And despite Northam’s Aug. 17 remarks, converting the Virginia earned-income tax credit into a vehicle for state grants for low-income working taxpayers is not a matter of “giving back” something those families “earned.”
When Congress acted on President Trump’s signature Tax Cuts and Jobs Act, it was obvious most states would have to react in some way, even if the decision made was to do nothing. And for eight months, that was Virginia’s response — doing nothing while burning daylight, waiting silently on an outside economic analysis of the revenue impacts on various taxpayer categories.
Silence has been replaced by nonsense.
With the release of a report last month, we now know that if Virginia conforms to the new federal tax rules but leaves everything else the same, it will collect up to $4.5 billion more over the next six years, about two-thirds from individual taxpayers and one-third from business returns. Many of the individual returns include business income from partnerships or unincorporated entities.
Aubrey Lane, the state’s secretary of finance, tried to draw a line between whether Virginia should adopt all the new federal rules and definitions, the question of conformity, and whether any of the state’s own tax rates, brackets, deductions or exemptions should be adjusted, which are matters of tax policy.
Unfortunately for Layne, the first person to barrel across that line was Northam himself. He complained that the Trump tax plan provided too much benefit to the rich and too little help to working Virginians. Northam proposed to remedy that by transferring up to $250 million per year to the latter through the earned-income tax credit.
A quiet discussion about conformity followed by a reasoned debate over tax policy suddenly became impossible.
Republicans complained that Northam wanted to raise taxes on the middle class to fund an enhancement of the earned-income tax credit. “Working class people are taxed enough already!” shouted a recent GOP fundraising email. Every dime of the grants would go to working-class people, but it isn’t a tax-policy question because the tax credit is, and always has been, an income-support program. The earned-income credit just masquerades as tax policy.
Other Republicans have said that Virginians should be allowed to continue to itemize deductions on their state taxes while taking the standard federal deduction. Many of those deductions were eliminated or limited by the federal bill. Will Virginians who itemize use the old versions or the commonwealth create new ones?
Republicans now happily posturing on conformity and tax policy will soon discover it will be impossible for them to prevent any Virginian from paying more. There be winners and losers on every vote, and a failure to act at all also creates winners and losers. Many of the conformity quirks they are complaining about have been in Virginia law for decades — with their support.
The current plan is to delay any action on Virginia tax conformity until January, when the legislature will be asked to pass one or more emergency bills with super majorities that would apply retroactively to the 2018 tax year. “It’s too late in the season to change a great deal,” Layne said during an Aug. 28 interview.
But that is not true.
Layne conceded that Virginia’s existing $6,000 standard deduction could easily be increased, which would go a long way toward lowering the individual state-tax increases created by the federal changes. Not mentioned but equally easy to adjust would be Virginia’s personal tax rates and brackets, and Virginia’s 6 percent corporate income tax rate.
Layne indicated he has no concern over the increase in the effective corporate tax rate in Virginia if the state conforms in full, but does not tweak its 6 percent corporate tax rate. A consultant pointed to 40 percent or higher increases in state revenue on the corporate income tax because of the federal changes (which, at the federal level, were accompanied by a 40 percent rate cut).
Layne claimed corporate decisions are not driven by the state income taxes. That, too, would be labeled nonsense in some serious policy circles.