That’s primarily because the federal income tax cuts championed by President Trump and approved by Republicans in Congress were not accompanied by changes in state law, and the differences caused an increase in some state tax payments.
At a news conference Friday at the state Capitol, Northam said half of the additional amount should go to low-income workers because of an “imbalance” in how the federal tax cuts are structured.
“Most of the benefits go to corporations and the top-income-earning individuals,” he said. “I want to make sure that everyone benefits, and the best way to do that is by targeting a refund to those working families who need it the most.”
His proposal: make the state’s earned-income tax credit fully refundable.
Under current law, a Virginian who qualifies for the earned-income tax credit can only claim it up to the amount of their total tax liability. For example, if someone has an $800 tax bill and qualifies for $1,000 in earned-income tax credit, they can only get $800 of the credit.
Northam said that roughly 600,000 Virginians qualify for earned-income tax credit each year, and only 200,000 of those get the full amount. He is proposing to extend the full credit to all who qualify.
The Republican leadership of the closely divided General Assembly criticized Northam’s proposal Friday, saying it amounts to a tax increase on the middle class.
House of Delegates Speaker Kirk Cox (R-Colonial Heights) “isn’t interested in raising taxes on middle class families and will instead be looking at broad based tax relief for all Virginians to make sure the Commonwealth fully realizes the benefits of the federal tax cuts,” spokesman Parker Slaybaugh said via email.
State Finance Secretary Aubrey Layne said the surplus tax revenue is flowing in because of differences between Virginia law and federal tax law. Congress increased the standard deduction, for instance, and the state did not. That causes more federal taxpayers to take the standard deduction instead of itemizing, and they must do the same with their Virginia tax returns — leading to higher state tax bills.
Republican lawmakers, who hold a narrow majority in both chambers of the General Assembly, said there are a number of ways to square the situation. They include allowing Virginia taxpayers to itemize deductions on their state returns even if they take the standard federal deduction, or increasing the state’s standard deduction, or lowering the state tax rate.
“Of course, I’m willing to listen to the governor and see the details of his proposal in the context of the entire budget,” House Appropriations Committee Chairman S. Chris Jones (R-Suffolk) said. But Jones said he doesn’t consider it “an equitable proposal” if other taxpayers continue to be prevented from itemizing their deductions.
Northam argued that because many of the federal tax changes cut rates for corporations and for people with income from stocks and other capital gains, his earned-income proposal “will put what’s happening in Washington more in balance across Virginia.”
The governor said he would like to use the rest of the additional revenue for priorities such as workforce training, extending high-speed Internet service to rural areas, boosting education and lowering health care costs.
The General Assembly will probably take up the issue in its budget deliberations next January. Though the legislature is technically still in session — it has unfinished business related to appointing judges — it has completed budget work and would have to suspend its rules to consider the proposal now.
For taxpayers, then, the soonest such rebates could be available is next year.
These additional tax revenue are separate from a $550 million surplus the state reported at the end of the fiscal year on June 30. That money went into Virginia’s short-term and long-term rainy-day funds, shoring up the state’s coveted AAA bond rating.
Northam said he will provide more details about his proposal next week when he makes an annual presentation to legislators about the state’s fiscal health.