The Truth Is Out There (To Be Revealed Friday)

So it’s going to be politics, not economics. Perhaps it was inevitable.

On Friday Governor Ralph Northam and Secretary of Finance Aubrey Layne will be presenting to the House and Senate money committees, part of their report looking back (at the completed fiscal year), but the key parts of their message looking forward. Both are expected to put some flesh on the bare-bones announcement made last Friday about how the Governor wants Virginia to respond to the opportunities created by federal tax reform.

The announcement was telegraphed by the left-leaning Commonwealth Institute for Fiscal Analysis, which endorsed converting Virginia’s Earned Income Tax Credit into a fully refundable version, putting cash in people’s pockets, discussed in a previous Bacon’s Rebellion post.  The political angle was described well this morning by the Democrats’ Virginia media strategist Jeff Schapiro, also of the Richmond Times-Dispatch, who tagged the EITC proposal as aimed at the 2019 legislative elections.

Finally you can see the strategy in the Governor’s own guest column today, this from the Roanoke Times.

“The recent federal tax changes have benefited mainly higher earner. These tax policy changes from Washington will result in additional revenues to Virginia. We can use this opportunity to invest in those who need it most— hard working Virginians. We can do this by making Virginia’s existing earned income tax credit refundable, ensuring that 600,000 working Virginians, including thousands of veteran and military families, can get the full tax benefit for which they qualify.”

What the Governor and Secretary Layne know that we don’t yet is, well, everything. The state commissioned a detailed study of the state-level financial impact of the various federal tax rules changes. That was the apparent basis for the Governor’s announcement Friday that about $500 million plus in new state revenue will result, half of which he wants to use to finance the EITC refunds and half of which he wants to keep in the General Fund.

Secretary Layne assured Bacon’s Rebellion after that press conference that the full report from the consultant will be released and available online Friday after the Governor speaks. Until that report is picked apart, anybody who hasn’t read it is just speculating. I won’t join in that yet.

Probably the best analysis of the issues – written without access to the new report on the numbers – was released this week by Jared Walczak of the Tax Foundation. Come Friday it should be clear where that $500 million estimate came from, which tax provisions produced additional revenue and which taxpayers may pay more in the long run.  And it may be clear whether that windfall results from full conformity to the myriad federal changes, no conformity to the federal changes, or from cherry-picking which provisions to accept or reject – meaning a different combination produces a different revenue result.

There has been no mention so far, but expect news on Friday, about the potential state revenue boost from requiring more out-of-state retailers to collect and remit sales tax on goods they ship to Virginia customers.  And until Friday we really won’t know the size of any surplus from fiscal year 2018, or the status of the reserve funds. Those are also key parts of this coming tax debate.

This is the best opportunity in a generation Virginia has seen for some intelligent tax reform, something positioning our economy for this century. And tax reform does not mean cut my taxes and raise somebody else’s. As previously noted the EITC is an effective anti-poverty program, and Virginia’s income tax is arguably regressive, hitting lower income workers harder than it should. But that is just one element of what needs to be a long conversation that ranges over the whole tax code, one that has been stymied for decades because of the various political risks.

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20 responses to “The Truth Is Out There (To Be Revealed Friday)”

  1. LarrytheG Avatar

    I’m sure it’s me but the following seems contradictory:

    ” “The recent federal tax changes have benefited mainly higher earners,” Northam writes. “These tax policy changes from Washington will result in additional revenues to Virginia.”

    One would think that if there is a tax-cut for higher income earners that it would result in LESS tax revenues, not more.

    So what additional revenues is Virginia getting and from what demographic if not the higher earners?

    anyone got any clear understandable answers?

  2. Steve Haner Avatar
    Steve Haner

    As noted, His Excellency and his team and those he has clued-in have those answers already, and the rest of us get to see the data Friday. Most of the money will come from people who itemize their returns and will now move to the standard deduction, probably. Those clearly will not all be high income, in fact the truly high income may continue to itemize.

  3. LarrytheG Avatar

    re: ” Most of the money will come from people who itemize their returns and will now move to the standard deduction, probably.”

    wouldn’t that also be true at the Federal Level also?

    Aren’t all the states – not just Virginia/Northam … getting the same increase in revenues?

    I know the GOP is demonizing this…calling it Northams tax increase – but isn’t this really a result of Federal Tax Law changes that Congress passed?

    Let’s get some truth into the conversation.. and no I’m not accusing Steve of lying… we’re just not getting all the facts to the discussion.

    1. TooManyTaxes Avatar

      Larry, states, including Virginia, have traditionally conformed their income tax laws to changes in the federal Internal Revenue Code, including the Ronald Reagan, George HW Bush, Bill Clinton and Barack Obama tax increases. They’ve done this for the Ronald Reagan and George W Bush tax cuts. Why is the Donald Trump tax decreases different? And didn’t the Mark Warner tax increase to fix the structural problems in the Virginia tax code fix that problem?

      Northam is trying to get Virginians to pay higher state income taxes. Why is his behavior different from previous Virginia Governors from both parties?

      1. LarrytheG Avatar

        @TMT – yes Virginia has conformed for prior POTUS and why do anything different for this one?

        What I’m asking is WHY we get MORE tax revenues just by continuing to conform as we have with prior POTUS?

        If Northam does nothing – we get more money – and what Northam is proposing is to take that increased taxes – that he had nothing to do with – and use it for things he supports… rather than just going into general revenues ….

        1. TooManyTaxes Avatar

          Larry, it’s my understanding that, by failing to conform the Virginia tax law to the new federal tax law, Virginians will be taxed based on state law that was last conformed to the Obama tax increases. That’s why the state gets more revenue. By not following traditional practices of conforming state tax law to the federal changes, Virginia gets a windfall that would not have occurred had Northam followed the practices of former Governors from both sides of the law.

          Since he doesn’t want to follow tradition (which has conformed state tax law to federal law for both increases and decreases alike), he’s imposing an effective tax increase on Virginians so he has more money to spend and to give to Virginians who don’t have any state tax liability. Screw Northam.

          1. LarrytheG Avatar

            @TMT – Northam can change tax law in Virginia? Who Knew!

            Virginia conforms to the Federal tax law – has done it all along – nothing has changed… Northam has made no changes – he can’t. Only the GA can do that …

            Here’s the truth and the reality :

            ” Thanks to Federal Tax Code, Virginia Could See Millions in New Revenue”

            ” The new federal tax code may be having an unintended consequence here in Virginia: higher state taxes. And, that could mean hundreds of millions of dollars of new revenue.

            It’s kind of counter-intuitive to think of federal tax cuts leading to more state revenue. But one quirk of Virginia tax law is that people who take the standard deduction on their federal tax returns also have to take the standard deduction on their state tax returns.

            Nicole Kaeding at the Tax Foundation says that’s likely to have dramatic consequences for Virginia’s budget.

            “Because more individuals will be taking the standard deduction than they had in previous years, there will be fewer deductions taken in the state of Virginia, meaning there’s more revenue generated.”

            About $300 million, according to state officials.”

            Now how about it TMT… you gonna admit that this is not Northam?

            Now the GOP in Virginia could, if they wanted, Royally screw up Northams plans by simply allowing Virginia’s to choose whether to itemize or not – then send that change in tax law to Northam.. to see if he signs it or not.

            but then I’ve ruined the whole party here where folks want to conjure up a different scenario that make Northam the bad guy… It has nothing to do with Northam.. it’s the current Virginia Tax Law…

            We expect Northam to advocate spending it – after all he’s a Dem but will the GOP make that one change that protects Va taxpayers from a tax increase?

            We’ll See… but right now they’re demonizing Northam rather than promising to fix the problem.

  4. Um the middle class is not upper class. This takes away from upper AND middle to give to lower. Honestly, how much do we think to give and not get soemething back?

    1. LarrytheG Avatar

      @V N – this is coming from the Federal tax code … the recently passed Tax Cuts and Jobs Act of 2017… that says it is a tax cut… and what I’m asking is – if it is a tax cut – how come it is generating higher tax revenues – at the State Level if we continue to conform to Fed Tax law as we have before?

      come on guys.. no matter your political philosophy – don’t you want to know the facts here? Why is Virginia getting more tax revenues as a result of the Tax Cuts and Jobs Act of 2017? Yes.. Northam has plans for spending it but he did not cause the increased tax revenues…

  5. If it was me (and Chap Petersen) our team would probably use the extra money to figure out a way to improve or eliminate Virginia’s crazy car tax.

    1. LarrytheG Avatar

      I think I agree with that … but it just seems like they’d be making taxation even more complicated in Va. I’d rather see them permanently do away with the car tax refunds all together – and turn it back to the localities to deal with.

      It’s a moronic convoluted clusterF… the state takes tax money from citizens then sends it back to the localities to spend for local services – instead of having the localities directly tax their own taxpayers to pay for services that they deliver locally AND be held accountable! The way it is done now is basically a backdoor way for localities to increase taxes on local citizens by having the state collect additional taxes that are then characterized as “tax relief”. the “relief” is when the state takes the money from taxpayers and “gives it back” to the county that then claims it’s “tax relief”.

      1. TooManyTaxes Avatar

        Larry- Gilmore’s car tax plan was about the only good thing that Richmond has done for Fairfax County since I moved there in 1987. It took state income and sales tax dollars, which are disproportionately paid by NoVA residents, and funneled them back to NoVA local governments. They, in turn, reduce the personal property tax bills we pay each fall.

        Had the law not been changed, even more NoVA income and sales tax dollars would go to subsidize low real estate taxes in much of the rest of the state. Fairfax County has not changed its personal property tax rate on cars for eons. It’s never tried to stick it to its residents by requiring even higher local car taxes.

        This is plain and simple a plan that makes a very unfair situation for NoVA residents better.

        I also like it because the plan was strongly opposed by real estate developers who feared any tax cuts for individuals resulted in less taxpayer money to subsidize their land investments through tax dollars, rather than through proffers. And of course, the Ministry of Enlightenment and Propaganda was enraged. Can’t get much better than that.

        1. LarrytheG Avatar

          no.. Gilmore’s plan was a ClusterF. He had the State collect taxes from taxpayers then sent that money back to the locality to spend – so the locality didn’t have to tax citizens more.

          So citizens paid more in taxes anyhow – but because the money went to Richmond first – they could not hold the local elected responsible for the tax.

          by sending the money to the state FIRST – NoVA folks are actually paying MORE to other localities because it allows the State to decide how much to send back to NoVa…just like the composite index calculations…

          If you kept the tax in NoVa – then NONE of it would go to Richmond and ALL of it would be up to your own elected to decide – and to be held accountable for.

          It’s a moronic way to tax that basically hides how the tax is being collected and spent.

          And if you want to hold local real estate developers accountable – then do it locally – don’t expect the state to do it.. In fact, you can see what happened to the Proffer law when the state got their hands on it!

          TMT – you seem to be looking for whatever benefits you or you think it does – no matter how it screws up everything else.

          The best govt and taxation is one that is local ; the more you send it to Richmond to decide how to allocate – the more you are at risk for it to be sent to other localities.

          1. TooManyTaxes Avatar

            Larry – we send the money to Richmond anyway. Much of it is used to keep local real estate taxes lower in other parts of the state. For example, the LCI does not require a minimum local tax effort to get state aid for K-12. So they get state money and pay very little in local taxes. Rural legislators from both parties laugh about it.

            The Gilmore plan takes some of the income and sales tax I send to Richmond and gives it to Fairfax County, instead of [fill in the blank]. Fairfax County, in turn, charges me less than the value of my car times the personal property tax rate. Let’s say that’s $400. Since that money comes from money I pay the state, my total effective tax bill is $400 less than I’d pay without the car tax plan. And there’s $400 less for Richmond to send to [fill in the blank.] Residents of [fill in the blank] have to pay $400 more in property taxes.

            And, as I wrote, Fairfax County doesn’t change the tax rate so they don’t try to get the $400 from me as well as from the state.

            If we had a fair system, I’d be less inclined to look for ways to beat it. But we don’t have a fair system. Impose a minimum local tax effort into the LCI for starters.

  6. Rainy day fund?

    1. LarrytheG Avatar

      most fair approach that will generate no additional revenues for Va? Allow taxpayers to pick std deduction or itemized on the State Return – no matter what they picked on the Federal.

      I’m wondering if the Va GOP is going to take a principled stand on it or instead choose to demonize Northam and then negotiate with him over how to spend the largess…

      Wanna guess what a cynic believes?

      Here’s the bottom line – I bet not 1 guy out of 100 actually KNOWs what is REALLY going on.. and is so clueless that they don’t know what Northam and the GOP are actually doing in reality.. one teensy-tiny change in Va law will fix i t and insure no Virginian will pay increased taxes… right?

  7. LarrytheG Avatar

    @ TNT WHY do you send tax money to Richmond to be sent back to help pay for property taxes rather than directly tax it at the local level to start with?

    The whole idea of Richmond sending money to localities in the first place is to help them pay for schools, law enforcement and other things they cannot pay for themselves. The LCI determines their ability to pay. It includes things like total income, value of property, amount of sales tax collected so it’s hard to game but the essential point is that the State will “help” the counties that cannot afford basic minimal standards for schools, law enforcement, social services, etc… NoVa is going to help pay for that no matter what.

    The car tax is just flim-flam type obfuscation to fool people into thinking that Richmond is sending them money! They ARE but they are getting that money from the local taxpayers via the state income tax – and it’s a significant budget item every year that competes with other priorities like K-12 and Higher Ed and MedicAid. I doubt seriously that NoVa is getting back dollar for dollar you guys are actually paying on your income taxes… but the bigger point is – because of the circuitous path – you really don’t’s hidden… they divert some portion of what you pay the state to send back to Fairfax but you have no idea if you’re actually getting one for one… at all..

    Just imagine if even more money was done that way – even more tax went to Richmond for them to decide how much to send back to NoVa …. and how much to send to the poorer counties …

    You’re letting the State decide how much of your money to send back to you… and you have no idea if you getting back your share of what was sent to Richmond by all counties…

    you just like the idea of getting money back… I like that idea also until I realize I was the one who sent the money to start with and I have no idea if I’m getting it all back or not – and in the end – why send money in the first place ? what does that accomplish other than allowing the state to fiddle with how much to send back?

    1. TooManyTaxes Avatar

      Most states have school funding formula similar to the LCI. It’s likely mandated by law or even a constitution. But most states also require the local government to impose a minimum local real estate tax. When that tax is insufficient to fund local schools at a minimum level, the state is required to make up the difference.

      For example, both Michigan and Indiana require local governments to impose a minimum real estate tax in order to get the state aid. Virginia doesn’t. Senator Janet Howell told me that a number of local governments, some in suburban Richmond, regularly cut their real estate taxes, at least in real terms, when state aid increases. Fairfax County, despite having more poor kids in public school than most Virginia school districts have in total students, has seen real estate taxes increase at rates that regularly exceed inflation and classroom sizes push state limits. That’s not required by the law.

  8. LarrytheG Avatar

    re: ” But most states also require the local government to impose a minimum local real estate tax. ”

    Can you provide some links to substantiate that claim?

    Most states require local match to get funds but I’ve never heard that States force localities to have minimum tax rates …

    how would they determine what the minimum tax rate should be?

    The LCI in Virgina, by the way DOES take into account the value of taxable property…

    The Local Composite Index determines a school division’s ability to pay education costs fundamental to the commonwealth’s Standards of Quality (SOQ). The Composite Index is calculated using three indicators of a locality’s ability-to-pay:

    True value of real property (weighted 50 percent)
    Adjusted gross income (weighted 40 percent)
    Taxable retail sales (weighted 10 percent)

    Each locality’s index is adjusted to maintain an overall statewide local share of 45 percent and an overall state share of 55 percent.

    but again – what is mandated is not the tax rate – but the match to get the state money…

    I suspect that no states actually mandate a specific minimum tax rate… but all of them require local match to get state funds for various categories like schools or public safety. The Feds do the same thing.. they offer money if there is a State or local match… but that’s not mandating a particular tax rate. Virginia already determines “Ability to Pay” to determine how much State aid to provide – on a match basis.

  9. […] from federal tax reform into tax benefits for the non-income tax-paying poor. (Steve Haner gave an excellent preview of the issue on Bacon’s Rebellion a week […]

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