Virginia’s tax code is now more progressive than most states, meaning that taxes impact higher income brackets more than lower income brackets, after the state’s general assembly increased the standard income tax deduction from $4,500 to $8,000 for individuals and made the Virginia Earned Income Tax Credit 75 percent refundable.
“Taken together, these changes will make Virginia’s income tax 45 percent more progressive than in 2021 (as measured by change in the ‘Suits’ progressivity index, which measures the progressivity of taxes on all income groups), and more progressive than most other states’ income tax,” a Joint Legislative Audit and Review Commission report states.
Progressivity in tax policy means that higher-income earners pay a higher percent of their income than lower-income earners. Tax policy progressivity doesn’t correspond directly to political parties, and Republicans aren’t skeptical of all progressive tax policies. Governor Glenn Youngkin led Virginia Republicans in pushing to double the standard income tax deduction while Democrats pushed to make the EITC fully refundable; in the final budget compromise, the deduction wasn’t quite doubled, and the EITC is only mostly refundable.
JLARC Senior Associate Director Justin Brown told legislators Monday those changes moved Virginia from less tax progressivity than average among states to more progressivity than average.
“Making earned income tax credits refundable—so that low income filers can receive a refund even if they have little or no tax liability—is what many experts say is the single most important element in establishing a progressive tax,” the JLARC report states.
If legislators want to continue to increase Virginia’s tax progressivity, Brown suggested options that would lower tax burden on low- and middle-income payers, like making the EITC fully refundable.
“Doing that would push the effective tax rate, again on average, at the bottom 20 percent of filers down to negative 1.7 percent,” he said, although it wouldn’t impact middle-income payers.
Another option would be to increase the filing threshold, which would impact a broader range of low-income Virginians. A third option that would impact lower- and middle-income filers would be to update Virginia’s tax brackets to account for inflation, which has caused the percent of taxes paid by median-income earners to rise faster than their income.
“Virginia’s income tax has become less progressive over time, because the income tax brackets have remained the same since 1990,” JLARC reported. “During this time, Virginia median income rose 108 percent, but income taxes owed by a single filer with median income increased 173 percent. This difference is due to a much higher percentage of each filer’s income being taxed at Virginia’s highest rate of 5.75 percent on income of more than $17,000.”
JLARC also suggested that the brackets could be indexed to inflation, updating its brackets annually like most states that tax income.
One other way to increase tax progressivity is by increasing taxes on higher-income earners; JLARC suggested that new tax brackets could be created with higher rates. While other changes making the tax code more progressive would decrease Virginia’s revenues, these changes would increase revenues.
“The state could create a new income bracket for the top one percent of filers by income (about $600,000 or more in income) and apply a nine percent tax rate. This option would increase progressivity by 38 percent (See Figure, Option 10). Alternatively, the state could
create a new income bracket with a 10 percent rate that would apply only to approximately 17,000 filers with more than $1 million in income,” JLARC reported.
Governor Glenn Youngkin is already preparing changes to the budget for the 2023 general assembly session, and legislators are preparing bills to introduce in the session.
“There’s no question in my mind that this is going to be a topic we’re going to wrestle with during the upcoming regular session,” Senate Finance and Appropriations Co-Chair Janet Howell, a top budget negotiator, said during Monday’s meeting.
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