Virginia Should Double Its Standard Deduction

In 1987, as part of its response to the conformity issues created by President Reagan’s tax cut, the Virginia General Assembly increased the standard deduction available to Virginia taxpayers to $3,000 for an individual and $5,000 for a couple. At some point since the joint filing amount went up to $6,000 to eliminate any marriage penalty.

Faced with a similar problem in 2019, that’s what the Virginia General Assembly should do as a start:  Increase the state standard deduction.  Double the amount of income a Virginia couple can shield from tax under that method, with no itemized deductions necessary.

Virginia also allows personal exemptions to provide a bit more tax-free income.  The personal exemption is now $930 each.  A couple with one child gets $6,000 in standard deductions and $2,790 in personal exemptions for a total of $8,790 pre-tax income.  Compare that to where surrounding states are on that score and to the new federal standard deduction of $24,000.  Even if Virginia doubles the standard deduction, its only a step in the right direction, as you can see below.

Taxable Income Threshold
Couple Plus One Child
Virginia Current $8,790
Virginia Proposed $14,790
Maryland $13,600
District of Columbia $24,000
North Carolina $17,500
South Carolina $24,000
West Virginia $6,000
Tennessee No Income Tax
Federal Taxes $24,000

I’ve been drawn to this idea from the start but when I saw that surrounding states (except West Virginia) were already there, this suddenly struck me as imperative.

It would be only a good first step toward preventing the personal income tax increases which will result when Virginia conforms to the new federal tax rules and definitions.  The idea is further explored in a briefing paper published today by the Thomas Jefferson Institute for Public Policy.  It is neither creative nor comprehensive tax reform, but creative and comprehensive make people nervous and will take time so let’s start with something simple and familiar we can do quickly.

It is better than doing nothing, which is what the Virginia Society of Certified Public Accountants is recommending.  It wants to adopt conformity and let the revenue accumulate, hoping later next year some consensus on reform will emerge.  Hope is no substitute for cash.  This is a very attractive idea that might get consensus now and could be adopted in the same bill that accepts conformity.

It is also a better approach than breaking conformity and allowing Virginia taxpayers to itemize on their state taxes while taking the standard deduction at the federal level.  The whole idea behind federal tax reform – and many surrounding states clearly agree – is to move people away from deductions driving their economic behavior.

Finally, this is a better idea than giving low income workers grants through the Earned Income Tax Credit system.  The grants come once a year and you must apply.  They reduce to nothing on a sliding scale.   This is a clear-cut tax reduction of $345 ($6,000 x 5.75%) for almost every family taking the standard deduction.  With withholding tables adjusted, the money shows up in every paycheck.

Many in the political class remains focused on spending the windfall money.  This takes away about $440 million of that possible spending, according to the Department of Taxation’s modeling.  This is an accidental tax increase, a windfall not approved by the General Assembly or (despite some of the rhetoric) caused by the Governor.  Any tax increase has economic consequences as people lose spendable income, so if you can reduce that impact there is economic benefit.

People with a pile of itemized deductions, which would usually be people who also have high incomes, taxes, interest payments and charitable giving, didn’t take the standard deduction before and will not do so going forward. This idea does nothing for them.  This also does nothing to address the corporate income tax increases which are coming.

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19 responses to “Virginia Should Double Its Standard Deduction

  1. Priority #1: Give the windfall back to taxpayers immediately.

    Priority #2: Failing that, use the windfall to pay down the state’s unfunded pension liability, thus strengthening state finances and avoiding tax increases (or programmatic cuts) down the road.

    Priority #3: Failing that, use the windfall to pay for one-time expenditures such as capital investments or pilot projects.

    Priority #4: The worst use of the windfall is to create new programs or entitlements that commit the state to higher operating expenditures.

  2. I would have voted for number 1 also but my understanding is that will cause a deficit just like it did at he Federal level – and Virginia does not want a deficit. Even the Va. GOP is a bit circumspect – they want to accuse Northam of a tax increase as oppose to be strongly in favor of “giving it back”. It would be irresponsible to “give it back” if it damaged the Va Budget.

    If the VA GOP does an analysis and is convinced that “giving it back” won’t cause a deficit – then I’m in favor but if they are not clear about that -then I would ask why the VA GOP does not itself have a firm Number 1 or 2 or 3 that it supports and instead wants to use the issue to go after Northam.

    So which is it? What does the Va GOP support? We already know what Northam supports…. right?

  3. None of the projected conformity windfall is baked into the budget, so deciding to give it back in some way does not create a deficit or shortfall. What the legislators want is still in play, hence the effort to point the way.

  4. I just did a 2018 Federal estimate. Not sure how to do a State estimate. I will probably have to take my lumps this year as we will lose ability to itemize Federal. For the future I will consider upping donations and maybe fiddle with mortgage interest to get back into itemizing.

    While they are at it, they can give me back the Virginia free on-line tax filing system, my understanding is the special interests nixed that so we’d have to pay them $25 or $30 bucks to do it with their software .

  5. Steve- what a crazy mess the state tax is now, if I have this correct.

    My federal standard deduction is $25300 for married/joint/one person over 65. So if my federal itemized deductions are close but under, say $25000, I would be better off taking the itemized. I would pay extra $71 in federal tax, but I could save about $850 in state tax by being able to deduct the federal itemized amount.

    Also suggests I should now stop making further 2018 state tax payments, because Virgina just adds back into my state income, assuming I am going to try to itemize, mainly to save on state taxes.

  6. The state expects that to be a common situation. If your federal deductions are above 2oK but below 24K, it is worthwhile to run the scenario where you pay a bit more federal to save a bunch of state tax. (And what we’ve proposed changes the incentives slightly on that, too, by narrowing the gap between the two standard deduction amounts.) Big thing to remember is the new $10K on local taxes.

    • So.. the concept of “broadening the tax base” – at the Federal level may be true! So because of the conformity issue – what is happening – is the Feds are getting more tax revenues – at the expense of the states?

      Should I repeat that?

      what do we call that? An inter-governmental transfer of wealth? 😉

      • Presumably this was always the case for a few taxpayers, because even the 2017 FORM 1o40 says “most” taxpayers, but not all, will benefit from the deducting the standard deduction if it is higher than the itemized deductions.

    • What it means for me is, I need to try to bump up my contributions. The best way to do this is through the Virginia state Neighborhood Assistance Program, which gives you 65% tax credit for a donation to a valid Virginia organization. If you add up the savings it becomes effectively 82% return on investment of the “contribution”…assuming a cash donation.

      The question would be if that option is still available, or did the tax experts already suck up the available funds for that crazy state loophole, oops I mean program?

  7. re: “baked into the budget”.

    What I’ve read is that if we conform – there will be a loss in revenues – not from the individual side but from the business side. Unlike the Feds, we cannot run a deficit and it would be folly to conform without knowing the effects.

    Having said that I’m NOT in favor of “keeping” the money and redirecting it to a recurring expenditure like EITC but I expect the Dems to go for that – and I expect the GA to act on it …

    re: individuals deciding whether to take a loss on the Fed or State side.

    yes.. and I would expect virtually everyone who used to itemize and know that if they don’t that they’ll lose on the State – they’ll want to do their taxes
    both ways and take the method that hurts them less.

    I do volunteer taxes for AARP so that’s going to add time to our work so we’re going to have to work out a standard method to run taxes both ways but even then – it won’t be quick and dirty because the State and the Feds both have a variety of credits and “adjustments” that are outside of “itemized”.

    Anyone who does taxes as a service to others – knows what a JOKE it is for politicians to talk about a “Post Card” tax system. Perhaps the time HAS come to wipe out any/all credits, deductions, “adjustments”, etc but no one should be holding their breath… every little tax “advantage” has a strong constituency and we cannot get rid of them one by one – it has to be a single swing of a very large axe that wipes out most of them in one fell swoop!

    • A GAIN in revenues. Conformity on its own produces more state tax revenue.

      • yes.. but the opposite – just de-link – does it cause a deficit?

        • You have no idea how discouraging it is that I can’t get these basics across…..wasting my time, I guess. I don’t know that anybody has run a scenario on revenue assuming Virginia does not conform at all, and continues using pre-TCJA definitions and rules and deductions. It would be an amazing train wreck in so many other ways that is not what is going to happen. But no, I don’t think that move would put a big dent in the current revenue projections. That’s the set of rules they are based on. (I got this from the two year old all weekend….why, Papa, why, Papa….)

  8. Steve- I am still trying to work thru sample 2018 estimates, but aside from doubling Va. standard deduction, I think there probably needs to be an incremental addon for Age 65+ to be consistent with the Federal standard deduction (which increases from $24k to $26.6k for married filing joint over 65)

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