Be Bold in Overhauling the State’s Personal Income Tax System
Virginia’s tax brackets have always shocked me, not least because of their gross lack of fairness.
When I was a newspaper columnist in South Hampton Roads, I ended up earning in the upper five figures every year. This put me in the same category as someone making just over $17,000 a year.
We both paid an income tax rate of 5.75%.
This dichotomy was crazy. That wasn’t even an ounce of fairness. The brackets are based on taxable income.
Why didn’t I carry a heavier burden? Why didn’t people who earn much less keep more of their desperately needed money – and return a smaller percentage of it to Caesar?
I bring this up because the Joint State Audit and Legislative Review Commission released a report recently about making the income tax system fairer – and healthier. My colleague Virginia Mercury Graham Moomaw reported on obsolete brackets and JLARC recommendations to the General Assembly.
The Assembly asked the JLARC to study increasing the “progressivity” of the personal income tax system. This means taxing people according to their ability to pay, instead of setting the same tax rates for rich and poor or taxing the poor disproportionately.
Income taxes make up 70% of state general fund revenue, so they are the main source of expenditure.
The report notes that the Assembly, fortunately, has already changed two components of the income tax this year to make it more progressive. The legislature nearly doubled the standard deduction and made the state earned income tax credit partially refundable.
The problem is that the Assembly has not changed the state’s four tax brackets since 1990. This practically argues negligence against our legislators.
Virginia’s median income has increased 108% since then, “but income taxes owed by a single filer with a median income have increased 173%,” JLARC said.
At a minimum, the state could update tax brackets to account for inflation.
The third-highest bracket now covers, say, people earning just $5,001 to $17,000, and the highest has everyone above $17,000. Why someone making six or seven figures a year is lumped together with someone making even less than $20,000 is mind boggling.
“Thirty-two years ago you were considered rich at $17,000 and in the top tax bracket,” one delegate said earlier this year at a legislative hearing.
I don’t know everywhere in America in 1990, that $17,000 was considered “rich” – especially not in Northern Virginia or Hampton Roads. It certainly wasn’t the case in Detroit either, where I was living at the time.
Comments like the delegate’s make me reflect on the process of discerning honorables in Richmond. But I digress.
Parts of the state capitol rejected some of JLARC’s proposals, including the possible raising of taxes on the wealthy. The report says the move would increase progressivity and state revenue, but Gov. Glenn Youngkin and the GOP-controlled House of Delegates prefer broad tax cuts (of course) over tax increases.
Youngkin and other pro-business leaders say lower taxes would help the Commonwealth compete with North Carolina and other southern states. They must be careful not to trigger a race to the bottom, where the quality of life could suffer simply to entice companies to locate here.
The status already approved $4 billion in tax cuts this year, although Youngkin wants to go further. Before making further tax cuts, lawmakers should tell Virginians exactly how they would handle the cut in income.
The state’s dismal performance in fully funding its own quality standards, for example, is a sore point for educators and localities. It is a permanent problem. Virginia also ranks 41st in spending per student in the state, analysis shows by the Commonwealth Institute for Tax Analysis released in 2021.
Virginia lawmakers should create tax brackets that take into account the inflation that has occurred over the past few decades. Six slices, instead of four, should be debated. A rate of 10% for state millionaires should also not be ruled out.
What the Assembly should not do is continue to treat someone at the bottom of the income scale as someone earning tens of thousands of dollars more. It is indefensible.
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