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February 4, 2022

Ashley Kenneth column: Youngkin administration should take a more responsible, targeted tax policy approach

On the issue of taxes, Virginians have seen two competing visions in recent weeks, as Gov. Ralph Northam’s term ended and Gov. Glenn Youngkin’s began. These plans impact individual people, families and Virginia’s ability to invest in essential public services. So how do they compare?

We ran the numbers to find out. While both plans proposed tax rebates and changes to Virginia’s income tax, this fact is clear: Compared to his predecessor’s proposals, Youngkin’s plans are more expensive and would help fewer families who need it the most.

Youngkin’s proposals would leave out nearly 80% of the more than 800,000 Virginia taxpayers who have incomes below $24,000. The proposed changes also would sharply reduce General Fund revenues — the portion of the state budget which lawmakers have the most discretion over, and which primarily goes toward funding K-12 and higher education, and health and social services.

If there’s one thing to understand that explains why Youngkin’s plan leaves behind so many people, it’s this: Virginia’s tax code is upside down, meaning families and individuals with low and moderate incomes pay a larger share of their income in state and local taxes than those with the highest incomes. This is driven by sales, excise and property taxes.

From that starting point, Northam’s proposed budget advanced a number of targeted tax proposals. These included eliminating the state’s portion of the sales tax that applies to groceries and personal hygiene products; and making the state’s earned income tax credit partially refundable for working families with low and moderate incomes, meaning those families would receive a larger tax refund.

EITC legislation has been filed in the current General Assembly session, an effort bolstered by a report from Virginia’s Commission to Examine Racial and Economic Inequity in Virginia Law. The commission said reforming the EITC “would help to increase incomes for working families in Virginia, particularly for Black and Latinx families who, and despite working, are more likely to be excluded from the current nonrefundable credit due to having low incomes.”

In contrast, the Youngkin administration included more than $3 billion in tax cuts in its legislative agenda, including eliminating both the state and local portions of the grocery tax, and providing new tax breaks for select businesses. Youngkin has proposed doubling the state’s standard deduction as his most significant change to the state income tax code. However, this increase largely would not reach working families with low incomes, according to analysis from the Institute on Taxation and Economic Policy.

Many families would not be helped by a higher state standard deduction because the state income tax code already includes several provisions that minimize state income taxes for individuals and families with low incomes. This includes the “no tax floor” that exempts individuals and married joint filers from state income tax if they have incomes below $11,950 or $23,900, respectively.

In addition, tax filers also can claim either the state’s low-income taxpayer credit or nonrefundable EITC. Both of these options reduce state income taxes for many families, including those whose adjusted gross income is at or below the federal poverty level ($26,500 for a household of four as of 2021). However, the state’s nonrefundable EITC reduces state income taxes owed for qualifying working families, but many are unable to receive the full credit.

Because many families already benefit from these existing policies, increasing the state standard deduction by itself generally would not help low-income families: They may not owe state income taxes but pay a high share of their income toward other state and local taxes such as sales, excise and property.

At the same time, Youngkin’s proposals come with a higher price tag, one that would put a strain on Virginia’s ability to meet its commitments to public services like education, health care and many other priorities.

We urge Youngkin to take a more responsible and targeted approach. This could include a partially refundable EITC, a repeal of only the state portion of the sales tax on groceries and a far more modest change to the state standard deduction, along with a provision to automatically adjust the state standard deduction or personal exemption to match inflation so that those provisions maintain their value over time.

Those elements would preserve a larger amount of budget resources, reach more tax filers with the lowest incomes who otherwise would not benefit from the standard deduction changes alone, prevent inflation from eroding tax measures and make the tax system more racially equitable.

Ashley Kenneth

ashley@thecommonwealthinstitute.org

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