As Budget Pressures Mount, Lawmakers Can Raise Significant Revenues and Protect Families by Updating Virginia’s Upside-Down Tax Code

As federal support declines, a new report highlights how fairer tax policies can help Virginia avoid harmful cuts and invest in families’ futures

With federal funding cuts looming — and decades of state underinvestment in public schools, housing, and other essential services — state lawmakers face urgent choices about how to sustain the foundations of thriving communities. A new report from The Commonwealth Institute for Fiscal Analysis (TCI), Policy Choices to Protect and Increase Investment in Virginia Communities, outlines practical, forward-looking options to raise the resources necessary to meet growing needs and expand opportunity for families across the commonwealth.

For years, Virginia’s tax code has been upside down — the wealthiest 1% in the state pay the least in state and local taxes as a share of their incomes, leaving the state less equipped to invest in community priorities. Without action, new federal spending shifts and ongoing funding pressures could force lawmakers to consider harmful cuts to schools, health programs, and local services that families rely on. TCI’s analysis shows that our state leaders can choose a different path by modernizing Virginia’s tax code and ensuring that the wealthy and profitable corporations contribute in line with their ability to pay.

“When wealthy individuals and large corporations don’t pay their fair share, families with low and moderate incomes ultimately pay the price, and that shortchanges every community,” said Megan Davis, Senior Policy Analyst at The Commonwealth Institute and primary author of the report. “Lawmakers have an opportunity to build a tax system that keeps pace with today’s economy and makes sure contributions rise with the ability to pay. That’s how we invest in the strong schools, affordable housing, and health care every person in Virginia deserves.”

The report points to several proven solutions, including:

• Creating a new state income tax bracket with a 10% rate for annual income exceeding $1 million a year ($1.4 billion)
• Modernizing our state tax code to include digital products and new economy services, including for business-to-business transactions ($1.035 billion)
• Establishing a 1% or more wealth proceeds tax on net investment income for households making $200,000 for single filers or $250,000 for married, filing jointly ($258.5 million or more)
• Re-establishing the estate tax (about $60 million) 

These options, considered before in Virginia or successfully modeled in other states, would give lawmakers the tools to safeguard current critical public services and make long-overdue investments in health, education, and more.

“Virginia’s leaders have tough decisions ahead, but they also have real opportunities,” said Ashley Kenneth, President and CEO of The Commonwealth Institute. “Families across the state are counting on lawmakers to make choices that reflect our shared values. Acting now, to advance fair tax reforms, will help meet immediate budget pressures and build a stronger foundation so that every family can thrive.”

As the 2026 General Assembly session approaches, TCI urges lawmakers to avoid repeating harmful choices that have largely harmed Black, brown, and low-income families in the past. Instead, TCI argues, state leaders should take this moment to reimagine how Virginia raises and invests its resources so that everyone pitches in their fair share and everyone benefits.