RICHMOND, Va. (WRIC)- A new study lays out several options for reforming Virginia’s income tax system, including raising rates for the highest income earners, but lawmakers are split on the path forward.
In a presentation earlier this week, the Joint Legislative Audit and Review Commission said the state hasn’t updated its tax brackets since 1990, but wages have increased substantially. As a result, auditors say a larger portion of the state’s population is paying higher tax rates.
“With income increasing over those 30 years, essentially if you make $50,000 or $50 million, you pay the exact same tax rate right now. It’s long overdue to be adjusted,” Senator Jeremy McPike (D-Prince William) said in an interview on Wednesday.
The goal of a “progressive” tax system is to have higher income people paying a greater share of their income in taxes than lower income people. Supporters argue higher income people have a greater ability to pay, especially as the wage gap grows.
JLARC’s report presents 11 policy options for increasing the fairness of the income tax system during the 2023 session, but it does not make specific recommendations.
Under one plan, the report says lawmakers could adjust the state’s four existing tax brackets for inflation. In that case, all income groups would pay a little bit less, particularly lower and middle income filers, but the state would lose roughly $1 billion annually.
Alternatively, lawmakers could scrap the old brackets and start from scratch by drawing up new categories based on income distribution in Virginia today.
“Any option that we pursue has to be revenue neutral. The income tax generates 70 percent of our general fund in the state. So we’re talking about schools, roads, so many important things that we still need to catch up on,” McPike said.
To balance out revenue losses, the report notes that lawmakers could increase taxes for the highest income Virginians. One option in the report suggests adding a new income tax bracket for the top one percent of earners, defined as making $600,000 or more, with a tax rate of 7%, up from the current rate of 5.75%. The study said this would increase state revenues by roughly $400,000.
McPike said raising taxes on the wealthiest Virginians is something lawmakers should look at, but it’s too soon to determine what specific proposals may be considered next session.
A tax hike of any kind is likely to be a tough sell for Republicans.
Senator David Suetterlein (R-Roanoke) said in an interview on Wednesday that Virginians are already overpaying.
“I don’t think we want to try to discourage economic growth in the commonwealth by discouraging people from coming here. We have states near us that have no income tax at all,” Suetterlein said.
Instead, Suetterlein said lawmakers should build on tax relief passed earlier this year by further increasing the standard deduction.
“The vast majority of Virginia taxpayers use the standard deduction, especially low-and middle-income taxpayers, and I think that’s what we ought 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 hasn’t weighed in specifically on JLARC’s report but he has previously advocated for additional tax relief.
In a letter responding to the JLARC report, Virginia’ Secretary of Finance Stephen Cummings said Governor Glenn Youngkin’s administration has prioritized lowering the cost of living for Virginians.
“The JLARC report recognizes that the changes to Virginia’s individual income tax enacted during the 2022 legislative session will substantially reduce the tax liabilities of low- and moderate-income taxpayers,” Cummings wrote. “With regard to the options presented in the report, policymakers should consider the impact these proposed changes may have on Virginia’s competitive position.”
Cummings noted that the states Virginia primarily competes with for jobs and capital investment, including North Carolina, South Carolina, Georgia, Tennessee, Texas and Florida, either have no individual income tax or are “aggressively reducing income tax rates in an effort to attract and retain talent and reduce the cost of living for their residents.”
The JLARC report notes Virginia’s highest income tax rate is currently below the national average. The study said increasing tax rates could risk higher income filers relocating 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.
“It’s also true that Virginia is well-behind our neighbors in investing in core public services, like our schools, hospitals, and nursing homes. The new JLARC report makes clear that we can both provide tax relief to Virginia’s working families and invest in the services the state has been neglecting for far too long. We need to do both,” Hudson wrote.
In a brief phone interview on Wednesday, House Appropriations Committee Chair Barry Knight (R-Virginia Beach) said he hasn’t had a chance to look through the full JLARC report. He said Republican and Democratic leadership are planning to form a tax preference committee to see where there is common ground ahead of the 2023 session.
“If they want to look at it, we will look at it,” Knight said. “It’s not a piece of legislation I would carry.”
