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June 27, 2024

How We Fought to Invest in Families through a Fair, Family-focused Tax Code (Session 2024 Recap)

Most of us want to send our kids to well-funded public schools, to have access to affordable health care, and to be able to get to and from work safely — which all require everyone to pitch in their fair share through taxes. But Virginia’s tax code is upside-down. Households with the lowest incomes spend a greater share of their income on state and local taxes than those with the most. Together, we’ve made progress in recent years to address this, like giving families with the lowest incomes greater access to the state’s Earned Income Tax Credit (EITC) by adding a refundable option. More work must be done to make our state tax code more fair. This session, TCI worked to flip Virginia’s upside-down tax code and advance tax policies that would provide meaningful economic support to families and invest equitably raised funds in our communities.

Fighting for Fairness

In December 2023, the governor introduced a tax package with key components that would have on average increased taxes on families with lower incomes, while giving large benefits to the wealthiest in the state, who already pay less than their fair share. The proposed cut to the income tax brackets, increase of the sales tax rate, and increase in the nonrefundable state Earned Income Tax Credit (EITC) would have resulted in families with less than $30,000 in income (the bottom 20% of incomes), on average paying $44 more in taxes, while those making more than $763,000 (the top 1% of incomes) would see, on average, a tax decrease of $9,640. By highlighting how harmful these choices would have been to families struggling to make ends meet and to our ability to invest in our communities, we were able to defeat this proposal and protect our shared resources.

Family Friendly Tax Credits

While inflation has slowed, families still face the reality of volatile and high prices. This leaves less room to meet the most basic needs like food, rent, and school supplies, let alone invest more broadly in our joy and well-being through summer camps, after school activities, and continuing education, for example. Tax credits can provide families much needed financial support to use for their families’ unique needs. This year, lawmakers considered two key tax credit policies that could get cash back to families at tax time: an improved state Earned Income Tax Credit (EITC) and establishing a state level Child Tax Credit (CTC).

Earned Income Tax Credit

In 2022, lawmakers included a new EITC option in the budget, a refundable credit equivalent to 15% of a family’s federal EITC. Families taking this option can receive all of the credit value they are eligible for, even if it exceeds their income tax liability, unlike the nonrefundable 20% option. The refundable 15% option is a better deal for many low-income families, who tend to owe less in income taxes but pay higher proportions of their incomes on other state and local taxes. Lawmakers considered legislation this year to increase the refundable EITC option to 20%, so all qualifying families can claim the full credit the state offers. 

This legislation would have also extended the state EITC to filers who use Individual Tax Identification Numbers (ITINs) rather than social security numbers (SSNs), making sure our immigrant friends and neighbors who would otherwise qualify for the EITC can do so in Virginia. House and Senate Finance committees considered the legislation but ultimately pushed any further discussion to 2025. Like most tax legislation in the House, lawmakers sent the EITC bill to the Joint Subcommittee on Tax Policy for further study in the off-season.

Advocate parents, partners, and elected officials call for lawmakers to advance family-focused tax policy, specifically improving the state’s refundable Earned Income Tax Credit option and creating a Commonwealth Kids Credit

Commonwealth Kids Credit

For the second year, TCI worked with other advocates and lawmakers to propose a Commonwealth Kids Credit. As proposed, this would allow families making less than $100,000 Virginia AGI to claim a refundable $500 tax credit for each child under 18. This choice would build off the success of the temporary 2021 federal Child Tax Credit (CTC) expansion, creating a permanent program at the state level. In addition, it would provide families with a meaningful boost, recognizing the increasing costs of raising children. Like the EITC, the CTC legislation was heard in front of the House Finance Committee and carried over to 2025, with a recommendation to the Joint Subcommittee on Tax Policy for further study.

Increasing Fairness in Funding

In order to make transformational investments that matter to our communities, we need to raise revenues and raise them equitably, rather than rely on a tax code that asks more of those with less. This year, lawmakers considered options to make the tax code more modern and fair and help make key investments in their budget proposals.

Fair Share Tax

For the first time in Virginia, lawmakers considered legislation to establish a “Fair Share Tax” in Virginia, which would have millionaires and billionaires pay more of their fair share (a new 10% bracket on annual taxable incomes over $1 million). This Fair Share Tax would have raised an estimated $3 billion according to state analysis for the current two-year budget and would have made significant ongoing investments in public education, affordable housing, and accessible child care. While the proposal did not pass, it was continued to 2025 with other tax proposals and referred to the Joint Subcommittee on Tax Policy for further study, and it enriched the conversation on the need to raise new and equitable revenues to make much-needed investments in communities across Virginia.

Modernizing Our Tax Code

As part of his proposed budget, the governor included a plan to modernize the tax code by including “new economy” products (digital personal property and some new taxable services) in the state sales tax base. The governor’s proposal would have applied this change only to consumers and would have excluded businesses from paying their fair share of this tax. Consumer habits have shifted; rather than go to the store and buy a DVD, someone might download a movie at home. Right now, sales tax would only apply to the DVD. Treating both interactions equally is a commonsense step to updating our tax code. By doing so, Virginia would have joined the ranks of 39 other states plus D.C. with a more modern tax code. Lawmakers increased fairness in the proposal by extending it to business-to-business transactions in the case of software application services. This final proposal would have raised $1 billion and provided ongoing support for key investments in education, housing, and more that the General Assembly included in their March budget. The final budget did not include any version of the “new economy” sales tax modernization or another significant way to raise needed resources.

Next Steps

Lawmakers maintained new spending items in the conference budget primarily through higher-than-expected revenue collections and exchanging cash for debt for capital projects to free up funds in a budget that already relies on a large amount of one-time funds. While things are looking positive for the economy, and thus also revenue collections, there is little room to invest in other priorities or sustain current commitments if revenue fails to meet expectations. This potentially unsustainable budget situation highlights the need for lawmakers to advance tax choices that will raise new, sustainable resources that our families and communities can count on in the future.

Many tax proposals under consideration this session, including the ones mentioned above, were referred to the Joint Subcommittee on Tax Policy. In the recently passed budget, the subcommittee was tasked to meet in the 2024 interim. TCI looks forward to working with lawmakers and community leaders to advance policies that help families and provide new and sustainable sources of revenue to invest in all of us. 

Budget & Revenue, Economic Opportunity

Megan Davis

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