March 3, 2026
Policy Choices to Protect and Increase Investment in Virginia Communities (Mar 2026)
To make sure every community in Virginia is a good place to live, work, and raise a family, we must invest in quality public education, health care, affordable housing, access to food, and other important services and supports. However, the ability to protect existing investments and make new ones is under threat due to the significant impact that recent federal decisions will have on our state budget. Rather than doubling down on tax choices that are more likely to harm low-income families, drawing from rainy day funds meant for unexpected and short-term revenue shortfalls, or cutting funding from programs — a choice that has largely harmed Black, brown, and low-income families in the past — we should look to advance tax fairness and make continued and long-overdue transformative investments that would make Virginia a place where everyone can thrive.
There are a number of ways to increase state revenues while modernizing our tax system and making sure the wealthiest among us, who pay the least taxes as a share of income, pay their fair share. Options range from altering our state income tax, expanding the sales tax base and addressing sales tax exemptions, and more. While we don’t delve into every opportunity to increase state revenues through the state tax code, we highlight several below that could be used to create and support thriving communities.
Closing Loopholes
| Option | Most Recent Estimate (non-inflation adjusted) | Estimate Time Frame | Estimate Year | Source |
|---|---|---|---|---|
| Decouple from federal special treatment of capital gains for Qualified Small Business Stocks (QSBS) | $28.1 million | 2026 | 2025 | ITEP |
| Decouple from Foreign- Derived Deduction Eligible Income (FDDEI) deduction. 18 states and DC, including NC, have already decoupled | $99.6 million | 2026 | 2026 | ITEP report |
| Address incomplete non-grantor (ING) trusts: Fix loophole by treating income as taxable to the grantor, rather than as the income of a separate entity taxed elsewhere | Unknown positive revenue. See recent CBPP report |
Income Tax Changes
| Option | Most Recent Estimate (non-inflation adjusted) | Estimate Time Frame | Estimate Year | Source |
|---|---|---|---|---|
| Establish a fair share tax, a new state income tax bracket of 10% only on annual taxable income that exceeds $1 million starting TY26 | $3.0 billion in FY27 $2.1 billion in FY28 | FY27-28 | 2026 | HB188 FIS |
| Establish a new state income tax bracket of 7% only on annual taxable incomes over $600,000 | $530 million in FY27 $584 million in FY28 | FY27-28 | 2025 | HB1754 FIS |
| Establish two new income tax brackets, one on taxable income between $600,000 and $1 million with an 8% tax rate, and one on income above $1 million with a 10% rate starting TY27 | $1.1 billion in FY27 $2.5 billion in FY28 | FY27-28 | 2026 | HB979 FIS |
Sales Tax Changes
| Option | Most Recent Estimate (non-inflation adjusted) | Estimate Time Frame | Estimate Year | Source |
|---|---|---|---|---|
| Expand the state sales tax base to include digital personal property and new economy services, including some Business to Business (B2B) transactions (part of HB 978, Del. Watts) | $1.6 billion in FY27 $1.8 billion in FY28 (includes K12 and transpo money) | FY27-28 | 2026 | HB978 FIS (portion) |
| Expand retail sales and use tax to select services, including delivery, dry cleaning, repair, and storage services (part of HB 978 Del. Watts) | $1.2 billion in FY27 $1.3 billion in FY28 (includes K12 and transpo money) | FY27-28 | 2026 | HB978 FIS (portion) |
| Eliminate data center sales and use tax exemption, cap, or tie to clean energy efficiency standards | $550 million in FY27 $1.3 billion in FY28 (includes K12 and transpo money) | FY27-28 | 2026 | SB30 Item 4-14 #4s estimate |
| Expand the state sales tax base to include digital personal property and new economy services, not including any B2B transactions | $441 million (GF, includes restricted for K12) | FY26 | 2024 | Aug. 2024 SFAC staff presentation |
| Increase the watercraft sales tax rate and eliminate $2,000 cap (this cap is sometimes referred to as the ‘yacht tax loophole’) | $6.6 million | FY24 | 2018 | HB465 FIS |
Other Taxes and Credits
| Option | Most Recent Estimate (non-inflation adjusted) | Estimate Time Frame | Estimate Year | Source |
|---|---|---|---|---|
| Reestablish the state estate tax | about $60 million | Annual | 2024 | HB1414 FIS |
| End the Education Improvement Scholarship Tax Credit (EISTC) | $25 million | Annual | Limit set by state code | § 58.1-439.26 |
| End single sales factor apportionment for manufacturers for corporate income tax | $28 million | FY23 | 2024 | JLARC, Econ. Development Incentives 2024 |
| Adopt mandatory combined reporting | Further study needed for revenue impacts | 2021 | 2021 Unitary Combined Reporting Study | |
| Switch to market-based sourcing | Further study needed for revenue impacts | 2025 | Study included in Chapter 725 |
New Options from Other States
| Option | Most Recent Estimate (non-inflation adjusted) | Estimate Time Frame | Estimate Year | Source |
|---|---|---|---|---|
| Establish 3.8% tax on net investment income for households making over $200k/single or $250k/joint | Approximately $475 million in FY27 $960 million in FY28 | FY27-28 | 2026 | HB378 FIS |
| Establish a 2% surtax on net capital gains income for households making $200k or more | Approximately $400 million using TY2022 data; would be volatile | 2022 | 2025 | IRS TY22 SOI |
| Establish marginal rates on real estate transfers of high value properties, either on the value above a threshold or on the total value | Up to $403 million | 2024 | Center on Budget and Policy Priorities (CBPP) |
