Virginia’s House Republicans on Friday rolled out proposed changes in the state income tax which backpedal from the signature accomplishment of President Donald Trump’s first year, his tax reform package which supercharged the economy. They would conform Virginia’s taxes to the new federal law only in part (more details here).
One of the best policy provisions of that 2017 Tax Cuts and Jobs Act (TCJA) is a $10,000 cap on the deduction for state and local taxes (SALT). No longer will the federal government subsidize out-of-control local and state taxes, and the state of Virginia should do likewise and cap the deduction for local taxes.
Virginia’s House Republican leadership disagrees, wants to remove that cap and allow unlimited deductions on state tax returns for high local taxes. This restores a subsidy for increases in local real estate and personal property taxes. The good thing Trump did, they would undo, at least at the state level.
Another major improvement in the federal tax reform is a much higher standard deduction for those who lack enough expenses to itemize deductions, which is most people. People who rent their housing, people who lack a big mortgage (or a second home), usually take the standard deduction. The Trump bill doubled the standard deduction at the federal level to $24,000, and fewer people are expected to itemize deductions now. That’s a good outcome.
But instead of matching that with a 100 percent increase in the Virginia standard deduction, this new proposal would increase it by only one-third. The overwhelming number of Virginia taxpayers would benefit all of $57.50 (or less) if they file as individuals, $115 (or less) if they file a joint return. This is the first increase in the standard deduction since the 80s, and it’s a pittance.
No, these Republicans are more worried about people who use itemized deductions. They want to allow Virginians the option of continuing to do so while taking full advantage of the higher federal standard deduction. They sweeten that deal for the highest incomes by removing the SALT cap, so some family with a $1 million house in Arlington, a vacation home at Virginia Beach, and a couple of luxury cars can keep deducting all those local taxes.
Finally, the federal tax bill lowered the federal corporate income tax rate by 40 percent but coupled that with ending several tax preferences that benefited business taxpayers, the dreaded “loopholes.” More than a year later the Virginia House Republicans have no business tax proposal at all, not yet, even though with conformity to the new federal rules state business tax receipts will soar. The business community is busy lobbying to get its loopholes back (and may yet succeed, which would be another retreat from TCJA.)
As was demonstrated in an earlier article, the Earned Income Tax Credit grant process that Governor Ralph Northam is promoting provides substantial cash benefits to low-income workers, but the benefits disappear once income reaches $25-30,000. Despite the way it is being sold, it does nothing for the middle class. Zip.
This new GOP proposal has the same problem: It is not really aimed at that vast number of Virginia taxpayers who take the standard deduction, who do not have large mortgages, large local real estate tax bills, or car tax bills on late model SUVs. Once again, those folks – stuck with the same standard deduction for 30 plus years – are ignored by both political parties.
Better proposals are in the queue. Last week Delegate Chris Peace (R-Hanover) dropped House Bill 1851, and similar bills are being drafted for other legislators. Peace’s bill closely follows the recommendation of the Thomas Jefferson Institute for Public Policy, a tax reform outline endorsed by several business and conservative advocacy groups.
Peace’s bill does increase the standard deduction 100 percent. It does include a business tax rate reduction, although not as large a reduction as the Trump tax plan provided at the federal level. It adds something else missing from the House Republican plan, provisions to index Virginia’s tax brackets and standard deduction so they increase with inflation, the same way the federal tax code adjusts annually.
Peace’s proposal is tax reform. The other Republican plan is a tax retreat, an effort to negate the higher taxes conformity would impose on a small subset of taxpayers who have less than $24,000 in federal tax deductions, but more than the $12,000 in state tax deductions (the new standard deduction in Peace’s bill) and/or those with local tax bills over $10,000. Status Quo Ante Trump.
The GOP House leadership proposal is better than doing nothing. It does return much of the higher individual taxes generated when Virginia conforms to the federal changes. But it is not tax reform.
There were four tax policy elements in the Thomas Jefferson Institute reform proposal and the House GOP leadership plan ignores two of them and partly accepts two of them. It does not index the tax code for future inflation, it does not include any business tax cut, it provides only a nominal hike in the standard deduction, and it does not fully conform Virginia’s tax code to the new federal system. The proposal to dump the SALT cap is a highly significant deviation from the new federal regime.
The SALT cap has been hugely unpopular with people in high-tax blue states such as New York, New Jersey and California. The new Democratic majority in the House of Representatives in Washington is already taking aim to remove it. The conservative Tax Foundation is seeking to preserve it. It makes no sense that some Virginia Republicans are rushing to abandon it.
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