Deconstructing Teacher Turnover

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(Editor’s Note: Chester Finn has a long and distinguished career in education, academe and government. He is currently Distinguished Senior Fellow and President Emeritus at the Thomas B. Fordham Institute and Senior Fellow at Stanford’s Hoover Institution. More importantly, he recently completed his term as member of the Maryland State Board of Education, where he battled for the practical application of the education reforms he’s advocated for many years. Here, he suggests a number of reforms aimed at confronting the teacher turnover rate and moving toward meaningful changes that will make a difference to the men and women who instruct our children. With a teacher turnover rate of 10.6 percent (no doubt exacerbated by a high military spouse transfer rate), there is much here that Virginia might consider adapting in an effort to retain qualified teachers – a particularly challenging task in a state with a 2.8 percent unemployment rate.)

During the news lull between Christmas and New Years, the Wall Street Journal published an alarmist piece about the high rate of teachers and other public educators quitting their jobs. Reporters Michelle Hackman and Erick Morath examined Labor Department data on employee turnover during the first ten months of 2018 and found that educators were exiting at the rate of 83 per 10,000 per month, which would work out to almost one in ten over the course of a full year. This, they noted, was the most since job departures began getting tracked in 2001, although they cautioned that it didn’t necessarily mean all were quitting public education altogether; some number of them were changing schools, relocating, etc.

It’s worrying, though, especially when this turnover is combined with the teacher shortages that many districts (and charter and private schools) are facing, creating an absolute inability to fill some jobs with qualified individuals.

Yet making sense of these data requires some context and additional explanation. The journalists provided a bit of the former when they noted that the overall rate of turnover among all American workers during that period—231 per 10,000 per month—was almost triple the rate for public educators. This, too, turns out to be a seventeen-year high. And it’s a lot worse in other fields. Whereas close to 2 percent of educators quit monthly, other state and local employees have been leaving their jobs at almost twice that rate; for those in the “leisure and hospitality” fields, it’s closer to thrice.

That’s not to excuse or minimize the difficulty that many schools are finding when it comes to hiring and retaining first-rate (or even minimally qualified) teachers and other staff members. (We’re seeing that within Fordham’s family of Ohio-based charter schools, too.) Kids’ education definitely suffers when a teacher quits, when a long-term sub or assistant principal fills in, or when the person placed in charge of their classroom lacks the knowledge, experience, or competence to do the job well. That’s much more damaging to society’s future well-being than an abrupt turnover of waiters in your restaurant or clerks at the DMV.

Part of what’s going on in public education is, of course, the same as what’s going on throughout the American economy. First, unemployment is very low right now and jobs are plentiful, so if you’re bored, restless, mobile, or ambitious, it’s a good time to seek a better one, whether that’s in a nicer, richer, safer, or more convenient school, or in another field altogether. Second, tons of baby boomers are retiring, which produces more vacancies to fill—and fewer veterans to fill them. And third, we’re living in an era of job-hopping, career-sampling, and impulse-buying, a time when the typical college graduate works at a bunch of different things before—if ever—“settling down” in something akin to a permanent career. Twenty-somethings going into education are like their agemates going into anything else: I’ll try it and see if I like it. If I don’t, or if I’m just keen to try something else, I can happily move on.

The larger part of what’s going on, however, are the inevitable consequences—unintended, to be sure—of the education industry’s conspicuous failure to anticipate and forestall the HR woes that beset it today. From where I sit, five such failures are particularly notable.

There’s no mechanism for calibrating teacher supply to the demand via either the preparation pipeline or the compensation system. That’s why we face (in most places) a surfeit of generic elementary teachers but a shortage of special-ed, math, and science teachers. Most of our colleges of education encourage people to enroll in whatever they think suits them, not the fields with particular shortages, and public education’s union-enforced refusal to pay differentially means that the middle school gym teacher earns as much as the high school physics teacher. Given what’s going on in the rest of the economy, that’s certain to result in a plentitude of the former and a dearth of the latter.

Though teachers in most places aren’t badly paid when one calculates their compensation on a per-day or per-hour basis (factoring in those six-hour school days and long vacations), and those who stick with it are generally well taken care of when it comes to benefits, it cannot be said that public-school teaching is a high-paying field. Even as per-pupil spending on public education has doubled and tripled over the decades, teacher salaries in most places have barely kept pace with inflation. (In some places, they’ve lagged behind; in some prosperous and heavily taxed communities, they’ve forged ahead.) The main culprit here, as I’ve written before, is our long-standing proclivity to hire more teachers rather than better-compensating those we’ve got. Insofar as paying more generous salaries is a way to induce people to stick with jobs, and to attract abler, better-qualified people into those jobs, American public education has made decades of bad decisions, swelling its teaching ranks—nearing four million now—instead of settling for larger classes in return for smarter, abler, longer-serving—and more generously compensated—instructors.

The unions have encouraged that swelling while blocking the kind of professionalization they say they want for their members. Behaving more like teamsters or steel workers than lawyers, accountants, or musicians, they have insisted that all teachers be treated alike and paid alike; that there be no differentiation or compensation on the basis of performance; that everyone be retained forever—and that weak performers be endlessly defended and protected. That’s no way to earn professional respect or public admiration.

Schools and districts, too, have failed to structure themselves in ways that make the most of a high-turnover situation. Other fields—most obviously the military—do a competent job of integrating short-timers with career staff, blending the freshness, energy (and relatively low cost) of those who just do it for a few years with the wisdom, experience, mentoring, and leadership potential of skilled veterans. But not K–12 education. Sure, some of the top charter networks have figured this out, and yes, some smart districts are engaging instructional coaches to soup up the newbies—though always by adding more staff, which squeezes everyone’s pay. In most places, the beginner teacher is trying to figure it out in a classroom down the hall from a veteran who has mastered it.

With a growing handful of exceptions, American public education is also woefully behind in developing the kind of “blended” classrooms that supplement teachers with technology in ways that compensate for inexperience and blind spots on the part of some instructors, while enabling the skilled veterans to manage (and individualize) more kids without missing a beat.

Finally, and most obviously, we throw endless unpleasantness into the paths of teachers, starting with policies that make it impossible for them to discipline (or evict) the malefactors in their classrooms. Inconveniences such as no classroom (or desk or computer terminal or parking space) of one’s own. Parents who don’t do their part—and complain when the teacher is too strict or doesn’t give enough A’s. Politicians who meddle with curriculum. And administrators (and policymakers) whose overemphasis on test scores in reading and math squeezes out other content, even as they promote into one’s class kids who are far below grade level.

Who in their right mind would want to stick with such a job?

This column first appeared in the January 3, 2019 issue of Education Gadfly Weekly, published by the Thomas B. Fordham Institute, where Chester E. Finn, Jr. is a Distinguished Senior Fellow and President Emeritus.  He may be reached at cefinnjr@aol.com.

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Look What They’re Saying About The Thomas Jefferson Institute Tax Plan!

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The Thomas Jefferson Institute has proposed a tax plan that would double the standard deduction, phase in a reduction of the corporate income tax, index Virginia’s individual tax brackets, personal exemptions and standard deduction to inflation, and create a mechanism to track and segregate additional revenue resulting from federal tax reform to allow for additional adjustments or reforms if possible.


“The Virginia General Assembly has a unique opportunity to improve Virginia’s tax competitiveness with the Thomas Jefferson Institute plan. It will benefit Virginia voters and businesses alike. The other plans simply don’t get us there.” 


Brett Vassey, President and CEO
Virginia Manufacturers Association
Virginia Craft Brewers Guild


“Our members tell us that tax relief is the second most important problem facing them today, after the quality of labor.  This proposal is the first we’ve seen that offers tax relief to small-business owners and keeps tax compliance clean and simple. We believe this proposal is a positive step, so, on behalf of our members, we’re urging the General Assembly and Governor Northam to provide meaningful tax reform to small businesses and other Virginia taxpayers.”


Nicole Riley, Virginia State Director,
National Federation of Independent Business


“The Virginia Chamber appreciates the work that the Thomas Jefferson Institute put into this plan. A state’s tax climate is important to its ability to be economically competitive and create jobs.  To be the number one state for business, the Chamber supports comprehensive tax reform.”


Keith Martin, Vice President,
Virginia Chamber of Commerce


“This tax reform proposal offers needed adjustments to Virginia’s tax code that will reduce the state tax burden for many individuals, families, and small businesses across the Commonwealth.  Federal tax reform awakened a dormant economy, helped small businesses create more jobs, and reduced some of the financial stress often faced by families. But Virginia can do even better by adopting pro-family tax reforms.  If our politicians can give multi-million dollar tax breaks to large corporations, they can certainly find additional ways to reduce the tax burden on families. This proposal would accomplish that by conforming Virginia’s tax code to the federal tax code, ensuring that tax filing season is a little less confusing for taxpayers, and by doubling the standard deductions which will bring much needed relief to Virginia families.  To that end, The Family Foundation strongly supports this tax reform proposal because it will allow Virginians to keep more of their own money to use in the way that makes the most sense for them and their families.”


Victoria Cobb, President
The Family Foundation


“The 2009 to 2016 “recovery” was the most anemic the U.S. has experienced since the Great Depression. But in the wake of the 2017 Tax Cuts and Jobs Act has, which was specifically designed to encourage business growth and allow people to keep and spend more of their money, we are out of the doldrums and have experienced a historic surge in economic growth. Unfortunately, Virginia is poised to go in exactly the opposite direction and the timing of that mistake could not be worse. Where Virginia used to exceed the national average for employment growth, throughout most of the “recovery” we fell below that average. Where we used to experience a net inflow of population, we now have a net outflow. We need to imitate the demonstrable success that the Tax Cuts and Jobs Act has created by not doing exactly the opposite. Just give it back.”


Fletcher Mangum, President
Mangum Economics


“Middle Resolution supports TJI’s plan to duplicate Congress’s tax actions on the federal level:  broaden the tax base, reduce tax rates, and move people away from itemized deductions. The TJI plan aligns Virginia’s tax deduction framework with most surrounding states, makes Virginia businesses more competitive, and will not impact the current Virginia General Fund budget.  Tax refunds are returned to tax payers, who put that savings to work in a free-market economy, which benefits all of us.”


Craig DiSesa, President
Middle Resolution


“This plan is the least the legislature can do to begin conforming Virginia’s tax code to the federal Tax Cuts and Jobs Act, which has been a boon for taxpayers and our economy,” said AFP-VA State Director JC Hernandez. “While we’d prefer a plan that lowers individual tax rates to avoid raising taxes on hard working Virginians, we see this plan as a necessary step toward a tax structure that benefits all Virginians. If lawmakers conform the Tax Cuts and Jobs Act without adjustments, state taxes will increase for individuals, families, and businesses by an estimated $594 million in 2019. Other proposals would use that additional tax revenue to cover the costs of various government programs.  Instead of trying to figure out ways to spend hard working Virginians’ money, when conforming to the Tax Cuts and Jobs Act, the legislature must look for opportunities to reform our tax structure and put money back in Virginian’s pockets.”


JC Hernandez, Virginia State Director
Americans for Prosperity

“Americans for Tax Reform strongly endorses coupling federal tax conformity with immediate pro-growth tax reform in the Commonwealth of Virginia. Without immediate action by the General Assembly, Virginians could be sacked with more than one billion dollars in tax hikes over the next two years. By using taxes generated from the federal Tax Cuts and Jobs Act, state lawmakers could immediately increase the standard deduction to at least $6,000 per individual or $12,000 per family and reduce the state corporate tax rate to 5% without impacting the state budget. This would make the state more competitive and appealing for taxpayers fleeing states like New York, New Jersey, and Illinois. 
 
Tax reform should not stop there, however. Lawmakers should consider implementing additional revenue triggers that kick in as more tax revenue comes in, delivering tax savings and protections for families and businesses in the coming years. 
 
This opportunity is historic in Virginia. For years, both Democrats and Republicans have advocated for lower corporate rates and reductions in taxes for low and middle income taxpayers. We can do that right now. Without cutting a dollar of spending, the legislature can simplify and reform the state tax code to achieve that goal. ATR applauds the work of the Thomas Jefferson Institute and encourages the legislature to act on these proposals in the very near future.”“Americans for Tax Reform strongly endorses coupling federal tax conformity with immediate pro-growth tax reform in the Commonwealth of Virginia. Without immediate action by the General Assembly, Virginians could be sacked with more than one billion dollars in tax hikes over the next two years. By using taxes generated from the federal Tax Cuts and Jobs Act, state lawmakers could immediately increase the standard deduction to at least $6,000 per individual or $12,000 per family and reduce the state corporate tax rate to 5% without impacting the state budget. This would make the state more competitive and appealing for taxpayers fleeing states like New York, New Jersey, and Illinois. 
 
Tax reform should not stop there, however. Lawmakers should consider implementing additional revenue triggers that kick in as more tax revenue comes in, delivering tax savings and protections for families and businesses in the coming years. 
 
This opportunity is historic in Virginia. For years, both Democrats and Republicans have advocated for lower corporate rates and reductions in taxes for low and middle income taxpayers. We can do that right now. Without cutting a dollar of spending, the legislature can simplify and reform the state tax code to achieve that goal. ATR applauds the work of the Thomas Jefferson Institute and encourages the legislature to act on these proposals in the very near future.”

Grover Norquist, President
Americans for Tax Reform

“Governor Northam wants to spend the tax windfall of $600 million per year on entitlements.  Diverting $600 million from the private sector to government could kill, for example, 12,000 $50,000 jobs or prevent 300,000 $2,000 raises.  The Fairfax County Taxpayers Alliance supports the Thomas Jefferson Institute’s recommendation to double the Virginia standard deduction because we believe the poor are better served by more jobs and raises than by increased dependency on government entitlements.”

Arthur Purves, President
Fairfax County Taxpayers Alliance

 “Federal tax conformity provides a once-in-a-generation opportunity for tax reform in Virginia. As a result of federal tax reform, without corresponding tax relief at the state level, Virginians will see a $750 million average yearly tax increase from 2019-2024 that will threaten economic opportunity statewide. The Thomas Jefferson Institute’s recommendations would make Virginia more economically competitive with neighboring states. North Carolina, Tennessee, and Maryland together reformed their tax codes nine times since 2012, while Virginia’s most recent comprehensive tax reform dates to 1972. The Thomas Jefferson Institute’s recommendations to increase the Virginia standard deduction, index state tax thresholds to inflation, and cut Virginia’s corporate income taxes to 5% by 2019 are a great down payment toward a tax environment that will make Virginia’s economy more diverse, less dependent on federal spending, and on track for long-term economic growth.”

Jonathan Williams, Chief Economist and Vice President for State Fiscal Reform
Skip Estes, Legislative Analyst, American Legislative Exchange Council


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Party of the Rich?

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“Our tax code should work for everyone – not just for the highest earners.  That’s only fair.  But Washington is actually making these disparities worse”

Governor Ralph Northam
• “State of the Commonwealth” Address

Actually, it’s the other way around.

The federal Tax Cuts and Jobs Act (TCJA) put a cap ($10,000) on the ability of taxpayers to deduct their state and local taxes (SALT).  Allowing an unlimited deduction for state and local taxes essentially provided a subsidy to high tax jurisdictions like New York, New Jersey and California, since the “real cost” of those higher state taxes was lowered by the ability to deduct them on the federal tax form.  In short, it hit rich people more than the middle class, as did new limits on mortgage deductions.

Creating a SALT cap also affects what one pays in state taxes.  While the state taxes themselves are not deductible on your state form, local real and personal property taxes are, and if your real estate tax and car tax exceeded $10,000 part of it would no longer be deductible.  To a lesser extent this, too, affects higher tax jurisdiction and wealthier taxpayers more since the state deduction is a smaller form of subsidy for the local taxes paid.

Despite the fact that provisions of the TCJA hit the wealthy more than the middle class (and doubling the standard deduction helps the middle class more than the wealthy), liberal Democrats still insist on throwing out the canard that “Republicans are the party of the rich.”

And it appears that many Republicans in the House of Delegates are walking into the trap.  The Democratic Party of Virginia has already accused the House of Delegates Republican tax plan of being a “Republican super-rich tax giveaway.”

Among other provisions, the House Republican leadership tax bill eliminates the SALT cap in the state tax code:  If your real and personal property taxes exceed $10,000 you would benefit. 

Who would that be?  Among the 23 wealthiest House districts, where the median family income exceeds $100,000 (meaning half of families make more than $100,000), 21 seats are held by Democrats, only two by Republicans.  By reversing the SALT cap, the Republican proposal actually serves to help wealthy Democrats more than Republicans.

So much for “the party of the rich.”  Yet, the House GOP appears ready to take a political hit to help those in districts that vote against them.  This is the true definition of noble.

The Thomas Jefferson Institute’s tax proposal, on the other hand, seeks to make taxes simpler and fairer.  By doubling the standard deduction from $3,000 to $6,000 for an individual and from $6,000 to $12,000 for a couple it provides the same level of relief for tax relief for those who already take the standard deduction – more than 2.3 million, to which we can add hundreds of thousands more who would likely switch to the standard deduction. 

Who are they? We have data on standard deduction usage by locality, not legislative district. In the 23 cities and counties in which more than 80 percent of taxpayers use the standard deduction, 21 are represented by Republicans.  Not coincidentally, those cities and counties also overlap the poorer House districts in Virginia, and the ones least likely to be bothered by the SALT cap.

Steve Haner, the Jefferson Institute’s Senior Fellow for State and Local Tax Policy, notes that increasing the standard deduction is in ten of 15 bills introduced so far to make income tax policy changes – ranging from the leadership bill sponsored by Delegate Tim Hugo, which would increase it by 33 percent to Senator Glen Sturtevant’s bill, which would increase it 300 percent to match the new federal standard deduction of $24,000 per couple.  All are introduced by Republicans, save Delegate Vivian Watts’ bill to raise the standard deduction by 50 percent.

To be clear:  Tax legislation shouldn’t be about whether it helps Republicans or Democrats; wealthy or poor.  It should be about making it simpler for taxpayers, providing incentives for economic growth and job creation, keeping taxes low, and fairness.

But liberal activists started this fight, and years of tax debate allow us to anticipate the narrative that has already begun by the Left that tax reform helps rich Republicans – just as we saw that claim in the Reagan, Bush, and Trump tax reforms.  Knowing the reality is an important contribution to the debate.

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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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Virginia on the Cusp of a $600 Million Unlegislated Tax Increase

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The Virginia General Assembly, the New World’s oldest continuous lawmaking body, began its 400th year amid pageantry and an unintended tax increase on which, thus far, that body has had no say. The House’s ceremonial mace, a symbol of the legislature’s prerogative, was escorted into the chamber by a company of pikemen in colonial garb. But whether and how the legislature exercises that prerogative remains to be seen.

Virginia’s economy is linked to Washington, D.C. in important ways—and so is its tax code, in reverse. The Tax Cuts and Jobs Act (TCJA) cut federal taxes for most Virginians, but for many of them, it means higher taxes at the state level. Although that consequence is not unique to Virginia, the effect is particularly significant in the Commonwealth. In contrast to many other states, moreover, the General Assembly did nothing to address the issue during the 2018 session.

There’s still time to avoid an unlegislated tax increase on Virginians, but only barely. If legislators follow the path of least resistance, Virginians will face a tax increase of nearly $600 million in 2019, rising to almost $950 million a year by 2023.

Many Virginians Will Lose Their Itemized Deductions

In most states, increases in state tax liability arise from how the state’s tax base conforms to federal law. That will eventually be a problem in Virginia as well, but there is an even more immediate issue. Virginia is one of only nine states which requires taxpayers who take the federal standard deduction (now a generous $12,200 for single filers and twice that for married couples) to also take the state’s standard deduction. In Virginia, it’s a comparatively stingy $3,000 standard deduction that about 650,000 filers will have to take, even though it would otherwise be to their advantage to itemize on their state return.

Before the enactment of the new federal tax law, about 38 percent of Virginia filers itemized. State officials expect that to decline to 24 percent under the new law, since so many more filers will be better off taking the much-higher federal standard deduction. And that decline could be more dramatic than these estimates suggest. (Nationally, 30 percent of filers used to itemize; 12 percent are expected to do so now.) Suddenly, a lot of people are saving on their federal taxes by shifting to the standard deduction—but at the same time, they’ll be earning themselves a tax increase in Virginia.

That wouldn’t happen if Virginia didn’t require taxpayers to use the same itemization status for federal and state returns, or of the Commonwealth’s standard deduction were tied to the federal one. The standard deduction issue alone represents a $100 million unlegislated tax increase.

Base Broadening Will Raise Hundreds of Millions in New Revenue

Choice of itemization status is a big enough issue on its own. But if and when the Commonwealth conforms to the provisions of the TCJA, the tax increase will be higher still—much higher. That’s because the new federal law broadens the tax base (increasing the amount of income subject to tax) while cutting rates, but only the base-broadening provisions—and not the rate cuts—flow through to Virginia’s tax system.

(Technically, Virginia updated its conformity date to 2018 during last year’s legislative session, but that update expressly excluded all changes from the TCJA from 2018 onward.)

Changes to the mortgage interest deduction, the property tax deduction, and the moving expense deduction will increase individual income tax liability. Revisions to the treatment of net operating losses, business interest, and manufacturing activity, among others, will increase taxes on businesses. Virginia’s corporate income tax would even be applied to international income that has little, if anything, to do with Virginia.

What Happens to the Personal Exemption is Unclear

Plus, there’s another looming question of great significance: if Virginia conforms to the current version of the Internal Revenue Code, what happens to the Commonwealth’s personal exemption, which provides a deduction of $930 per person?

The federal personal exemption was functionally eliminated, but due to the peculiarities of the reconciliation process, its effective repeal was accomplished by setting its value at $0, not by taking it off the books altogether. Virginia’s personal exemption is a deduction for “each personal exemption allowable to the taxpayer for federal income tax purposes,” which creates a certain amount of ambiguity.

Some states provide a personal exemption equal to the federal one, or for each exemption claimed for federal income tax purposes. Those state personal exemptions are gone, absent legislative action to restore them. Other states offer one for each exemption allowableunder federal law, and those have been retained. Technically, the exemption is still allowed; it’s just that no one can actually claim it.

Virginia’s statute, however, provides not only that the exemption must be allowable, but that it must be allowable “for federal income tax purposes.” The personal exemption no longer appears on federal tax returns, and no longer has a clear “federal income tax purpose.” So, for Virginia’s purposes: in or out? Provisionally, tax officials in Virginia seem to be saying that it’s still in place—but given how much is at stake (around $400 million), that’s an ambiguity the legislature ought to clear up as part of any conformity update.

Revenue Implications and Possible Solutions

According to an analysis commissioned by the Virginia Department of Taxation, full conformity would increase state revenues by $594 million in 2019 ($532 million of it on individual taxpayers). And it would rise rapidly, particularly on the business side, leveling off around $943 million by 2023. At that point the impact on individuals will be $520 million, with another $423 million falling on businesses. The business tax changes won’t happen unless Virginia updates its conformity statute, but a significant share of the additional tax burden on individuals is already underway, even if lawmakers do nothing.

Add to this the roughly $78 million a year the state anticipates collecting from online sales taxes and Virginia is looking at a very sizable revenue increase—well over $1 billion a year in additional collections within five years.

Governor Ralph Northam (D) would like to keep that revenue, at least as a baseline.  “Conforming our tax code to the federal tax code is a straightforward process, and we should do it this year, as we do every year,” he said in unveiling his biennial budget. “After that, and only after that, should we begin a conversation about tax reform.” But most years, a clean conformity bill doesn’t cost Virginians hundreds of millions of dollars.

Several legislative proposals already circulating would reform Virginia’s tax code, or at least avoid the unplanned tax increase, in tandem with a conformity update. Delegate Dickie Bell (R) has a bill allowing Virginians to itemize on their state returns even if they take the federal standard deduction, a change which would benefit nearly 650,000 Virginia taxpayers to the tune of about $150 million in 2019 (and about $100 million a year thereafter). Bills introduced by Delegates Chris Peace (R) and Nick Freitas (R), based onrecommendations from the Thomas Jefferson Institute, would tie conformity to a higher standard deduction ($6,000 for single filers), a lower corporate income tax rate (down from 6 to 5 percent over two years). That proposal would also set aside new TCJA-linked revenue in fiscal year 2020 in a new fund to pay down future tax reform.

Delegate Vivian Watts (D) has proposed increasing the standard deduction and phasing in the refundability of the earned income tax credit (based on federal levels), meaning that, once fully phased in, tax refunds to some low-income households could exceed $6,000.

Senators Siobhan Dunnavant (R) and Richard Stuart (R) take a similar approach to Peace and Freitas, but also address some of the business provisions by exempting previously untaxed international income (GILTI) and decoupling from a narrowing of the interest deduction. Some members are said to be contemplating individual income tax rate reductions as well.

If anything, these approaches are relatively restrained given the estimated scope of the new revenue at Virginia’s disposal. Other proposals, like one-year relief or a refund in the form of a temporary tax credit, fall well short of reflecting the magnitude of the new revenue Virginia can expect.

If the goal is to avoid a tax increase, legislators should prioritize longer-term structural reforms. That can include giving filers a choice of itemization status, a higher standard deduction, or rate cuts. There are many possible permutations, but one-off refund checks would be the least economically beneficial approach, and they would likely fall by the wayside in a year or two, yielding a tax increase.

Legislators shouldn’t forget about businesses, either. The initial impact on business taxpayers is modest, but according to state estimates, it will skyrocket in a few years. Legislators should get ahead of that problem, not wait until it’s already a part of the budget baseline.

Ultimately, it is up to Virginia policymakers whether to keep some or all of this windfall or to return it to the taxpayers. Given the figures involved, however, the issue deserves a robust and public debate. This time, at least, conformity is not a straightforward process to be handled like any other year. If legislators don’t take action on conformity before tackling the consequences for taxpayers, they might not find another chance to address the issue any time soon.

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