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The Largest Tax Relief Ever Given…

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New Governor Glenn Youngkin has now submitted his tax cut proposals to the 2022 General Assembly in the form of bills and budget amendments, and if all his campaign pledges are adopted it will be the most significant tax cut in the state’s recent history.

“There is one vital thing we can do to help Virginians,” Youngkin told assembled legislators in his first policy address on January 17. “And that is remove some of the tax burden — added on top of rising prices for groceries, gasoline and housing.” He said the proposals outlined below “represent the largest tax relief ever given to the people of Virginia, $1,500 this year for the typical Virginia family.”

In all, the package would reduce the state’s revenue over the coming 30 months by $5 billion or more. It starts with a one-time cash rebate to all Virginians who pay the state income tax, $300 per individual taxpayer or $600 for a couple filing jointly. That would be about $1.25 billion in rebates overall. You can find more details in Youngkin’s recently released summary of his high priority legislative agenda.

Of even greater value to most who pay the state income tax would be his proposal to double the standard deduction, up to $18,000 for a couple filing jointly. The additional $9,000 in tax-free income for that couple would likely save them almost $520 per year.

The rebates and standard deduction changes are complemented by a) a brief suspension of higher motor fuel taxes, b) a proposal with a history of bipartisan support to eliminate the sales tax on groceries, c) a one-time income tax reduction for small businesses and d) an income tax subtraction for up to $40,000 in military retiree pay.

Those six proposals are supplemented by one more, his effort to eliminate the carbon tax imposed on the state’s electricity generators, a tax which the state’s largest power company simply adds to its monthly bills. That tax is expected to raise about $300 million in 2022 and more in subsequent years.

The rebates, motor fuel tax suspension and small business tax breaks are short term. The change to the standard deduction, military retirement subtraction, end to the grocery tax and elimination of the energy carbon tax will be long term, saving Virginians about a billion and a half dollars per year going forward.

The challenge, of course, will be making all of Youngkin’s additional revenue changes and still producing a budget bill satisfying his spending priorities and those of the legislature. The House and Senate money committees must produce balanced draft budgets by February 20, then proceed to reconcile them by March.

Youngkin’s version of the tax rebate to individual taxpayers is $300 per person and $600 per couple. It appears the taxpayer will get it upon filing their 2021 taxes, as an additional refund amount (but they are only eligible for a rebate if they owe at least that much in tax.)

His proposal to double the standard deduction taken by individuals who do not list itemized deductions is the big ticket item. That would reduce income tax revenues by $1.24 billion in Fiscal Year 2023 and $852 million in the second year, Fiscal Year 2024. Another version of the bill is here. Similar tax reductions would extend into future years.

During the campaign it was not clear just what Youngkin had in mind as he promised a tax break for small businesses. Now this bill (and this one) spells out which companies or individuals would qualify for a one-year break on their state income tax returns, but sets a $75 million cap on the tax relief available in Fiscal Year 2023. If too many folks qualify, the tax relief may be prorated.

Youngkin’s proposal to eliminate the sales tax on groceries can be found in this Senate and this House bill. It is more generous than a version outgoing Governor Ralph Northam (D) had included in his introduced budget. Value to taxpayers (including the local share): $594 million the first year and $667 million the second, according to a fiscal impact statement.

Northam proposed full conformity with the Internal Revenue Code, which places into Virginia’s tax system all the rule changes coming from Congress or Internal Revenue Service decisions since last year. That means Virginia will not tax the 2021 federal Paycheck Protection Program funds that business received, keeping another Youngkin promise. Last year Northam took the position those funds for 2020 were taxable and sparked a major legislative battle.

Value to taxpayers of the Northam’s conformity decision: $159 million in this fiscal year (mainly from not taxing PPP), and $35.6 million in the second. Youngkin’s version of the IRS conformity bills are here and here, and seeks a retroactive change to the tax treatment of PPP for 2020. That would add another $110 million in tax relief over two years.

A substantial fiscal impact will result from Youngkin’s campaign promise to create a state income tax subtraction for military retiree pay, with House and Senate versions. His budget amendments put the taxpayer value at $287 million in Fiscal Year 2023 and $228 million in the next year. The exclusion is $20,000 for 2021, $30,000 for 2022 and $40,000 for 2023 and later.

Youngkin also proposed a break on motor fuel taxes in a budget amendment. His campaign rhetoric indicated a roll back of taxes already imposed, but his proposal now is also forward looking, delaying a scheduled 2022 increase tracking the inflation rate. No budget amendment yet indicates a fiscal impact, but a story in the Richmond Times-Dispatch cited about $200 million less revenue.

Finally, Youngkin keeps his promise to require local government referendums on real estate tax increases with this House and this Senate bill. The voters would be asked to approve if the proposed tax collected based on the reassessed values and proposed tax rate would be more than one percent above the amount collected the previous year. The attached fiscal impact statement makes no effort to estimate how many such local plebiscites would occur annually.

How much support voters express to legislators for these tax changes will matter. The Virginians seeking to defeat them and have the state spend the money will not be shy.

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