On Wednesday, Senate Republicans announced a proposal for broad tax cuts for Virginians. They used the occasion not only to trumpet their plan, but to throw shade at their colleagues in the lower chamber.
“There are lots of gossip and rumors going on about whether or not there is peace in the valley of the House of Delegates, particularly amongst the House Republicans,” said Senate Majority Tommy Norment (R-Williamsburg).
Republican lawmakers agree that they want to push through a tax cut this session, but they disagree how to do it, and who should benefit. An estimated $1.2 windfall caused by changes to the federal tax code has exposed policy differences not only between the two political parties, but between two chambers.
Lawmakers have put forward three major proposals on what to how to spend that cash.
Governor Ralph Northam wants the state to keep most of it in reserves and give some of it to lower-income taxpayers as rebates. House Republicans are rallying behind a plan targeted at the middle and upper-middle income taxpayers they believe are most hurt by the changes. Senate Republicans announced their own plan on Wednesday that they say helps a broader swath of taxpayers in a simpler way.
With tax season already in progress and November elections around the corner, those groups will likely spend the next few weeks of the General Assembly hashing out their differences.
Firefighters and Teachers
For House Republicans, the tax cuts are about helping taxpayers who they say are paying those extra bills: people who usually itemize their tax returns.
Stephen Haner, a senior fellow with the conservative Thomas Jefferson Institute for Public Policy, says those itemizers tend to be middle or upper class homeowners.
“To do itemized deductions, you have to have a house, you have to have a big mortgage and usually a pretty good size local tax bill, maybe some big medical expenses,” he says. “And without those you're better off using the standard deduction.”
Trump’s tax plan doubled the federal standard deduction. That will incentivize an estimated 600,000 Virginia itemizers to take the standard deduction instead. The state hasn’t increased its standard deduction since the 1980s, so those taxpayers will end up with heftier state tax bills unless lawmakers intervene.
Itemizers by Legislative District
Infogram
Last week, Del. Tim Hugo (R-Centreville) laid out the House Republican plan that he says would target those taxpayers. It would allow them to continue to itemize their state returns even if they took the federal standard deduction, effectively decoupling the state’s tax code from the federal one. And it would increase the state standard deduction from $3,000 to $4,000 for an individual and from $6,000 to $8,000 for a married couple.
Hugo said under his plan, a married couple making a combined $110,000 would save about $800 on their state tax bill.
“That could be a fireman,” he said. “That could be a fireman married to a teacher. These are the people we’re trying to target with this targeted tax relief bill we bring before you today.”
That hypothetical fireman and teacher are most likely to be found in wealthier suburbs of Northern Virginia. An analysis of 2016 returns from the Commonwealth Institute found that those legislative districts were more likely to have a higher share of itemizers. Nearly all of those districts are currently represented by Democrats.
Keeping it Simple
Critics of Hugo’s plan say decoupling is needlessly confusing and too narrowly targeted. That includes Senate Republicans, who launched their own plan on Wednesday.
“I think what our proposal does is it really reaches across the spectrum of various income groups,” said Senate Majority Leader Tommy Norment. “Simplicity was an essential element in our approach.”
Norment’s proposal, which is backed by the Republican Senate caucus, would increase the standard deduction by 50 percent starting in 2020; a married couple could deduct $9,000 instead of the current $6,000.
It would mean a smaller tax cut spread over four times the number of households -- an approach favored by Haner’s think tank.
“It affects people who don't have a large house who don't have a large tax bill who are not usually the more wealthy folks,” he says.
It also avoids potential actuarial pitfalls of decoupling, including a more convoluted tax code and an added burden on the tax department. Senate Republicans say they worked with Secretary of Finance Aubrey Layne and the Northam administration to sidestep those issues.
“It's just so complex and convoluted to even entertained the notion of decoupling,” said Sen. Emmett Hanger (R-Mount Solon).
Tax Relief for the Poor
Regardless of what tax plan Republicans agree on, they'll still have to get 80 percent of lawmakers to sign-on if they want to pass something quickly. And for that, they’ll need Democratic support.
Governor Ralph Northam says the lowest income brackets didn’t really benefit from the Trump tax cuts, and is backing tax rebates for low-income taxpayers by making the Earned Income Tax Credit (EITC) refundable.
A married couple with no children would have to make less than $21,000 to qualify. Chris Wodika, a policy analyst with Commonwealth Institute, says the average eligible family would get around $500 from the state -- money that could make a transformational difference in their lives.
“That's money that people use to help put more food on the table or repair their cars,” he says. “And it has a number of positive impacts in terms of folks actually being in the labor force...and having their children have better life outcomes.”
Source: The Commonwealth Insitute
Policymakers say the EITC is one of the most effective tools at reducing poverty. It was first enacted by President Richard Nixon and has enjoyed bipartisan support for most of its existence. But, Virginia Republicans have pushed back at the idea of expanding it to include rebates. They say that amounts to giving checks to people who aren’t paying income taxes.
Mildred Robinson, a professor who teaches tax law at the University of Virginia, says lower-income people are disproportionately hit by other taxes, ranging from sales taxes to so-called sin taxes on alcohol. One analysis from the Commonwealth Institute found that households making under $22,000 a year pay, on average, nearly 10 percent of their income in state and local taxes, compared to 7 percent for households earning more than $587,200.
“And so to say that relief under the income tax system should be denied because these citizens are not bearing their share of public cost is I think completely misleading,” Robinson says.
But Republicans are sticking to their top priority: getting tax relief to the middle class. And if they can’t make that happen this year, they have a backup plan: a bill from Jones that calls for putting the extra windfall collected this year into a special fund and saving the debate for next year.
“The beauty of that is it'll be all 140 of us will be up for reelection this fall, and we can then make our case as to what is the proper posture for the state to do,” he said.
Jones is betting that if lawmakers can’t figure out what to do with the money in the next three weeks, maybe voters will give them a hint in nine months.
