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Tax Issues Stay On Front Burner

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Things move rapidly at the Virginia General Assembly, but one week into the 2019 session there is no hint of a decision on how Virginia will respond to federal Tax Cuts and Jobs Act of 2017, which happened 13 months ago.  Fifteen bills propose tax policy changes to protect taxpayers from state tax impacts, several containing all or many of the steps recommended by the Thomas Jefferson Institute for Public Policy.

All House of Delegates bills dealing with how Virginia conforms to that federal change, and what other policy changes might follow, have been assigned to the House Rules Committee, chaired by Speaker Kirk Cox and meeting whenever the Speaker decides for it to meet.  

Sending a controversial issue to Rules instead of the subject-matter committee is becoming a common House Republican tactic, with Rules the one committee where there is not partisan balance reflecting the 51-48 party makeup of the chamber.  The Democrats have six of 17 votes on that committee, and the 11 Republicans all chair committees themselves. 

The Senate Finance Committee met Tuesday without discussing the topic.  The Senate lacks a bill that has any majority leadership consensus behind it, which the House has in Delegate Tim Hugo’s House Bill 2529.  In fact, by midweek some of the patrons of the competing House bills had announced support for the House consensus bill, solidifying for any negotiation. There is no identified Senate GOP approach yet, no rallying around one set of provisions, other than a stated desire to prevent the state from keeping and spending the $1.2 billion produced by conformity over two years.

Just doing that is going to be complicated, because Governor Ralph Northam assumed all the new revenue when he drafted his budget amendments and spent all the money on popular items or put it into depleted cash reserves.  When the Republicans produce their smaller budgets in a few weeks, the cry will go up they are hurting education, oppose employee raises or further “cut” government.  Those complaints will be bogus.  Spending will still be higher than last year.

The valid complaint:  2018 General Assembly was a lost opportunity to discuss conformity and comprehensive tax reform, as was the lingering special session that continued through the rest of 2018.  The 2019 session is not opening with signs that the Assembly is prepared to move quickly, with Governor Northam and the Democrats adamant that conformity must come first to be followed by tax policy, and the Republicans all over the map on tax policy proposals.

Two Democratic legislators, senior House Finance Committee Democrat Vivian Watts and freshman member Dawn Adams, have introduced tax policy proposals that breaks the dam on the Democratic side.  Watt’s House Bill 2086 includes an increase in the standard deduction plus the Governor’s favored new income transfer program tied to the Earned Income Tax Credit (EITC), and Adams’ bill is similar.

Increasing the standard deduction, the centerpiece of a tax proposal by the Thomas Jefferson Institute for Public Policy, is the most popular tax reform element, appearing in eleven of the 15 bills introduced so far to make income tax policy changes.  Most propose to double the standard deduction to $12,000 for a joint return, but one (Senator Glen Sturtevant’s Senate Bill 1531) goes further and matches the new federal standard deduction of $24,000 for that couple.

Five of the bills mirror the Thomas Jefferson Institute proposal in full, including its proposed cut in the corporate income tax rate and is proposal to index Virginia’s tax code to future inflation.  That package picked up the endorsement of the Virginia Manufacturers Association, having also been supported by the National Federation of Independent Business, Americans for Tax Reform and several conservative activist groups.

One of the smallest proposed increases in the standard deduction is in the Hugo bill, the GOP leadership bill, which hikes it only 33 percent.  That bill is more focused on preserving the ability of Virginians to take itemized deductions on their state returns, even if they take the federal standard deduction.  If they have local taxes above the new $10,000 federal cap on those deductions, they can ignore that cap.

Hugo’s is the only bill of the 15 filed so far which lifts the cap on the local tax deduction, and one of only two which seek to preserve itemized deductions.   No Senate bill enters that territory yet. On Monday the Northam administration issued data on the revenue impact of those changes, arguing the cost of protecting that deduction on local taxes is far higher than Republicans claimed.

A game of chicken is now underway.  The Republicans have agreed, it appears, that one way or another the windfall from conforming with the federal rules will not be plowed into the budget.  And to force tax policy changes, they are delaying the normally-routine legislation to conform Virginia’s tax system to the federal changes.  If negotiations with the Governor or between the chambers are underway, they are off the radar.

Figuring out your tax liability for 2018 with Virginia fully out of conformity, therefore using 2017 rules, will be a nightmare.  A failure to agree on a budget that is signed by the Governor is also a terrible outcome, but these are midstream budget amendments, so a stalemate there does not produce the fear of a shutdown.  The biggest and perhaps most essential amendments are hardly popular with Republicans – Medicaid spending increases.

The best outcome for Virginia is a tax policy bill that reaches a consensus including the Governor and is passed out by wide margins, quickly. That bill should be valid tax reform, not a simple reversal of the recent federal policy changes.  Various people may see political advantage in a long stalemate, but that is a very bad outcome for Virginia.

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