What Is Going On with Virginia Taxes?

Virginia normally passes a two-year budget and, then, we update it going into the second year. Thus far, even though the second year starts July 1, we’ve only passed a few technical amendments focused on our rainy day set aside, retirement funds, and federal income tax provisions.

    Why the holdup? Essentially, it started last December with a proposed $1.4 billion-dollar permanent tax cut versus funding K-12 education and the mental health crisis. Resolving the budget has been made significantly more challenging by the federal debt ceiling standoff and efforts to control inflation.

     When Governor Youngkin proposed his tax cut, state income and sales tax revenues were running well ahead of what was needed to balance the budget. Ever since then, monthly collections have been falling and, now, the total for the first nine months of this budget year is up just 0.6%.

    The good news is that part of the drop in revenue is due to tax cuts we passed last year. Income tax refunds are way up due to increasing the standard deduction and allowing low-income working families to get the federal tax credit. As of April 1st, refunds totaling over $2.5 billion are going back to taxpayers compared to just $1.1 billion as of April last year.

    The month after month fall in state revenues since December has made Virginia Senate and House budget negotiators reluctant to agree to $1.4 permanent tax cuts proposed by the Governor. Added to that downward trend, national speculations about the impact on the economy of an unprecedented refusal to raise the federal debt ceiling are very disturbing. With 30 percent of our workforce dependent on federal spending, resultant job losses will hit Virginia harder than virtually any other state.

    Just as our state revenue is affected by federal decisions, local government budgets are affected by Virginia not updating the state budget. This is particularly true for K-12 school funding. The lower the share the state ends up funding, the more pressure on the local real estate tax. In other words, cuts in the state income tax and in the corporate tax – which are taxes based on ability to pay – may well result in higher local real estate taxes. This isn’t good tax policy given real estate taxes are based on the re-sale value of the home – not on the current owner’s income.

    Even if the federal debt ceiling crisis is resolved, the federal budget negotiations that follow will still leave Virginia revenues in jeopardy given our military and civilian federal workforce and related private sector support. If, by July 1, Virginia budget negotiators nonetheless decide a tax cut is necessary to get a budget passed that increases funding for education and mental health, hopefully, it will be as we did last year: give all taxpayers an equal, one-time rebate. This is far preferable to the House budget that gives a permanent and sizable tax cut of $1000 and $1000 to those at the high end. Minimum wage workers will get nothing, most beginning teachers get $30-$35, and 3/4 of all other taxpayers get less than $100.