Time to Cut Taxes

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If Virginia ended the fiscal year June 30 with a general fund cash surplus of $2 billion, almost 10 percent of its annual budget, that means taxes are too high. Period. The debate for the 2021 political season should be how to cut taxes, and how much.

The $2 billion projection surfaced in recent legislative meetings and departing Secretary of Finance Aubrey Layne did not dispute it.  He and his staff have the best handle on state tax collections as they come in, and probably know the final amount already.  It might not be announced until August.

The $2 billion represents tax collections beyond the initial estimates and is only part of the coming surplus.  The other piece is cash not spent in the budget, and there are always programs that do not use 100 percent of their assigned funding.

The $2 billion or larger general fund surplus should not be confused with the flood of federal funding justified by COVID which is washing across state and local governments and the private economy.  The General Assembly will be back in Richmond next month with billions of COVID-related dollars to allocate.  The fate of the general fund surplus will be decided by the regular General Assembly session which begins in January.

That means there is time – and indeed a duty – to ask all the men and women running for the General Assembly and the two men running for Governor what they intend to do with the unexpected bonus cash.  Will they use it to continue to grow government or can taxes be adjusted down to fit government as it exists?

Because the truth is, this rush of extra money being pulled away from working families and businesses is not in the least unexpected.  While former Governor Mark Warner is remembered for the major tax bill he negotiated and signed more than a decade ago, that was a mere shadow of the tax increases imposed under Governor Ralph Northam.  The difference is Northam’s have been adopted in pieces, over several years, and the state reaped the greatest tax harvest through inaction.

When the final numbers are in, it is likely the core general fund taxes will have grown by more than one third under Northam, while inflation during the same four-year period was about 10 percent.

The bulk of the higher taxes Virginians are paying are income taxes, both on individuals and corporations.  The increase can be traced to 2019 General Assembly’s bipartisan decision to capture and keep most of the windfall revenue produced by President Donald Trump’s 2017 Tax Cuts and Jobs Act.

In a nutshell, Congress in that bill expanded the amount of income subject to tax but cut tax rates deeply.  The Virginia General Assembly agreed with all the expansions of income subject to tax and then refused to cut rates even a little bit.  Legislators provided a one-time election year rebate, which arrived just before Election Day (surprise, surprise) and made a modest adjustment in the standard deduction.

The General Assembly understood it was raising taxes.  Its own published analyses showed the long term result would be a bonanza of higher taxes for it to spend, which has now appeared.  The opportunity remains to do what should have been done in 2019 and end the income tax bonanza that produced most of the $2 billion surplus.

Step one is to continue to increase the state’s standard deduction.  The gap between the state’s standard deduction ($9,000 per couple) and the federal ($25,000 per couple) is the problem. Take the large federal standard deduction, and you must accept the small state one.  Reducing that gap by raising the state’s standard deduction will relieve Virginians of income tax on thousands of dollars.

Step two is to index the state’s tax brackets and deductions to inflation, all the more important now that federal deficit spending is about to spark another round of 1970s-level inflation.  Virginia imposes the maximum income tax rate starting on $17,000, which hasn’t changed since the 1970s.  The opportunity is here to end the annual creeping tax hike created by inflation.

The immediate push-back will be that the state cannot “afford” to make such substantial reductions in its future revenues.  The surplus itself proves that major reductions in revenue will have zero impact on state spending, so the real question is whether the surpluses represent permanent growth, and how much tax reform is possible.

The revenue forecast to be done later this year will explore that, but a safe prediction is:  Yes, the tax bonanza produced under Northam will be sustained.   If nothing else, the economic sugar high produced by massive federal stimulus spending in Virginia will continue for several years.

Voters, silence implies consent.

This commentary originally appeared in the July 6, 2021 edition of the Richmond Times-Dispatch.  Stephen D. Haner is Senior Fellow for the Thomas Jefferson Institute for Public Policy.  He can be reached at steve@thomasjeffersoninst.org.

Stephen D. Haner

About Stephen D. Haner

Stephen D. Haner is Senior Fellow for State and Local Tax Policy at the Thomas Jefferson Institute for Public Policy. He may be reached at steve@thomasjeffersoninst.org.
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