The leaders of the General Assembly finance committees are laying the groundwork now for a hard look at Virginia tax policy — particularly how the state taxes income — for possible action as early as next year after election of a new governor and House of Delegates.
Senate Finance Chairwoman Janet Howell, D-Fairfax, said Tuesday that she is forming a special joint subcommittee to look at the state’s income tax and whether to make it more progressive by tying tax rates more closely to how much income people earn.
On the other side of the assembly, House Finance Chairwoman Vivian Watts, D-Fairfax, is pushing for a detailed study of Virginia’s income tax by the Joint Legislative Audit and Review Commission — over the objection of Republicans who hope to win back the governor’s office and House majority in elections in November.
The study resolution, which the House approved 55-40 on Wednesday, would give JLARC until the end of 2022 to complete its work and report to the assembly at the beginning of its session in 2023.
Watts said the two efforts should “dovetail,” with preliminary conclusions from the subcommittee by the next session, followed by more detailed recommendations after JLARC completes its work.
“Both the House and the Senate see the need for a broad look at both the equity and the currency of the tax system,” she said in an interview on Tuesday. “Make it equitable, make it fair.”
Specifically, Howell and Watts are looking at ways to make the state income tax — accounting for about 70% of the revenues to pay for core services in the state general fund budget — more progressive. Currently, the top tax rate is 5.75% for people earning more than $17,000 a year, which includes the vast majority of taxpayers with a wide range of incomes.
Virginia’s current income tax structure “is basically a flat tax,” Howell told the Senate Finance and Appropriations Committee.
House Joint Resolution 567, introduced by Watts, would direct JLARC to study all aspects of the income tax — brackets, rates, exemptions, credits and deductions, “as well as any other factors it deems relevant to making Virginia’s individual income tax system more progressive and fair in response to economic dynamics.”
“Really, the issue is building the political will to do something,” said Michael Cassidy, president and CEO of the Commonwealth Institute for Fiscal Analysis, a liberal think tank that favors a more progressive income tax that would require people who to pay more in taxes based on financial wealth.
The resolution passed the House Rules Committee and subcommittee on party-line votes, with all Republicans voting against it.
“I did not vote for the study because I suspect it’s really an effort to create a justification for tax increases and because I don’t think you can have a conversation about tax reform that isn’t holistic,” said former Speaker Kirk Cox, R-Colonial Heights, who is running for the Republican nomination for governor. “That’s been an incredibly difficult ongoing conversation, but we need to figure out how to crack it.”
Aside from the election-year politics, the twin efforts attempt to look at the big picture of interrelated tax policies rather than in separate bills related to income taxes, credits or exemptions, as the assembly does now.
“We have a piecemeal system now,” said Secretary of Finance Aubrey Layne, who will step down from his role as a new governor and assembly take office next year.
In an interview on Tuesday, Layne said the assembly should look “with no predetermined outcome” at the revenues necessary to run state government and other goals it wants to achieve through the tax system, before committing to major changes in how it taxes income, sales and, potentially, services in a rapidly changing economy.
“It’s going to be hard to do in a political environment,” he said.
In the meantime, efforts to address revenue and spending issues in the current assembly session may be deferred to the larger studies after the legislature adjourns next month.
For example, Howell delayed action Tuesday on a bill Sen. Creigh Deeds, D-Bath, proposed to increase the top income tax bracket from 5.75% to 5.9% for taxpayers earning over $150,000 a year. The proposed increase would raise $278 million over two years to increase compensation for sheriff’s deputies and help localities replace or repair deteriorating school buildings — both initiatives with bipartisan support in the assembly.
“This bill is my effort to put real money behind both of these issues,” Deeds said.
Howell agreed with his goals but asked that his bill be carried over for study by the new tax subcommittee as part of a larger effort to overhaul state tax policy.
“I have a real sense of urgency around these issues ... but I don’t want to piecemeal this,” she told him.
But the committee also recognized that some needs are too urgent to wait. The committee endorsed a bill Senate Minority Leader Tommy Norment, R-James City, proposed to allow Isle of Wight County to raise the sales and use tax by 1% to raise money to replace two elementary schools.
Isle of Wight Assistant County Manager Don Robertson said that building the schools would require the rural county to increase its real estate tax rate by 4 cents per $100 in value, so the additional sales tax could help relieve tax pressure on property owners.
Sen. Emmett Hanger, R-Augusta, cast the only vote against the bill because he considers the approach “an end run around the composite index” the state uses to distribute aid for public education based on local ability to pay for its share. Most of the nine localities that have been granted authority to raise the sales tax for school construction would generally receive favorable treatment by the index, he said.
“We were talking earlier about a study to look more broadly at our tax system,” Hanger said. “I think this is one of those items that we need to ultimately address that way.”