RICHMOND — Virginia lawmakers are playing chicken with a deadline that could leave state taxpayers in the dark about how to file their tax returns and delay the processing of refunds for millions of residents.
Tax season officially begins Monday. Within the first 10 days, Virginia expects as many as 650,000 returns to be filed. They can’t be processed until lawmakers vote to conform state tax policy to federal policy.
This year, that routine vote is mired in politics.
The seemingly arcane dispute is at the heart of a sweeping debate in the General Assembly about how to set tax policy and what to do with more than a billion dollars in potential revenue.
“If we fail to timely reconfigure the tax code, I believe we will have failed at a fundamental task that we have before us,” Del. Lee Ware (R-Powhatan), who chairs the House tax policy committee, warned his colleagues in a floor speech this week.
The basic problem is simple: Virginia law requires residents who itemize on their federal returns to also itemize on their state returns. But the congressional tax cuts that went into effect last year made complex changes that left state policy out of alignment.
Most notably, Congress doubled the standard deduction, making it likely that many people who usually itemize their taxes would instead choose the standard deduction.
Many Virginia residents who make that switch are likely to wind up with a heftier state tax bill, because the state’s standard deduction is puny — it hasn’t been raised since the 1980s. That could result in $1.2 billion in extra revenue to Virginia over the next two years, according to Gov. Ralph Northam (D).
The legislature is wrestling over what to do with that extra money. In the meantime, state taxpayers — and tax preparers — need to know how to file their Virginia returns.
“We’ll be getting communications out to the public to say we’ll accept your return but we won’t be able to process it until there is a decision by the General Assembly and signed by the governor,” state Finance Secretary Aubrey Layne said Thursday. “The longer it takes, the more disruption to the tax season and the less options we have.”
It gets far worse if lawmakers fail to agree on a policy by May 1, the deadline for Virginians to file their state taxes. That would leave many taxpayers having to file amended returns after the deadline.
“We would really not like that to happen,” said former state senator Walter Stosch, who is lobbying on behalf of the state’s certified public accountants. “That’s an inefficient way to deal with tax compliance.”
It’s not just the itemize-or-not dilemma that accountants are watching; the federal tax cuts cascaded changes through the code, and not reconciling state law would create dozens of corrections Virginia filers would have to make to their state returns, Stosch said.
But on a broad, policy level, there are three basic approaches to the issue.
Northam and most Democrats want to conform to the federal code and keep state policy about deductions unchanged. They would take some of the expected additional revenue and give it to lower-income Virginians, arguing that they didn’t benefit as much from the federal tax cuts as more affluent residents.
The rest of the windfall would go to a smorgasbord of priorities, from teacher salaries to local economic development.
Republicans, who narrowly control both the House and Senate, say that’s not going to happen.
In the House, Republicans have advanced a plan to “decouple” state policy from federal policy. They would let state taxpayers itemize on their Virginia returns even if they choose the federal standard deduction. That route is aimed at benefiting “middle class” residents, who Republican leaders have defined as married couples earning between $120,000 and $150,000 a year. The state’s median household income is $54,000.
Recognizing that it would be hard to process such a change this year, House Republicans would leave current tax policy unchanged, collect the extra revenue, then rebate the money to taxpayers next year.
Senate Republicans seemed to be coalescing this week around a plan to keep state policy tethered to federal policy but to increase the state’s standard deduction. That, too, is aimed at middle-income residents.
But when the Senate Finance Committee met late Thursday to take up some 14 bills addressing the income tax problem, they voted to delay consideration.
Afterward, Sen. Thomas K. Norment Jr. (R-James City), co-chairman of the committee, said he is “very concerned” about the consequences of not acting before tax season kicks off Monday. But senators have not settled on a solution.
“We’re trying to work through a collaborative approach to come up with a simple, succinct approach on taxation, and it is still a work in progress,” Norment said. He added that he hopes committee leaders will have “a firmer idea” on Monday.
Complicating the debate in Richmond is the fact that lawmakers are posturing for reelection, with all 140 seats in the legislature on the ballot this fall.
One Republican senator — Glen H. Sturtevant Jr. of Richmond — proposed quadrupling the state’s standard deduction, which is $3,000 for individuals and $6,000 for married couples filing jointly. Such an increase would cost an estimated $3.7 billion over the next two years.
“We have not increased the state standard deduction in any real way in a generation,” Sturtevant told a Senate working group Wednesday night.
“What you’re proposing,” Sen. Emmett W. Hanger Jr. (R-Augusta), co-chairman of the Finance Committee, responded politely, “would be something where we can’t go to right this moment.”
Ware, the House Finance Committee chairman, noted that the legislature faced a similar dilemma in the 1980s with tax cuts that were championed by President Ronald Reagan. At that time, Democrats controlled both houses of the legislature and the Executive Mansion. Their solution, he said, was to change several tax brackets and return extra revenue to taxpayers.
“That would be the best possible outcome,” he said.
But Ware said if lawmakers want to keep debating, he would be happy to carry a bill calling for straight conformity with federal code — as he usually does, every year. Then, he suggested, the legislature might consider a special session to decide what to do with the extra revenue and how to handle next year’s taxes.
Northam has offered to work with legislators on a compromise, Ware pointed out. “It is my conviction that we can act,” Ware said. “But we must act promptly.”