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February 14, 2020

What’s Holding Virginia Back from Solving Its “Math Problem” and Funding Our Schools – Virginia’s Tax System

This Sunday, House Appropriations and Senate Finance will release their proposed amendments to the governor’s 2020-2022 budget. Educators and advocates are hopeful to see critical investments in Virginia’s public schools that build upon the introduced budget, especially with continued economic growth bringing in additional revenues to the state budget. Yet, these proposals are unlikely to include the full array of solutions needed to ensure a high-quality education for every student in every zip code of the commonwealth. State leaders have made it known that they are aware of the needs and share the concerns. What’s missing and the reason why we are likely to not see all that is needed is action to address the true culprit holding back resources for schools and communities: Virginia’s outdated and inadequate revenue system and lawmakers’ current reluctance to make needed changes to it.

Both lawmakers and residents alike are aware of the needs of Virginia’s public schools: underpaid teachers (Va. has one of the worst wage penalties for teachers in the country), understaffed schools (staffing has decreased over the past decade while enrollment has grown by 55,000 students), inequitable funding (divisions spend less per student in highest poverty localities than in those with the lowest poverty), and deteriorating facilities (more than 60% of Virginia schools were more than 40 years old in 2013). 

Solutions have been put forward by education leaders and advocates to address these challenges. This includes more appropriately staffing schools based on standards prescribed by the Virginia Board of Education (VBOE), creating an Equity Fund to direct resources based on student need, providing a 5% pay increase to teachers and school staff in both years of the state budget, and directing additional state aid to assist local divisions with construction costs for school facilities.

Virginia residents seem to understand these needs and support these types of proposals to address them, as seen in the annual VCU poll, including a willingness to pay more in taxes to pay for them. Legislators have taken up and championed some of these ideas this legislative session.

Yet when it comes to significant action, we hear about a “math problem.” We hear there simply aren’t sufficient resources to meet needed spending. Unfortunately, discussion of this challenge often assumes a fixed revenue system tied only to the performance of the economy and ignores the tax policy decisions made by the elected leaders every year. By focusing on spending and the economy, state lawmakers are ignoring the real driver of our “math problem.” Virginia is 47th in the state and local revenues (resources to fund public investments like schools) as a percentage of personal income. This means Virginia raises among the least revenue to fund budget priorities when compared to the earnings of the residents. 

Virginia’s tax system is not only inadequate, it is also upside down. The highest-income people in the state pay the lowest in state and local taxes as a share of their income. In addition, corporations are not asked to pay their fair share.

Lawmakers had opportunities this legislative session to make meaningful improvements to Virginia’s state tax system. Unfortunately, none of these important tax policy proposals have survived and crossed over to the other chamber for consideration. These proposals included: HB 739, HB 1109, and SB 756 to reform the corporate income tax by adopting unitary combined reporting, which would require large multi-state corporations to be taxed similarly as mainstreet businesses; HB 736 and SB 637 to restore the state estate tax that would be applied to only the largest estates; and HB 735 to annually update the state individual income tax code for inflation to prevent the eroding of key tax measures. 

Instead of rejecting these policies, lawmakers should work to re-design the state’s revenue system so that it brings in sufficient resources to fund public investments like our schools and asks the wealthiest households and large corporations to pay their fair share – including by closing some loopholes in the current tax system. 

Below we sketch how that could look in the future, based on tax proposals that were submitted this legislative session or in past years and an income tax surcharge on filers with incomes of more than half a million dollars.

graphic comparing education funding needs to revenue options

Revenue options, along with specific examples used in the calculations, include: adopting a 1% and 2% surcharge on taxable incomes above $500,000 and $1,000,000 a year, modernizing our sales tax by taxing certain services in recognition that our economy has shifted from goods to services, restoring Virginia’s estate tax, adopting a combined reporting law on multi-state corporations, taxing digital downloads similarly as other goods, eliminating certain loopholes in Virginia’s tax code (for luxury watercraft purchases and online hotel bookings), maintaining caps on certain tax credits (land preservation tax credit), eliminating certain other tax credits (Education Improvement Scholarship Tax Credit), proposed gaming changes from online sports betting, and use of discretionary deposits from the governor into the revenue reserve. 

Make no mistake, budget writers do not have all these tools at their disposal as they finalize their budget proposals this week, as legislators have already tabled the proposals that were put forward. What the exercise can offer is a glimpse of what state leaders could accomplish if they put their minds to modernizing Virginia’s tax system and eliminating unnecessary carve-outs going forward. 

We can design a more progressive tax system that raises sufficient revenues to invest in our public schools. This is a math problem we can solve. 

Budget & Revenue, Education

Chris Duncombe

Chris Wodicka

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