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Will The “Taxpayer Relief Fund” Become a Sham?

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The Taxpayer Relief Fund to be created with the residual dollars from the 2019 state tax legislation on conformity has not seen the first dollar deposited and Governor Ralph Northam is already proposing to spend some of it, seeking to expand to 150,000 more Virginians the refund payments given in lieu of tax reform.

The Richmond Times-Dispatch story on the proposal, which you can read here, quotes state officials as pegging the cost at a modest $18 million, with 98 percent of the recipients being exactly the people Northam sought to reach with his failed proposal to make the Earned Income Tax Credit into a grant program.

Well, why not just include everybody? The $110 per person, $220 per couple one-time grants already authorized for most of us really have no relationship whatsoever to the impact of conformity with the federal Tax Cuts and Jobs Act. Whether your state taxes went up, went down, or stayed the same because of the federal changes, you will qualify for the grant. The check will arrive before Election Day.

The only way not to get a check was to not have any tax bill at all, which is the case with many of the people enrolled in the EITC program. The language which Northam is seeking to add to the state budget through an amendment will not mention EITC but will allow the grant for any taxpayer with zero tax liability due to any form of state credit. So, a wealthy taxpayer who wiped out their tax with a land conservation easement will get it along with that single mother working the minimum wage job paying zero state income tax due to EITC.
Sending these grants to anybody isn’t tax reform. It isn’t even tax policy. Given it is basically a one-time payment attempting soften the political blow of a major tax increase, why not send the checks to everyone? According to the newspaper account Northam’s idea has already been blessed by the Republican leaders of the two key House committees, but reluctance was expressed by Senate Majority Leader and Finance co-chair Thomas Norment.

As a Governor’s amendment, in this case to the budget bill, it will need a majority vote in both chambers for adoption. Presumably the Governor starts with his 49 House Democrats and 19 Senate Democrats, needing only a few Republicans to join.

There came a point late in the session on this tax issue when it was clear Governor Northam and the Democratic legislators were going to demand something in exchange for their votes on the conformity bills, which needed supermajorities. This is what many expected them to demand, a way to keep his lost promise to the EITC recipients.

Instead they talked the Republicans into higher effective taxes on the wealthy by restoring a cap on deductions known as the Pease Limitation.

State tax filing season is well underway, and by the deadline of May 1 most people will know what the 2019 legislative decision to conform to federal law – with no tax policy changes to reduce the impact – did to their state income taxes. Hundreds of thousands who once itemized deductions no longer will. The one policy change that matters for most people, a slight increase in the standard deduction, goes into effect for 2019 but had no impact on their 2018 liability.

If you compare your 2018 return to the previous 2017 state income tax totals, assuming nothing major changed on the income side, you can see the impact, if any. Unfortunately, most people have no idea what they pay overall and only see or seem to care about the level of refund, if any.

The General Assembly did make policy changes retroactive to 2018 on two business tax issues, one mainly important to foreign-owned or multi-national corporations and the other a subsidy for corporate debt. Draw what conclusions you will about how that speaks to the legislature’s priorities. Secretary of Finance Aubrey Layne said more than once that the standard deduction for families could also have been changed retroactive to 2018, but the legislature didn’t do it.

The very unsatisfactory outcome for individual taxpayers was softened by the prospect of future tax reform through the new Taxpayer Relief Fund. If conformity to federal rules has the expected state-level impact, that fund could grow to hundreds of millions of dollars or even billions within a few years. The final line of the new law reads: “The General Assembly shall appropriate any revenues in the Fund to effectuate permanent or temporary tax reform measures.”

It looks like the first use of those fund will be temporary, not permanent, and will not be tax reform at all. It can’t even be called a tax refund, because the individuals getting it will have paid no income tax. This does not bode well for the future of that fund, especially if the partisan make-up of the legislature changes and it is Democrats deciding how to use those funds.

Taxpayers (and voters) have a choice: They can either demand that the “Taxpayer Relief Fund” be used for the purpose it was designed for, or they can permit it to become little more than a political slush fund to satisfy the needs of particular constituencies.

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