Virginia lawmakers split on path forward for income tax reform

RICHMOND, Va. (WRIC) — A new study outlines several options for reforming Virginia’s income tax system, including raising rates for top earners, but lawmakers are divided on which way to go.

In a presentation earlier this week, the Joint Audit and Legislative Review Commission said the state hasn’t updated its tax brackets since 1990, but wages have increased significantly. As a result, auditors say more of the state’s population is paying higher tax rates.

“With income going up over those 30 years, basically if you make $50,000 or $50 million, you’re paying the exact same tax rate right now. It’s been long overdue for it to be adjusted,” said Sen. Jeremy McPike (D-Prince William) in an interview on Wednesday.

The goal of a “progressive” tax system is to make high-income people pay a greater share of their income in taxes than low-income people. Proponents argue that people with higher incomes have a greater ability to pay, especially as the wage gap increases.

The JLARC report outlines 11 policy options for increasing the fairness of the income tax system in the 2023 session, but it does not make specific recommendations.

As part of a plan, the report says lawmakers could adjust the state’s existing four tax brackets for inflation. In this case, all income groups would pay slightly less, especially low- and middle-income filers, but the state would lose about $1 billion a year.

Alternatively, lawmakers could remove the old parentheses and start from scratch by establishing new categories based on the income distribution in Virginia today.

“Any option we pursue has to be revenue neutral. Income tax generates 70% of our general fund in the state. So we’re talking about schools, roads, so many important things that we have to still catch up,” McPike said.

To make up for lost income, the report notes lawmakers could raise taxes on higher-income Virginians. An option in the report suggests adding a new tax bracket for the top 1%, defined as earning $600,000 or more, with a tax rate of 7%, up from the rate current 5.75%. The study says this would increase state revenue by about $400,000.

McPike said raising taxes on the wealthiest Virginians is something lawmakers should consider, but it’s too early to determine what specific proposals might be considered in the upcoming session.

A tax hike of any kind is likely to be a tough sell for Republicans.

Sen. David Suetterlein (R-Roanoke) said in an interview Wednesday that Virginians are already paying too much.

“I don’t think we wanted to try to discourage economic growth in the Commonwealth by discouraging people from coming here. We have states close to us that have no income tax,” Suetterlein said.

Instead, Suetterlein said lawmakers should build on the tax relief passed earlier this year by further increasing the standard deduction.

“The vast majority of taxpayers in Virginia use the standard deduction, especially low- and middle-income taxpayers, and I think that’s what we need to do,” Suetterlein said.

The report also notes that lawmakers could make the earned income tax credit 100% refundable, rather than the current rate of 75%, to make the system more progressive. The idea is generally favored by Democrats in the General Assembly.

Governor Glenn Youngkin did not weigh in specifically on the JLARC report, but he has already advocated for additional tax relief.

In a letter responding to the JLARC report, Virginia Finance Secretary Stephen Cummings said Youngkin’s administration has prioritized lowering the cost of living for Virginians.

“The JLARC report recognizes that Virginia’s personal income tax changes enacted in the 2022 legislative session will significantly reduce the tax liability of low- and middle-income taxpayers,” Cummings wrote. “With respect to the options presented in the report, decision makers should consider the impact these proposed changes may have on Virginia’s competitive position.”

Cummings noted that states with which Virginia primarily competes for jobs and capital investment, including North Carolina, South Carolina, Georgia, Tennessee, Texas and Florida, have not personal income tax or “aggressively reduce income tax rates in an effort to attract and retain talent and reduce the cost of living for their residents.

The JLARC report notes that Virginia’s top tax rate is currently lower than the national average. The study says that increasing tax rates could cause higher-income filers to relocate, but research on this is “inconclusive”.

In a written statement, Delegate Sally Hudson (D-Charlottesville) said Virginia’s tax code is “upside down” and the state should be concerned about falling behind neighboring states in other areas. other areas.

“It’s also true that Virginia lags far behind our neighbors when it comes to investing in basic public services, like our schools, hospitals, and nursing homes. The new JLARC report makes it clear that we can both provide tax relief to working Virginia families and invest in services the state has neglected for too long. We need to do both,” Hudson wrote.

In a brief phone interview Wednesday, House Appropriations Committee Chairman Barry Knight (R-Virginia Beach) said he hadn’t had a chance to read the full JLARC report. He said Republican and Democratic leaders plan to form a tax preferences committee to see where there is common ground ahead of the 2023 session.

“If they want to review it, we’ll review it,” Knight said. “It’s not a bill I would carry.”

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