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. 

According to the official fiscal impact statements on the House and Senate legislation, so far sponsored and voted for only by Republicans, the two bills end up with a very similar six-year impact of just over $2.2 billion, leaving the state treasury with the other $2.3 billion.  One of the impact statements was challenged by the Republicans but confirmed by the Joint Legislative Audit and Review Commission.

The question of how to respond to TCJA was showing signs of a partisan train wreck on Friday, before the revelations about Governor Ralph Northam’s yearbook page photo and the subsequent effort to force his resignation.   The 14 months Virginia leaders have sat on their hands, failing to broker a compromise before the session, may now prove disastrous.

The Senate bill, which contained the conformity provision and an emergency clause, was defeated on a party line vote (an emergency clause needs 80 percent approval).  Senate Majority Leader Thomas Norment then stripped off the clause, so the bill could pass with the 21 Republicans only, and openly acknowledged the need for a broader conversation.  What was true Friday afternoon had also been true in February 2018.

It has been obvious all along that any bill seeking to conform Virginia’s tax code to TCJA, allowing taxpayers a smooth filing process, needed a strong bipartisan vote.  It has been clear what the Governor and Democrats wanted in the deal (cash benefits for low income workers), Republicans had a laundry list of proposals in front of them, and there is no valid excuse for their failure to act during 2018.   Who didn’t return who’s phone call?  We may never know.

It was also clear in the Chainbridge Solutions data released in August that the initial two years were just the start, and the revenue impact would grow in subsequent years, especially from the state’s corporate income tax.

The Senate proposal includes no individual tax reform element for the first year of the TCJA windfall, tax year 2018, but instead offers a flat $110 per person, $220 per couple state rebate for every taxpayer with a tax liability, a disbursement of about $420 million by their estimate.  That can be done through the budget, and indeed it is reflected in the budget amendments adopted by the Senate Finance Committee Sunday on a unanimous, bipartisan vote.

For individual taxpayers starting with the next tax year the Senate GOP plan increases the standard deduction by 50 percent, saving taxpayers $415 million this year and then about $280 million in 2021, with slight growth from there.  The 2020 number is higher because it represents 18 months of collections.  A higher standard deduction, especially in the out years, was and still is possible.  Indexing key benchmarks to inflation remains possible.  The business community has blown its chance for a corporate income tax cut with its apathy toward the idea.

The House bill on conformity may suffer the same fate as Norment’s today, failing because it needs a bipartisan vote.  A second House bill dealing with the tax policy issues could advance, as did Norment’s, without an emergency clause and with a simple majority vote.   Like the Senate bill, the House version makes no individual tax policy changes for 2018.  Instead, the bill dealing with conformity directs the TCJA revenue (estimated at over $500 million) into a holding fund for a decision later this year on how to disburse it.

For 2019 and beyond, the House bill increases the standard deduction 33 percent and allows individuals to split their decision and continue to take itemized deductions on their state tax return while taking the now-higher standard deduction on their federal return.  Both the House and Senate bill allow people who itemize to disregard the new $10,000 federal cap on deducting local taxes.  Both restore deductions important to a handful of huge businesses.

It was noted by Senator Steve Newman Friday that it takes an 80 percent vote to pass a bill with an emergency clause, but only a simple majority to adopt an emergency clause offered as a Governor’s amendment.  That only further underlines that a bipartisan compromise was always required, and the only way to get the Governor to sign a bill was to offer something – in the parlance – he could not refuse.   Starting in August, Secretary of Finance Aubrey Layne was claiming to be open to discussions, and to his credit Governor Northam didn’t rule out tax relief provisions in recent comments.

Now, almost 14 months after the federal bill passed, it seems we can start the real work.  Let’s hope.

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19 responses to “TCJA Remains A Big Revenue Gain for State

  1. re: ” 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.”

    how confident are they in the numbers? They did not do so good on the Medicaid forecast…. and Virginia has had issues with projecting revenues in the past so is this a high confidence number?

  2. Name me just one other of the 50 states trying to use TCJA as a state tax increase excuse.

    • Steve- That is a fantastic article. Much complexity, but the one sentence that caught my eye was the states should use this as opportunity to make their tax code “more competitive”. I am not sure we Virginia are doing that, we seem to be hitting harder the people we already hit too hard (which I would say is folks just over the Fed 12% bracket). But that’s a subjective feeling, not sure without careful study.

  3. Doesn’t this General Assembly session end on Friday?

    • No, Saturday 2-23. Tomorrow is crossover, the day for each chamber to finish with its own bills, and Thursday they will vote on their budget bills. Two weeks with the other side’s surviving bills, conference negotiations, etc. On first blush I don’t see the budgets hanging up like last year, but the tax issue might be unresolved by the 23rd.

  4. IT’s an excellent analysis … a lot to digest but this:

    “States receiving additional revenue should view this as an opportunity to make their tax codes more competitive. In the past, federal tax reform initiated a round of state tax reform as well, and this process tends to last several years.”

    and this is something that needs to be done carefully and not fast… and not by politicos with particular agendas – left or right… at least not until the objective analysis is done – and probably done in-house and with a consultant to iron out areas that involve forecasts.

  5. ” At the same time, however, Arizona and Minnesota declined to act on conformity legislation, and thus continue to operate under the Internal Revenue Code as it existed prior to tax reform, while Virginia technically updated its conformity date but expressly decouples from all new provisions of the TCJA in effect 2018 and onward. These five states—Arizona, California, Massachusetts, Minnesota, and Virginia—are now the marked outliers on individual income tax conformity.”

    I’ve seen other references that Virginia did “something” about conformity in Feb 2018 but are we really “decoupled” from all “new” provisions of TCJA?

    At any rate – this is NOT a simple quick and dirty exercise in my mind. It’s going to take a fair amount of analysis including forecast data to really understand and to not end up with unintended consequences.

    And as the TF folks said – this actually IS an opportunity to reform the tax code .

    I’m not sure how many in the GA are more interested in partisan politics these days than the tax code and other substantiative issues of governance.

  6. TBill, reading the Tax Foundation report there are other states which have realized net tax revenue growth, after whatever tax relief steps were taken. Frankly its no surprise. But it is also clear Virginia is one of only four states still failing to act on either individual or business tax conformity.

    • Increase is not so bad if it was gentle small increase on many cohorts. In Virginia we have a certain cohort of middle income borderline itemizers as the chosen losers. I am thinking the maximum magnitude of the tax hike here is roughly given by 5.75% x ($24,000 – $6000) = +$1035, so I am thinking certain tax payers could see a large say up to 25-30% increase in their state taxes ( I would have to calc the worse case scenario). They can consider itemizing Federal to try to optimize combined Fed+state, if they think of it.

  7. some tax software allows running both itemized and std deduction scenarios and we are seeing instances where it’s better to itemize the Feds even though it’s lower than the std deduction because the state ends up with a bigger refund. bottom line – run both scenarios if you itemized last year.

  8. The GA did “something” last year and it’s not clear what they did do…

    but here it is:

    ” During the 2018 General Assembly Session,legislation was enacted to advance Virginia’s date of conformity to the Internal Revenue Code from December 31, 2016 to February 9, 2018. This allows Virginia to conform to the Disaster Tax Relief and Airport and Airway Extension Act of 2017, as well as most of the provisions of the Tax Cuts and Jobs Act and the Bipartisan Budget Act of 2018 that are effective for Taxable Year 2017. However, this legislation does not conform to the provision of the Tax Cuts and Jobs Act that temporarily increases the medical expenses deduction for Taxable Years 2017 and 2018. In addition, this legislation deconforms from most of the provisions of the Tax Cuts and Jobs Act and the Bipartisan Budget Act of 2018 that are effective for Taxable Year 2018 and thereafter.”

    I have no idea what the above actually means… can anyone else read it and discern it?

  9. What IS OBVIOUS in reading this bulletin is this – that the issue was not forgotten or not recognized…in 2018. It clearly WAS recognized and legislation WAS actually passed and if I read it right it was “emergency” legislation that required 80% approval.

    It’s obviously water under the bridge at this point – but the point is that they’ve been aware of this issue since the 2018 legislative session.

    ” Under emergency legislation enacted by the 2018 General Assembly (SenateBill 230,Chapter14 of the 2018Acts of Assembly,enacted on February 22, 2018,and House Bill 154,Chapter 15of the 2018 Acts of Assembly, enacted on February 23, 2018), Virginia’s date of conformity to the terms of the Internal Revenue Code will advance from December 31, 2016 to February 9, 2018.”

    then this follows the above:

    ” However, this legislation does not conform to the provision of the Tax Cuts and Jobs Act that temporarily increases the medical expenses deduction for Taxable Years 2017 and 2018. ”

    So .. they actually explicitly DID de-conform SOMETHING … and acted/voted on it and all that was really needed for more de-coupling was to specify those other things to decouple – which could have easily been the itemized/standard deduction conformity. Why did that not happen?

    Was it because they could not get a majority to vote to do it?

    see, these are the kinds of things that go on at the General Assembly that do not get well reported… and then a year later – no one seems to remember anything.

  10. I confused who is defining what “conformity” means but seems to me Virginia could conform and still allow itemizing on the state return. That’s what New York is doing….not sure who else.

    • And in the article Steve provided above, New York is shown as a conforming state. Not that conforming is necessarily what we should doing now.

      So when Va. Dems say they want a “clean” conform, they want a clean conform with blocking itemizing on the state return unless you also itemize on the Federal. Which is basically saying the Dems feel a tax increase on that cohort is needed.

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