In 1987, as part of its response to the conformity issues created by President Reagan’s tax cut, the Virginia General Assembly increased the standard deduction available to Virginia taxpayers to $3,000 for an individual and $5,000 for a couple. At some point since the joint filing amount went up to $6,000 to eliminate any marriage penalty.
Faced with a similar problem in 2019, that’s what the Virginia General Assembly should do as a start: Increase the state standard deduction. Double the amount of income a Virginia couple can shield from tax under that method, with no itemized deductions necessary.
Virginia also allows personal exemptions to provide a bit more tax-free income. The personal exemption is now $930 each. A couple with one child gets $6,000 in standard deductions and $2,790 in personal exemptions for a total of $8,790 pre-tax income. Compare that to where surrounding states are on that score and to the new federal standard deduction of $24,000. Even if Virginia doubles the standard deduction, its only a step in the right direction, as you can see below.
| Taxable Income Threshold | ||
| Couple Plus One Child | ||
| Virginia Current | $8,790 | |
| Virginia Proposed | $14,790 | |
| Maryland | $13,600 | |
| District of Columbia | $24,000 | |
| North Carolina | $17,500 | |
| South Carolina | $24,000 | |
| West Virginia | $6,000 | |
| Tennessee | No Income Tax | |
| Federal Taxes | $24,000 | |
I’ve been drawn to this idea from the start but when I saw that surrounding states (except West Virginia) were already there, this suddenly struck me as imperative.
It would be only a good first step toward preventing the personal income tax increases which will result when Virginia conforms to the new federal tax rules and definitions. The idea is further explored in a briefing paper published today by the Thomas Jefferson Institute for Public Policy. It is neither creative nor comprehensive tax reform, but creative and comprehensive make people nervous and will take time so let’s start with something simple and familiar we can do quickly.
It is better than doing nothing, which is what the Virginia Society of Certified Public Accountants is recommending. It wants to adopt conformity and let the revenue accumulate, hoping later next year some consensus on reform will emerge. Hope is no substitute for cash. This is a very attractive idea that might get consensus now and could be adopted in the same bill that accepts conformity.
It is also a better approach than breaking conformity and allowing Virginia taxpayers to itemize on their state taxes while taking the standard deduction at the federal level. The whole idea behind federal tax reform – and many surrounding states clearly agree – is to move people away from deductions driving their economic behavior.
Finally, this is a better idea than giving low income workers grants through the Earned Income Tax Credit system. The grants come once a year and you must apply. They reduce to nothing on a sliding scale. This is a clear-cut tax reduction of $345 ($6,000 x 5.75%) for almost every family taking the standard deduction. With withholding tables adjusted, the money shows up in every paycheck.
Many in the political class remains focused on spending the windfall money. This takes away about $440 million of that possible spending, according to the Department of Taxation’s modeling. This is an accidental tax increase, a windfall not approved by the General Assembly or (despite some of the rhetoric) caused by the Governor. Any tax increase has economic consequences as people lose spendable income, so if you can reduce that impact there is economic benefit.
People with a pile of itemized deductions, which would usually be people who also have high incomes, taxes, interest payments and charitable giving, didn’t take the standard deduction before and will not do so going forward. This idea does nothing for them. This also does nothing to address the corporate income tax increases which are coming.
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