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‘Trump tax scheme’ or taxpayer relief? Budgets pass easily, and a tax deal is still cooking

‘Trump tax scheme’ or taxpayer relief? Budgets pass easily, and a tax deal is still cooking

Posted by on Feb 8, 2019 in News | 0 comments

BY MICHAEL MARTZ Richmond Times Dispatch, February 7, 2019.

The House of Delegates and Senate took different paths to passing a new state budget on Thursday, but they could come together soon over Virginia tax policy.

The House adopted its version of an amended two-year budget on a 73-25 vote, after a two-hour partisan battle over tax policy and spending in the aftermath of a federal tax reform law signed more than a year ago by President Donald Trump.

In contrast, the Senate briskly adopted its version of the budget on a 40-0 vote after agreeing to half a dozen spending increases totaling $22.5 million. The deal drew Republicans and Democrats closer together on how to handle an expected $1.2 billion windfall from higher taxes on Virginia taxpayers because of the federal Tax Cuts and Jobs Act.

“It is a significant step forward,” said Senate Majority Leader Tommy Norment, R-James City, who called the unanimous vote “nothing short of miraculous” in a chamber that divided sharply along party lines over tax policy a week ago.

The House, Senate and the administration of embattled Gov. Ralph Northam were working late Thursday to reach agreement on how to conform Virginia’s tax code to the new federal tax law so the state can process the more than 550,000 tax returns it has already received, issue refunds, and give guidance to taxpayers on the rules they must follow.

Northam, a Democrat, is under siege in a scandal that erupted almost a week ago because of a racist photo on his medical school yearbook page. The governor wants quick conformity of the tax codes before deciding on changes to state tax policy in an election year for all 140 legislative seats.

The coming elections loomed over the budget in the narrowly divided House, where a rhetorical battle raged over whether the proposed budget “doubled down on the Trump tax scheme” by shifting income tax revenues to higher-earning households or reversed a potential backdoor tax increase on middle-class Virginia families.

Ultimately, the question was whether to spend the “limited time” money generated by temporary provisions of the Trump tax law or hold $950 million in anticipated revenues in a proposed “taxpayer relief fund” until lawmakers can determine how to return it to the taxpayers who will pay higher state taxes.

Democrats battled unsuccessfully to restore cuts in spending on financial aid for college students, affordable housing, school modernization and stormwater management funds for flood-prone localities, while boosting the state’s financial reserves.

“Do we want to squander this opportunity by doubling down on the Trump tax scheme?” asked Del. David Toscano, D-Charlottesville, former House minority leader.

House Appropriations Chairman Chris Jones, R-Suffolk, led the defense of the budget his committee produced.

“You can’t say you’re against the Tax Cuts and Jobs Act and then say you want to spend the money, because you can’t have it both ways,” Jones said during a debate over education spending.

The House budget would cut money for school divisions with a high percentage of at-risk students from low-income homes, but would increase funding from the Virginia Lottery that school systems could spend as they like without having to match it with local funds, he said.

Similarly, the budget would cut financial aid proposed by Northam for colleges and universities, but offer almost $46 million in state money to those institutions if they agree not to raise tuition on in-state students, Jones said. “If you do not increase the need for tuition, the demand for financial aid does not grow.”

The House budget would not change Virginia tax policy, he said, only sequester the windfall until policymakers decide what to do with it.

But Democrats took aim at separate legislation passed by the House early this week that would make major changes in tax policy in ways they said would give money to high-income households that benefited most from the Trump tax cuts but would pay disproportionately less in state taxes than more modest working families.

“We have produced a House tax policy that does not return the money to the people who paid it,” said Del. Vivian Watts, D-Fairfax, who has led the Democratic opposition to tax legislation approved by a party-line vote on Monday.

Democrats produced their own tax relief plan in a floor amendment that would have given a $200 refund to households earning less than $50,000 a year and $100 to those earning between $50,000 and $125,000 a year.

“Here’s your opportunity to vote for a tax cut,” Toscano told Republicans.

The House killed the proposal on a 51-48 party-line vote.

Del. Tim Hugo, R-Fairfax, sponsor of the Republican tax policy proposal, framed the budget vote in purely partisan terms.

“There is not a tax increase they don’t endorse,” he said of Democrats. “There’s not a spending plan they don’t embrace.”

But 22 Democrats joined the Republican majority in voting for the final budget. Del. Mark Sickles, D-Fairfax, also voted with Republicans in defense of the proposed taxpayer relief fund, which survived by a 51-47 margin.

“I thought it was a reasonable way, since we didn’t have agreement on tax policy, to hold the money in one place until we decide,” said Sickles, a member of the conference committee that will begin work next week to reconcile the House and Senate budget proposals.

In the Senate, the Republican majority soothed Democratic objections by agreeing to increased spending on initiatives to hire lawyers to help people avoid eviction from rental housing, improve water quality, add school counselors, provide permanent supportive housing for people with behavioral health problems, expand affordable housing, and assist localities in controlling stormwater.

“The Democrats and the Republicans got together on a collaborative basis and we were able to reach an understanding,” Norment said.

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‘We’re headed for a pretty disrupted tax season’ as emergency legislation fails in Virginia House of Delegates

‘We’re headed for a pretty disrupted tax season’ as emergency legislation fails in Virginia House of Delegates

Posted by on Feb 5, 2019 in News | 0 comments

BY MICHAEL MARTZ Richmond Times Dispatch, February 4, 2019.

Emergency legislation to conform Virginia’s tax code with new federal tax law failed in the House of Delegates on Monday, leaving the state unable to process hundreds of thousands of tax returns it already has received for the 2018 tax year.

“It looks to me like we’re headed for a pretty disrupted tax season,” said Secretary of Finance Aubrey Layne, who said that Virginia had received 344,000 tax returns by Monday morning.

Emergency tax legislation has now failed in the House and Senate. That means there is no guidance for Virginia taxpayers who began filing returns a week ago on their taxable income from last year. Returns filed without conformity between the two tax codes will require an additional 20 questions for individual taxpayers to answer and 30 for businesses.

House Bill 2355, proposed by Appropriations Committee Chairman Chris Jones, R-Suffolk, failed to receive the 80 votes necessary to pass emergency legislation. Such legislation requires the backing of 80 percent of the House and 80 percent of the Senate in order to take effect immediately upon the governor’s signature, rather than on July 1, two months after the May 1 tax filing deadline.

House Republicans revived the bill and then amended it to strip the emergency clause from the measure, which the House then advanced to a vote on final passage on Tuesday, the crossover deadline for each chamber to act on its own legislation.

The pending showdown on the amended conformity bill and a separate Republican tax policy proposal comes in a politically charged atmosphere — heightened by dramatic accusations against Gov. Ralph Northam and Lt. Gov. Justin Fairfax, both Democrats — in an election year with control of the General Assembly at stake.

Partisan views emerge on new tax revenues

Virginia expects an additional $1.2 billion in income tax revenues because of the Tax Cuts and Jobs Act, which President Donald Trump signed more than 13 months ago. Republicans and Democrats are framing the opportunity differently as they prepare to battle for votes in affluent suburbs that could feel a bigger bite in their state taxes this year.

Republicans accuse Northam of seeking a “back-door tax increase” by proposing to spend the tax windfall instead of changing state law to let taxpayers itemize deductions on their state returns while claiming the standard deduction that the new tax law roughly doubled for federal taxpayers.

“We do have an opportunity to act on a straight tax increase on Virginians,” Jones said of attempts by Democrats to strip provisions from the bill that would sequester the additional revenues in a separate “taxpayers relief fund.”

Democrats blamed the higher state taxes on “the Trump tax cuts.” They called for a bill that would conform the tax codes immediately to help taxpayers with the 2018 returns, without changing Virginia tax policy.

Before the House dropped the emergency clause, Del. Marcus Simon, D-Fairfax, tried to eliminate the proposed fund and make the measure “a clean conformity bill” that could take effect immediately, and “allow Virginia taxpayers to get on with the business of filing their taxes.”

Simon’s amendment died on a 48-51 party-line vote.

Some Democrats break ranks in vote on legislation

Thirteen Democrats broke party ranks in the earlier vote on Jones’ emergency legislation, which failed on a 64-34 tally, or 16 votes shy of the 80 needed for passage.

All of the Democrats who supported the bill represent suburban swing districts, including Del. Dawn Adams, D-Richmond, who narrowly defeated Republican incumbent Manoli Loupassi two years ago in a district that includes parts of the city as well as Chesterfield and Henrico counties.

Six Democrats who serve on the Appropriations Committee, including Del. Lashrecse Aird of Petersburg, also voted for Jones’ bill.

Northam and Democrats wanted both chambers to pass tax conformity legislation with no changes in tax policy, which they said lawmakers could debate and settle later.

“We should be focusing like a laser on conformity,” said Del. Rip Sullivan, D-Fairfax.

Jones and other House Republican leaders said his bill is the only vehicle remaining in the General Assembly to address conformity of the tax codes without setting new policy.

Separate tax measure from Northern Va. Republican

Republicans are trying to push through major tax policy changes in separate legislation proposed by Del. Tim Hugo, R-Fairfax, one of the few remaining Republican legislators in Northern Virginia.

House Bill 2529 would effectively decouple Virginia’s income tax system from the federal code by letting taxpayers itemize deductions on state returns even if they claim the standard deduction that the Trump tax act roughly doubled for federal taxpayers.

House Republicans say Hugo’s bill is aimed at married couples earning $125,000 to $150,000, whom they describe as middle class. They say those households would pay most of the increased state taxes under the federal tax law.

However, Democrats say a study for the state tax department shows that Hugo’s bill would give the most benefits to middle- to high-income taxpayers, who would pay proportionately less in state taxes than low- to middle-income earners. They warn it also would force Virginia to administer and audit tax deductions without help from the IRS.

The Senate faces the same impasse after Democrats blocked emergency passage on Friday of tax conformity legislation proposed by Majority Leader Tommy Norment, R-James City. Senate Bill 1372, loaded with major tax policy changes, passed on a 21-19 party-line vote after Senate Republicans stripped its emergency clause.

“We’ve just got to hold the returns,” Layne, a certified public accountant, said Monday. “The longer it goes on, the more it’s going to impact taxpayers.”

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Money panels back 5-percent teacher raises as Virginia lawmakers press on amid Northam crisis

Money panels back 5-percent teacher raises as Virginia lawmakers press on amid Northam crisis

Posted by on Feb 5, 2019 in News | 0 comments

BY MICHAEL MARTZ Richmond Times Dispatch, February 3, 2019.

Gov. Ralph Northam’s political fate hangs in the balance, but that did not slow the General Assembly from introducing versions of the state budget on Sunday that both include 5 percent raises for teachers.

The House Appropriations Committee led off by passing its version of a revised two-year budget that includes extra funds for teacher and state employee pay, an offer of money to colleges and universities to forestall tuition increases, and big down payments on high-tech education initiatives for Amazon and the state’s growing technology business sector.

The Senate Finance Committee followed with a budget approach that focuses on carrying out its proposed tax relief plan and putting more money into the state’s financial reserve funds to guard against an economic downturn.

Mounting calls for the governor’s resignation over a racist photo on his medical school yearbook page didn’t slow the legislature’s most pressing business.

“We get the job done and get our budget out,” said House Appropriations Chairman Chris Jones, R-Suffolk.

House Speaker Kirk Cox, R-Colonial Heights, a former member of House Appropriations who attended the budget rollout, declined to answer questions afterward. Senate Majority Leader Tommy Norment, R-James City, made clear from the outset that he would not talk about anything but the budget.

“We are not going to engage in any conjecture about the situation the governor finds himself in,” Norment said.

Norment said assembly budget leaders would continue to rely on Secretary of Finance Aubrey Layne to address differences with the executive branch over the budget and tax policy.

“The continuity is there,” Norment said.

One high-ranking House Democrat said he expects the governor’s priorities to remain in the budget process even if Northam is no longer there to push them.

“There’s going to be a governor to sign the bill at the end of the process,” said Del. Mark Sickles, D-Fairfax, the second highest-ranking Democrat on the Appropriations Committee. “If we have a different governor, the priorities are going to be mostly, if not 100 percent, the same.”

The House proposal

The proposed House budget does not include any of the $1.2 billion that Northam proposed in “limited-time spending” because of an unintended increase in state income taxes from federal tax reforms.

For the House, the top priority of Republican leaders was removing money from the budget that would come from higher state taxes paid by Virginians because of the Tax Cuts and Jobs Act that President Donald Trump signed 13 months ago.

“This is not a windfall as some have described it, but they are the taxpayers’ hard-earned dollars and not the state’s,” Jones said in his opening remarks.

The Appropriations chairman faces a daunting challenge on Monday, when the full House will act on emergency legislation that would conform Virginia’s tax code to the new federal law so that the state can advise taxpayers who are already filing returns on last year’s income.

The legislation would require approval by 80 percent of both the House and the Senate in order for it to take effect immediately upon signature by the governor, rather than on July 1, two months after the tax filing deadline.

The Senate plan

Senate Democrats blocked a proposed tax conformity bill on Friday because it included major changes in tax policy that Republicans proposed without their agreement. Senate Republicans then passed the legislation without the emergency clause on a 21-19 party-line vote.

Norment said the proposed budget includes all of the elements of the Senate tax plan — including a tax reform fund that would send $420 million in refunds to taxpayers in October and hold about $80 million in reserve.

It also reflects about $470 million in reduced revenues in the second year to pay for a proposed 50 percent increase in the standard deductions for individual taxpayers and couples, as well as to protect businesses from two provisions of the new federal law.

He pledged to work with Senate Democrats on the elements of the plan, but he said embedding it in the budget makes an emergency clause unnecessary.

“The budget becomes effective on signing by the governor,” Norment said.

The bill Jones proposed in the House does not include tax policy changes, but House Democrats oppose it because it would sequester new tax revenues from the federal law during the biennium until lawmakers decide on how to send it back to affected taxpayers.

The proposed House Appropriations budget does the same thing, but uses existing revenue and savings to fund a number of the initiatives that Northam had proposed to address with money from the temporary provisions of the federal law.

These include expanding access to broadband telecommunications networks in rural Virginia and improving water quality in the Chesapeake Bay watershed, areas that the Senate Finance plan also addressed with existing revenues.

“I believe it was a false choice that was put before us that in order to make new investments we had to raise taxes,” Jones told the committee.

Spending priorities

The proposed House budget relies upon nearly $1.2 billion in available revenues from projected growth in tax collections and about $222 million in additional savings identified by committee staff to address almost $680 million in mandatory and high-priority spending needs.

That left a little more than half a billion dollars for the committee to spend on priorities. For example, the House budget would:

  • add 2 percent to the 3 percent raises for teachers in the current budget, as Northam proposed, but the raises would take effect on Jan. 1 instead of July 1 in order to allow local school divisions more time to produce matching money;
  • add 1 percent to the 4 percent raises for state employees in the budget — an additional 0.75 percent to the 2 percent across-the-board increase and 0.25 percent to the 2 percent pool for merit raises;
  • add 1 percent to the 2 percent raises already promised to college faculty and state-supported local employees; and
  • eliminate a one-time, 1 percent bonus that Northam proposed for state employees.

The Senate plan includes money for a 5 percent teacher raise and a 3 percent increase for general registrars, but no additional money for state employees.

The House plan also would help local school divisions pay their share of raises by giving them an additional $62.1 million from the Virginia Lottery that they can use for whatever priorities they choose, without having to match the state funds with local money.

In higher education, the proposed House budget would give colleges and universities an additional $45.7 million, but only if they don’t “continue on the well-worn path of tuition increases,” said Del. Nick Rush, R-Montgomery, chairman of the higher education subcommittee.

The proposal also includes major investments in higher education research initiatives, including nearly $28 million to boost production of degrees in computer science and related fields as part of Virginia’s commitment to Amazon in landing its $2.5 billion project in Arlington County.

Northam had proposed $8.6 million as the first installment in the so-called “tech talent pipeline.” Senate Finance included about $8 million for the degree initiative.

The House budget includes $34 million as the first payment into a pending new fund to pay $550 million in cash incentives to Amazon as it creates at least 25,000 high-paying jobs at its new headquarters in Crystal City.

The Appropriations Committee also provides $11.4 million in capital and $6.1 million in operating funds to rescue the financially struggling Commonwealth Center for Advanced Manufacturing in Prince George County.

The Senate Finance budget focuses primarily on improving the state’s financial reserves. It would boost total reserves to $1.3 billion by mid-2020, about the same as in the proposed House budget.

“This is an amount that is crucial should our economy weaken at all,” Norment said.

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How will the Northam drama affect critical tax and budget issues facing Virginia?

How will the Northam drama affect critical tax and budget issues facing Virginia?

Posted by on Feb 5, 2019 in News | 0 comments

BY MICHAEL MARTZ Richmond Times Dispatch, February 2, 2019.

Whether Gov. Ralph Northam resigns or not, the General Assembly’s money committees will meet on Sunday to issue their versions of the two-year state budget that are sure to contain $1 billion less than the spending plan the governor introduced less than two months ago.

Nor will the drama affect a political impasse in both legislative chambers over widely differing approaches to changing Virginia tax policy, even as hundreds of thousands of Virginians file tax returns that the state cannot process or issue any refunds owed without conforming the state tax code in some fashion to federal law under the Tax Cuts and Jobs Act to allow the state and federal tax departments to work together.

But the governor’s personal crisis comes at a crucial time in a process built on a three-legged stool supported by the executive branch and two legislative chambers that are sharply divided after a bitter budget battle last year that ended with Northam’s greatest triumph — expansion of Virginia’s Medicaid program.

Ahead of Tuesday’s procedural midpoint for the General Assembly session, lawmakers must hash out a host of complex issues on matters, from redistricting to a funding fix for Interstate 81.

“I serve at the pleasure of the governor, but I work for the people of Virginia,” Secretary of Finance Aubrey Layne, a longtime friend of Northam from Virginia Beach, said Saturday. “I’m just going to keep doing my job.”

Part of Layne’s job is working on both sides of the Capitol with House and Senate leaders who oppose the governor’s plan to return $216 million in anticipated new revenues to lower income earners and invest the rest either in bolstering state financial reserves or expanding major programs with “limited time” money from provisions of the federal tax law that will expire after 2025.

“The task remains the same,” House Appropriations Chairman Chris Jones, R-Suffolk, said Saturday in response to a potential gubernatorial resignation.

The House Appropriations and Senate Finance committees will meet consecutively on Sunday afternoon to propose changes to the 2018-2020 budget that will rely on more than $900 million in projected state revenues without any of the money anticipated from the unintended consequences of the tax law signed by President Donald Trump in December 2017. The House and Senate will act on the budget proposals on Thursday and ultimately reconcile the differences in a conference committee that will send a compromise budget to the governor, whomever that will be.

But Northam’s potential resignation could undermine the ability of the government’s executive branch to broker a deal on tax policy, which would require emergency legislation to take effect immediately on the governor’s signature to conform the tax codes and give guidance to taxpayers who began filing state tax returns Monday on income from the 2018 tax year. The Senate failed to pass emergency legislation on Friday that includes sweeping tax policy changes opposed by Democrats, and the House faces a crucial vote Monday on its tax conformity bill with similar opposition by Democrats who want to address policy after conformity.

Emergency legislation requires approval by 80 percent of each body — 80 members of the House and 32 in the Senate — to take effect immediately instead of on July 1, two months after the state tax filing deadline.

“The problem this year is the conformity thing,” Layne said.

Should Northam resign, his sudden departure also could throw into doubt the process of acting on legislation already adopted by both chambers of the assembly, including the approval of an incentive package of up to $700 million for Amazon to create as many as 38,850 jobs at the new East Coast headquarters that it plans in Arlington County. Northam announced the $2.5 billion Amazon investment with company officials in mid-November at the Crystal City site of the project. The General Assembly swiftly approved the incentive package, which had been vetted by a legislative commission that includes top Republican leaders in both chambers.

Even if the governor remains in office, his ability to lead has been cast into doubt by calls for his resignation by his closest allies, including Democrats in both chambers of the assembly. He would have to bargain from a weakened political position with Republican legislators who already have shown they are collecting fodder for upcoming legislative elections in November that will determine partisan control of both sides of the General Assembly.

mmartz@timesdispatch.com

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