderate-income Virginians who do not owe any income tax but are still struggling to meet the needs of their families.”

There still would have been positive responses to that, but how many?  Would it have proven to be as popular a choice as a general tax cut?  More popular?  We will never know.   Will we hear repeatedly in the coming weeks that this or that idea has been “strongly supported in a poll”?  Probably.

To borrow a line used about modeling, all polls are wrong, but some polls are useful.  This poll unfortunately is not very useful because it left off the main choice – keep it or give it back – and didn’t really describe the two choices for giving it back getting the most attention.

I do commend the CNU center for releasing the full text, cross-tabs and demographics of their sample.  Absent those, nobody should believe any poll result featured in the media or in campaign materials.

The Push for EITC Cash Grants Accelerates

A useful EITC example from the Commonwealth Institute’s website. Whether anybody “earns” a credit is debatable, but that claim will appeal to those who benefit.

With the 2019 General Assembly now a handful of weeks away, the main advocacy group for a new cash welfare entitlement in Virginia is ramping up its efforts with various appeals, perhaps testing themes for later use.

On Wednesday on its website the Commonwealth Institute for Fiscal Analysis was arguing that the state Earned Income Tax Credit (EITC) should be converted to a “refundable” cash grant because of how it would help “communities of color,” who pay a larger percentage of their income in state and local taxes.

A few weeks back, the focus was on how “veterans and their families deserve full credit.”  And, of course, they have broken down their data by legislative district, conflating the number of people who claim the EITC already with the number who would benefit from their idea.  Not everybody who now claims the state EITC would qualify for a grant.

The first to advocate for converting the tax credit into a cash payment was Governor Ralph Northam, who mentioned it last summer as his favored use for the windfall state income tax dollars generated by conformity.  It has nothing to do with that windfall.  In order to benefit from this idea, you already must be paying zero state income tax.

In recognition of that, the argument now is people need to get the balance returned in cash because they are still paying sales, excise and other taxes, just not income taxes.  It’s not good enough to zero out their income tax, advocates claim.

As previously explored, the Earned Income Tax Credit is a program with conservative credentials and has succeeded in improving the finances of low-income working families.  At the federal level, if your income and family size qualify you for a credit which is larger than your tax bill, the difference is sent to you in cash.  To call it a “refund” is political fiction, because it is not cash you paid in taxes to start with.  It just comes at the same time the rest of us are getting refunds.

The federal version has grown into a major income transfer program, about $60 billion annually, and as always with these programs the push to expand them is constant.  A Democratic House of Representatives will be more attentive.

In an earlier tax reform effort, Virginia added its own version of the program, allowing a credit against state taxes equal to 20 percent of the federal EITC.  But Virginia did not take the second step of paying cash grants from state revenue to people who had larger credits than tax bills.  That is what Northam and the Commonwealth Institute are talking about doing now.

The cost impact is about $250 million, based on an earlier legislative proposal which failed, but a full analysis is lacking.  The cost to taxpayers – and it is a cost to taxpayers, not a refund and not tax reform – will need to be more carefully spelled out when a bill finally appears.  Advocates have developed a calculator for individuals and for some the grants would be substantial.

While this proposal is not tax reform, but instead is a way to share the windfall revenue with low-income working families, the idea is not incompatible with tax reform.  It would be possible to couple it with an increase in the standard deduction or some other change in personal income taxes that actually aligns with to the conformity windfall.  It is only a question of how much revenue with which the legislature is willing to part (for some, the answer is none).

The proposal to expand the standard deduction would reach far more Virginians – more in “communities of color,” more veterans, more in every legislative district – than would turning EITC into a cash grant.  The problem for some on the left is they would not all be poor or working-class and might even be well-off.

What they would not be is the same people.  As noted before, to qualify for the cash grant Northam and the Commonwealth Institute are talking about, you already must be paying zero state income tax.  If the EITC credit has already wiped out your state tax bill, an additional standard deduction is of no value.

But there is this, which should appeal to the Commonwealth Institute:  The additional standard deduction would add to the number of people who pay zero income tax.  An EITC cash grant would go to those already paying zero but would not grow their ranks.

And this:  The additional standard deduction would stay with you as your income grew.  EITC – whether a credit or both a credit and grant — shrinks as your income grows, and that is what people really want, growing income.

If the General Assembly must choose, it should choose tax reform and increase the standard deduction.  If its willing to do both, well, this is why the legislative process is great theater.  It cannot be predicted.

Confusion, Silence Will Earn Business Higher Taxes

State revenue impacts of conformity to federal business tax changes without a corresponding cut in tax rates. Source: Department of Taxation

“I’m not going to get into it unless anybody wants me to.”

So said Kristin Collins, policy development director for the Virginia Department of Taxation, as she neared the end of her November 19 slide presentation on federal tax conformity and its impact on Virginia state taxes.  The final handful of slides focused on the business tax issues, and not one member of the legislative panel asked her to get into them.

With all the focus and political discussion swirling around individual income taxes and conformity, the business tax issues have received little notice.  In the projections on the state’s revenue windfall the higher business taxes produced by conformity play a big role.  In 2023 and 2024, the later years in the state’s projection, higher business taxes account for over 40 percent of the new revenue, according to an outside consultant’s study.

Collins was presenting to the Joint Subcommittee to Evaluate Tax Preferences, the closest thing Virginia has to a permanent tax commission in its legislative body.  Many key players on the money committees belong.   The chair, Delegate Lee Ware of Powhatan,  who also chairs House Finance, intends to call the joint panel together again for a deeper discussion and perhaps some decisions before the General Assembly starts in January.

A group I’m working with has already recommended on the individual side that Virginia increase its standard deduction, and on the corporate side we think Virginia should start to cut the corporate income tax rate, from 6 percent now down to 5.5 percent for this tax year and 5 percent for next tax year.  The full Thomas Jefferson Institute paper on our proposal is now available.

The business community needs to get its act together and decide what it wants, or it’s going to get the full effect of these business tax increases.  Unincorporated businesses – S corporations, pass-throughs, partnerships – do very well under conformity but incorporated businesses get hit.  The cut in the corporate income tax rate we propose effectively short-circuits that tax increase in general but does not return the benefit directly to the companies hit with the highest new taxes.

Some in the business community would prefer to leave the tax rates intact but instead get the General Assembly to restore the corporate deductions targeted by Congress.  They would have Virginia refuse to conform to those certain aspects of the federal system, which does target the corrective action directly to those facing higher taxes.

Our proposal is full conformity but rate cuts aimed at all corporate taxpayers.  It represents general tax reform, not maintenance of the status quo.

A short list of changed business provisions create the big tax hike, and they are spelled out in the Tax Department chart above.  You can see that several grow in impact over time, and a major change in the treatment of research and development expenses doesn’t even kick in for three years.   Unlike some of the new individual tax provisions, these changes have no sunset date.

What is wrong with that chart – and potentially misleading – is it includes provisions for both unincorporated and incorporated businesses.  The two changes producing lower taxes are mainly for the entities exempt from the corporate income tax, and most of those raising taxes are for corporations.  It also fails to detail one of the more controversial changes dealing with repatriated international earnings.

That provision, which goes by the wonderful acronym GILTI, is already the subject of a lobbying effort by some Virginia corporate taxpayers, who note some other states (Tax-achusetts included) have already elected to allow that deduction despite the federal action. It stands for Global Intangible Low-taxed Income, and the IRS guidance runs to 150 plus pages.  The argument over whether and how to tax intangible income (royalties on patents and copyrights for example) is an old one.

The Section 199 deduction also known as the domestic production activities deduction (DPAD) has been a source of contention in Virginia before, because when Congress expanded it Virginia balked at going along in full.  Its purpose was to lower the effective tax rate on manufacturers, and by lowering the tax rate for everybody by 40 percent Congress largely addressed that problem.  It then killed Section 199. (Virginia should do the same:  accept the change and lower its rates!)

The largest cash impact comes from new limits on the deduction for interest expenses, and here Congress also had reasons for its move.  Why subsidize excessive debt?  Apparently there is also a push on in Virginia to keep that deduction in place on Virginia corporate returns.

The limits on amortization of research and development expenses have a delayed impact, but eventually a large one.  That’s another one where Virginia could stay the course, maintain the old rules, but at the cost of a lost opportunity to lower overall rates.

The business community has some decisions to make, and it may be a handful of companies who have a developed presence at the General Assembly who get to make them.  Long-term considerations and discussion of overall economic policy tend to get ignored when lobbyists can angle for their own client’s advantage. That game is now afoot.