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.

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13 responses to “VA CPAs Say Conform, Hold Tax Funds for Later

  1. I think Layne was right from the get go. There are moving parts and we really don’t know with any clarity the downstream consequences not to mention – if you make changes now – a lot of software companies will be scrambling. It takes a while to make such changes and check the software out.

    None of the excess money is being spent nor will it unless/until there is agreement in GA… so hold tight… sock the new money away -and have both arguments later, i.e .whether to spend or rebate and what changes to make to the code.

    The GOP could – and probably should go get their own experts (by which I mean actual real professionals not partisan zealots) – to do a separate analysis – and like the Gov did – release it – so everyone can see both analyses… and go from there.

  2. The way we answer the question of conformity or non-conformity changes taxation in the Commonwealth of Virginia at the state level. While the letter of the law in the state constitution might not require a GA vote on such a decision the intent of the constitution is that elected representatives are accountable for matters of taxation. I think Gov Northam should ask that bills be prepared to decide the question of conformity calling a special session of the General Assembly if need be to vote.

    • Nothing can change without a recorded vote. There will be a host of bills and something will get voted out. Doing nothing means we all pay federal taxes under current law, and state taxes under 2017 law, and the mess will be incredible. Virginia will either fully conform or mostly conform but it dare not stand still.

  3. I’m inclined to the belief that Virginia should conform, pocket the $600 million, and use the money to help pay down the $20 billion in unfunded Virginia Retirement System pension liabilities. That might not benefit taxpayers (as a generic class) right now, but it will help them later. Sooner or later, taxpayers will get stuck with that bill.

    • That is a fine idea. But I doubt it will fly. Politicians pick and choose how to dole out other people money in return for power to themselves. Your your very fine idea will not gain for politicians sufficiently targeted private advantage.

    • Bad idea – keep in mind that VRS doesn’t just cover state employees but also most local government and school employees throughout the state. There is some level of obligation to fix the VRS debt for state employees. However, there is no reason for NoVA taxpayers to bail out local and school employees around the state. Those jurisdictions need to raise their property taxes.

  4. Well.. if we conform ONLY and more money is collected – no matter what it is spent for, the GOP will tar the Gov/Dems with a “tax increase”, no question – even if it is used to pay down the unfunded liability.

    Any other options of no conformity to partial conformity with changes – is likely to have unknown/unintended fiscal consequences and judging from recent history – the State already has difficulty in forecasting revenues which plays heck with any budget.

    I’d also like to better understand what the consequences are of an unfunded pension liability. “We put money aside to fund pension obligations on an ongoing basis but GAPP now requires us to disclose the total liability – which we should but I still do not understand in terms of consequences what a shortfall actually results in – for a given percent of shortfall.

    As long as the current appropriations are sufficient to cover all current pensions paid to recipients – why do we have a “fund” for future years how is the required amount of that fund actually determined ?

    When we doing 401Ks, we have to forecast how many years we’ll need an income after we stop earning an income.. that makes sense.

    but States don’t retire and they continue to put money into pensions every year so what exactly is an unfunded pension liability in plain terms?

    I’m not arguing that we should not be funding pensions – but I think we need to understand WHY unfunded pensions liabilities don’t cause immediate changes to fix that issue – in the budget – right now today.

  5. If you think the future liability compared to the projected revenue stream from the assets is excessive then the state just adjusts the percentage of payroll it contributes to VRS every year. Or it could force employees to increase the percentage of payroll they contribute every year. A slight adjustment now has a big impact 20 years down the road. I don’t share Jim’s panic over VRS, and it matters more to me because its going to be a big part of our retirement income. But if the state wants to shore up VRS with this new tax revenue, that’s a valid use.

    The main consequence VA might fear is a dip in its credit rating, as investors worry future taxes will go to paying pensions before debt. And if it does need to divert money from other uses to VRS, that’s less money for schools, cops, roads, etc.

  6. Steve – let’s take you for an example. If you start receiving a pension from the state and the fund is not fully funded – has an unfunded liability – how would that affect you – and when would it affect you?

    I’m not arguing that there are no consequences but as much as this issue is used as a cudgel , I think we ought to understand what it means beyond serious finger wagging from the scolders…

    Isn’t this a similar argument that we hear about Social Security “going broke” when, in fact, it will never go broke – but if we do nothing, payouts will have to reduce – AND the problem is not that it’s “unsustainable”, but
    rather actuarials… that change and, in turn, affect the fund dynamics.

    Further, some say Social Security is a pyramid scheme scam because current workers are paying benefits to existing retirees. Isn’t that also what is going on with VRS?

    If we really don’t understand more precisely what “unfunded liability” actually means – AND NOT – then we are vulnerable to those who demagogue and demonize the issue – either on-purpose or because they too are just as ignorant as to what it means and what the consequences are.

    And that, in turn directly impacts how urgent the full funding of VRS is – or is not.

  7. Yes, I would assume that if VRS found itself short in 15 years, my wife’s payment might be reduced. I don’t think there is a constitutional protection on that pension but there are laws governing the process (ERISA) and VRS might fall under some of the secondary insurance programs (pension guarantee fund?). At this point I fully expect that to happen with Social Security, which is far shakier than VRS. VRS is backed up with a major multi-billion dollar investment pool producing income but Social Security is not. Not sure how long the VRS pool would hold if it stopped taking in contributions, but it would hold longer than SS I bet.

  8. “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.” — I get it that this matters if the State does NOT conform; but if conformity is the baseline, does giving State taxpayers this option make any difference? As you say, “The new federal law places limits on state and local tax deductions, eliminates the moving expense deduction, and make many other changes.” Changes which conformity would bring to State taxation also.

  9. Many deductions go away. Moving expenses, for example (except for military). The limit on deducting local property tax ($10K) will put a crimp in some people’s state returns. There is just no way to make each individual whole. But the $10K capped local tax deduction is still $4K more that the state standard deduction, so taxpayer will still want to take it.

    https://money.usnews.com/money/personal-finance/taxes/articles/2018-02-09/10-tax-deductions-that-will-disappear-next-year

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