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Youngkin bets race on tax policy, but do the numbers add up?
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Youngkin bets race on tax policy, but do the numbers add up?

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Republican gubernatorial nominee Glenn Youngkin is betting the race on a public debate over tax relief, but his campaign faces skepticism over whether the numbers add up for the state to pay the price tag.

By Youngkin’s estimate, the total cost of his plan would exceed $3.2 billion, most of it for a one-time income tax rebate and for a doubling of the standard deduction for individuals to claim on their state income tax returns.

He contends that Virginia has plenty of money to pay for it, thanks to a $2.6 billion revenue surplus, unspent federal emergency aid, and the likelihood that Gov. Ralph Northam will raise the forecast for new revenues in the two-year budget he will propose in December.

“It’s all fully paid for,” Youngkin told business and political leaders gathered at a Tysons Corner hotel last week for the “leadership luncheon” staged by Virginia FREE, an influential business advocacy organization.

But is it really?

Many of the tax policy changes that Youngkin proposes have been debated by state policymakers of both parties for more than 20 years, but their cost has been an obstacle for their adoption.

Eliminating the state and local sales tax on groceries, for example, would cost more than $568 million in the next fiscal year and $581 million in the following year, or more than 2½ times the $225 million estimated by the campaign.

The reason? Youngkin’s policy team did not include the cost to local governments and the state’s transportation trust fund, which receive portions of the revenue raised by the 2.5% tax on groceries. The state’s share of the tax goes to K-12 education.

“That’s who would be losing,” said Jim Regimbal, a fiscal consultant to Virginia’s counties, cities and towns.

Del. Barry Knight, R-Virginia Beach, who would be the senior Republican on the House Appropriations Committee if re-elected in November, calls the elimination of the sales tax on groceries “very doable.”

But Knight withheld judgment on the centerpieces of Youngkin’s tax plan — $1.5 billion in one-time rebates to taxpayers and $1 billion for doubling the standard deduction.

“We’ll have to wait for the proposal,” he said of the plan to give one-time rebates of $600 to couples and $300 to individuals who pay at least that much in state income tax. “I’ll agree that it is a big number.”

Youngkin’s policy team calls the proposal the “surplus rebate,” saying it would be paid for out of the $2.6 billion surplus that Virginia collected in the fiscal year that ended on June 30.

The state can’t use any of the $1 billion in unspent federal emergency aid for tax relief under U.S. Treasury guidelines. The next governor and General Assembly also will face big bills for updating mandatory spending on K-12 public education and Medicaid in the next budget.

The Northam administration says the state constitution requires a $1.1 billion deposit in the revenue stabilization or rainy day fund, as well as a “super deposit” of $564 million if revenues grow by 5% or more in the forecast the governor will produce this fall.

State law requires an additional $300 million to be deposited to the water quality improvement fund and $116 million in the transportation trust fund. And Northam plans to set aside $222 million to repay the federal government if it determines that Virginia improperly spent some of the $4.3 million it received under the American Rescue Plan.

“Most of the money is already accounted for,” said former Gov. Terry McAuliffe, who is running for a second, nonconsecutive term against Youngkin, a former executive at a financial equity firm.

McAuliffe dismisses Youngkin’s tax proposals as “not a serious plan,” but he has not included tax relief in the sheaf of policy proposals he has rolled out for the campaign.

Steve Haner, a former state Republican Party executive director who is a commentator for the Thomas Jefferson Institute for Public Policy, says Youngkin’s plan would help offset tax increases during Northam’s term that he contends contributed to much of the surplus in revenues for the state’s general fund, as well as a $371 million surplus in transportation revenues.

“These are not new ideas, they are not strange ideas,” Haner said. “They’ve been kicked around in Virginia before.”

Haner’s top priority would be to double the standard deduction for income tax returns from $4,500 to $9,000 for individual filers and $9,000 to $18,000 for people filing as a couple. The state increased those thresholds by 50% two years ago as part of a $1 billion package of tax relief passed by the General Assembly in 2019, before Democrats took over both chambers.

“There’s no question it’s a big tax cut,” Haner said of Youngkin’s proposal for the standard deduction. “It’s long term.”

The proposed increase would reward taxpayers who stopped itemizing their deductions on state income taxes because of the much higher standard deduction at the federal level, doubled to more than $24,000 under the Tax Cuts and Jobs Act signed by then-President Donald Trump in late 2017.

Virginia taxpayers have to either itemize or claim the standard deduction on both their state and federal returns, so the change led to a big increase in state income tax revenues as fewer taxpayers itemized deductions.

The tax package, devised primarily by Senate Republicans and signed by Northam, gave one-time rebates of $110 to individuals and $220 to couples at a cost of $420 million.

The federal tax changes swelled state income tax revenue, but the provisions related to individual taxpayers expire at the end of 2024 unless extended by Congress. Most of the savings from permanent tax changes for businesses went into the state’s financial reserves.

Haner said doubling the standard deduction would most help “low-income working Virginians.”

“The lower their income, the more significant the tax cut,” he said.

House Finance Chair Vivian Watts, D-Fairfax, is a proponent of increasing the state’s standard deduction and indexing it to inflation to preserve its value.

However, she wants to consider major changes to the income tax as part of a larger, two-year study begun this year by the Joint Legislative Audit and Review Commission to consider ways to make the tax fairer and more progressive, or tied to income.

“The study of the measures to deal with issues of basic fairness is underway,” Watts said.

Knight, who could become chairman of House Appropriations if Republicans regain control of the House, said, “We’re probably not going to do anything” to address issues under study by JLARC until the second year of the budget.

Other provisions of Youngkin’s package would:

  • suspend a 5-cent increase in the state gasoline tax that took effect July 1, at a cost of about $200 million to Virginia’s transportation trust fund;
  • exempt the first $40,000 of military veterans’ retirement benefits from state income tax, at a cost of $180 million;
  • give a one-time tax holiday to small businesses for the first $250,000 of income, at a cost of $75 million; and
  • allow businesses that received one-time, tax-exempt grants from the state’s Rebuild VA program to still itemize their deductions.

Youngkin estimates the one-time provisions of the package would cost almost $1.8 billion and the permanent provisions add about $1.4 billion to the price.

“The more permanent changes are the more important changes,” Haner said.

The most politically contentious proposal in the package has nothing to do with state taxes. Youngkin wants to require local governing bodies to get voter approval to maintain or raise their real estate tax rate after an increase in property assessments.

Pointing to a 13.7% increase in real estate assessments in Richmond this year, his campaign team said the referendum would “empower the people” and prevent what Youngkin called “runaway property taxes.”

Watts, chair of House Finance, called the proposal “a nonstarter” that she compared to the Proposition 13 law passed by California voters more than 40 years ago to limit property tax increases.

“It’s the primary source of income for local governments,” she said. “It’s tied to the programs that local governments provide all the services for,” including K-12 education.

Youngkin’s campaign staff said local governments wouldn’t lose revenue if forced to equalize their tax rates with assessments.

But Virginia Association of Counties Executive Director Dean Lynch said he doesn’t have enough information about the proposal to assess it.

“We haven’t seen anything other than a couple of bullets in his political platform,” Lynch said. “The obvious question is: How do you make the revenue up?”

Sen. Emmett Hanger, R-Augusta, a senior Republican on the Senate Finance & Appropriations Committee, worked with Watts last year to allow counties the same power as cities to raise taxes on meals without a voter referendum.

Hanger, who supports Youngkin’s campaign, declined to comment on the proposed restriction on local real estate taxes.

But he said, “I tend to side with local governments on these types of issues.”

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