“A growing economy and federal tax changes have come together to create a unique opportunity to strengthen our balance sheet, provide targeted tax relief to those who need it the most, and make historic investments that will position Virginia for future downturns and improve our ability to keep pace with a changing world,” he said.
Northam formally announced his plans in a speech to the General Assembly’s money committees, proposing a package of amendments for the second year of the two-year, $117 billion state budget. The legislature passed the original spending plan in May for the fiscal year that began July 1.
Republicans, who narrowly control the House and Senate, balked at Northam’s plan, which they said would turn federal tax cuts into a stealthy, $1.2 billion state tax increase. They said they would like to change the state tax code in some way to prevent Virginians who benefit from the federal changes from having to pay higher state taxes.
“What you’ve got is the illusion that we’ve got all this money. We’ve got this money because you assume that we’re going to collect $1.2 billion more in taxes,” said House Appropriations Committee Chairman S. Chris Jones (R-Suffolk).
Senate Majority Leader Thomas K. Norment Jr. (R-James City) dismissed the governor’s proposal to sweep up and then spend that extra money as “gubernatorial fiscal bulimia,” while Republican National Committee spokesman Garren Shipley set his criticism to verse.
In “How the Grinch Stole Your Tax Cut,” Shipley pondered why the governor hated tax cuts: “It could be, perhaps, that his economics were trite./It could be his spending ideas weren’t quite right./But I think that the most likely reason of all,/Is he thought the state budget was $2 billion too small.”
It was a hard landing for a former lieutenant governor and state senator who took office in January amid a spirit of bipartisan bonhomie. A well-liked pediatrician, military veteran and folksy Eastern Shore native, Northam had such a moderate track record that Republicans once wooed him. Elected governor in 2017 on an anti-Trump wave that also swept 15 more Democrats into the House of Delegates, he scored a major win in May when a minority of Republicans teamed up with Democrats to expand Medicaid under the Affordable Care Act.
Compromise could be tougher in the General Assembly session that kicks off in January, the start of an election year. All 140 delegates and senators will be on the ballot in November.
Virginia’s governor and General Assembly typically make adjustments halfway through their biennial budgets, but Northam’s plan far exceeds the usual midpoint tinkering because potential revenue has swelled more sharply than usual.
Tax receipts are up $548 million over projections, thanks to a strong economy. A U.S. Supreme Court ruling in June cleared the way for the state to tax Internet retail sales, which could bring in an additional $80 million if the legislature approves the tax.
The biggest — and most controversial — source of funds Northam counts is the package of changes in the federal tax code, changes that were championed by President Trump and approved by Republicans in Congress. If Virginia does nothing to adjust to those changes, an extra $600 million will pour into the state’s coffers every year until the federal cuts partially expire in 2024.
One reason the federal overhaul could result in a state windfall is the limiting of federal deductions on mortgage interest and property taxes. Congress doubled the standard deduction to make up for those changes, but the state has not. That will probably prompt more federal taxpayers to take the standard deduction instead of itemizing, and under current law, they must do the same with their Virginia tax returns — leading to higher state tax bills.
Northam wants to use about half of that money to fund various programs and the other half to give a tax break or rebate to families making less than $54,000 a year.
“It’s highly unusual to see this level of spending proposed in the middle of the two-year cycle,” said Jones, a moderate who went along with Northam’s plan this year to expand Medicaid.
Northam sees a “historic” opportunity to make key investments in the state, shore up its reserves and counterbalance what he sees as the unfair nature of the federal tax cuts.
“The changes in the federal tax code basically help high earners and corporations. It does very little for individuals that are making less than $54,000 a year,” Northam said to reporters after his speech.
House Speaker M. Kirk Cox (R-Colonial Heights) and Jones said the plan would hurt the middle class, which Jones defined as a working couple making between $125,000 and $150,000 a year. They said they would propose a fix before the legislative session, perhaps by allowing filers who take the standard deduction on federal returns to itemize on their state returns.
“It’s certainly not a historic opportunity for the middle class, who I think will feel it very much in their wallets,” Cox said.
Michael Cassidy, president of the Commonwealth Institute for Fiscal Analysis, took issue with that definition of “middle class,” noting that 75 percent of Virginia tax filers make less than $100,000 a year. Cassidy said the $54,000 Northam chose was a better figure, since 50 percent of Virginians make less than that amount, and 50 percent more.
Gregory S. Schneider contributed to this report.