Virginia’s Budget Opportunity: Turning Fair Tax Choices into Needed Investments

Every Virginia family deserves a fair shot at building a secure life — being able to afford the basics, raise a family, and feel confident about the future. Affordability requires real investment, and real investment requires new revenue. 

Both the House and the Senate made choices to lift up Virginia families, buoyed in part by rejecting tax handouts to corporations proposed by Governor Youngkin, which would have threatened current and future state revenues. The Senate was able to propose even greater investment, particularly in health care access, K-12 public schools, and state employee salaries, by proposing that data centers pay their fair share of sales and use tax.

Over the next 10 days, we should all be asking legislators to take the best from each proposal and whether maintaining a corporate giveaway that costs us all $1.6 billion a year still makes sense.

Tax Policy

The House and Senate added back new resources compared to the introduced budget, including over $900 million by largely rejecting several tax proposals from Governor Youngkin, such as doubling down on federal tax breaks for corporations and exempting taxes on tips and overtime for select workers. Both chambers mirror a new federal change for deducting business interest, but they scale back a state deduction that lets businesses write off more interest than the federal tax code allows, from 50% to 20%. 

Both chambers address the growing revenue loss from the sales and use tax exemption for certain data center equipment. The House ties it to certain energy efficiency standards. The Senate goes further to ensure data centers pay their fair share in taxes, removing the exemption entirely starting in 2027. Repealing the exemption generates $977 million more for the General Fund (the part of the budget over which lawmakers have the most flexibility), and on top of that transfers $118 million to K-12, and directs $292 million to transportation. These additional resources show up clearly in the Senate’s proposal, with greater investments in ongoing K-12 spending, health care, and more.

The Senate takes further actions on tax policy. They proposed an increase in the standard deduction to $9,200 for single filers and $18,400 for joint filers. While this change will help many low- and moderate-income families, they missed an opportunity to pair this change with an increase to the state refundable earned income tax credit, as lawmakers have done in the past. In 2022, JLARC found that pairing these improvements helped make our tax code more fair by making sure families with little or no taxable income still benefit.

The Senate also proposed a new round of tax rebates — $100 for single filers and $200 for joint filers. Unfortunately, these rebates are nonrefundable and untargeted. Families with the lowest incomes and very low or no income tax liability may see a reduced benefit or no benefit at all, while millionaires would get a check. A better approach would make these rebates refundable and target them to families who need it most.

More work remains to improve tax fairness to support investments that make life more affordable for Virginia families. While both budgets make new investments by protecting and generating new revenues, Virginia’s tax code still allows a millionaire to pay the same top income tax rate as a teacher, limiting our shared resources. Reforming our income tax brackets and creating a Fair Share Tax would help generate resources to invest in truly transformative change. 

Public Education

Both the House and Senate make progress in supporting students facing higher barriers to learning while also providing resources for the Joint Subcommittee studying how to transform the school funding formula to make it more transparent — and hopefully more adequate and equitable. 

Both chambers boost support for students with disabilities through the add-on created last year to address the state’s severe underfunding of special education services. The House invests an additional $148.4 million over the biennium, more than doubling it, while the Senate makes a more modest increase.

Each chamber also increases support for students from low-income families. The House includes a one-time boost of $100 million within a larger $400 million in one-time flexible funding in the upcoming FY2027 school year. The Senate provides $118.7 million over the next two years through a combination of general and non-general funds.

With additional resources available — primarily from closing the tax center loophole — the Senate also provides additional ongoing flexible support for students and additional school construction and modernization funds. Ongoing flexible funding comes from both increased state sales tax allocations to K-12 schools and increased infrastructure and operations per-pupil allocations due to skills games changes. Additional school construction and modernization funding comes from using more of the Literary Fund for that purpose, rather than using it to replace (supplant) General Fund support for teacher retirement.

While these changes, particularly the Senate’s ongoing support, are welcome, Virginia still falls far short of investing enough to remove the barriers many students face, particularly students with disabilities, English language learners, and students from low-income families. As policymakers and advocates work to rewrite the state’s school funding formula over the next year, centering equity and adequacy in school funding will be critical.

Health Care

The House and Senate budgets respond to federal actions that are creating cost and administrative barriers to health coverage. Both proposals include funding — $79.1 million in the House and $200 million in the Senate — to offset rising ACA marketplace premiums since enhanced federal subsidies expired. The House proposal targets premium relief to individuals and families earning between 138% and 200% of the federal poverty level (FPL) — $37,701 to $54,640 for a family of 3 — for coverage in 2027. The Senate’s proposal prioritizes individuals and families earning below 400% FPL ($109,280 for a family of 3) and allows premium relief to begin in 2026 through a special enrollment period “if feasible and practical” for our state exchange.

The House and Senate proposals also set aside funding to cover likely SNAP benefit costs resulting from new federal provisions tied to state SNAP payment error rates — funding that Governor Youngkin failed to include. The House includes $211 million, assuming the state’s error rate, currently at 11.5%, remains above 10%. The Senate set aside $135 million, assuming the state reduces the error rate to between 8% and 10%.

Both chambers restore $29.5 million and continued access to the FAMIS Prenatal program, which Gov. Youngkin completely eliminated in his proposed budget. This program provides prenatal, labor and delivery, and 60 days postpartum coverage to certain immigrant groups and served more than 11,300 pregnant people in 2025 alone. Restoring funding helps ensure more families can access maternal health services and improve health outcomes for Virginia’s youngest residents. 

Unfortunately, both chambers retain a new $2,000 annual cap on adult Medicaid dental services. This cap may cause some individuals who need substantive oral health care to delay care.

Both budgets also increase support for Virginia’s Free and Charitable Clinics by $10 million over the next two years. These facilities provide essential care to people with no or inadequate coverage and are expected to face increased demand as federal changes push people out of coverage. However, proposals to increase funding for other key safety-net facilities, known as Virginia Federally Qualified Health Centers, were not included in either budget.

Economic Opportunity

Both budgets fund commitments to get Virginia to a $15 minimum wage, fund the infrastructure for statewide collective bargaining, support paid sick leave standards, and establish the first comprehensive statewide Paid Family and Medical Leave program in the South. 

Both the House and the Senate also make progress toward improving child care affordability through a public-private partnership model. The House invests an initial $25 million in this program, while the Senate provides $50 million.

While investments in the public-private child care partnership may help relieve some access issues for parents seeking high-quality, affordable child care, they are far from enough. Neither budget includes funding to raise child care educator pay or increase support for Virginia’s core child care subsidy program (CCSP) beyond the introduced budget’s shifting of some Virginia Preschool Funds into the CCSP. As a result, Virginia childcare providers will likely continue to face high staff turnover and hiring challenges as pay is too low for many people to make ends meet while doing that work. Solving this problem will require significant, ongoing investment.

Criminal Legal System

Both the House and the Senate invest in a more fair criminal legal system. This includes funding to set the statute of limitations for court debts to 10 years and delay the start of collections to 180 days. The House also included funding to ensure people who work while incarcerated are paid a more meaningful rate to go toward reducing their court debt, and they fund a new opt-out court date reminder system.

Both chambers also invest in community safety by addressing the root causes of violence. The House shifts $20 million from Operation Ceasefire to expand the Safer Communities program to Danville, Hampton, Hopewell, and Newport News. The Senate invests $25.1 million for the Office of Safer Communities and violence reduction grants, and prohibits the use of these funds for school resource officers.

Choosing the Best Path for Virginia

Virginia House and Senate budget proposals both take steps to address misguided decisions in Gov. Youngkin’s final budget proposal and further invest in Virginia communities. Tax policy decisions, including on data center exemptions, have created greater flexibility to respond to the ongoing needs of Virginia families. 

Budget negotiations are underway. Legislators should hear from constituents, advocates, and impacted communities on the need to combine the best elements from both proposals into a final budget that invests in Virginia’s future.

Categories:
Budget & Revenue, Economic Opportunity