Appropriations chairman won’t consider $1.2 billion tax windfall in budget until Northam, lawmakers reach tax policy deal

BY MICHAEL MARTZ Richmond Times Dispatch, January 9, 2019

The House Appropriations Committee quickly dismissed Gov. Ralph Northam’s plan to spend $1.2 billion in “limited time” revenues from federal tax reform without first reaching an agreement with the General Assembly on state tax policy.

Appropriations Chairman Chris Jones, R-Suffolk, opened the committee’s first meeting of the legislative session on Wednesday by declaring that the House won’t consider the so-called windfall as it prepares its own version of the budget over the next 3½ weeks.

“In fairness to the process, we’re not Washington, D.C., we’re Richmond, so we cannot assume revenues that we do not have,” Jones said.

If the legislature reaches an agreement with Northam on tax policy before the committee acts on the budget Feb. 3, he added, “we will, in fact, make adjustments.”

That means the committee will have, at most, about $950 million in new revenue and projected savings to spend, with about half already devoted to filling a $462.5 million shortfall in the Medicaid program that emerged in early November because of a faulty forecast.

“It’s not an easy exercise,” Jones said at the end of the two-hour budget briefing, “but we have to play it where it lies.”

Solving the impasse over tax policy also won’t be easy: Some taxpayers are likely to face higher state taxes this year because of changes in federal tax policy in the Tax Cuts and Jobs Act, which President Donald Trump signed in late 2017.

The heart of the debate is whether the state should spend that extra money or find a way to give it back to taxpayers.

Jones and other House leaders made clear last week that they will seek changes in state policy to allow taxpayers to itemize deductions on their state tax returns even if they claim the standard deduction that the Trump tax cuts doubled at the federal level.

If they don’t, taxpayers who benefit on their federal returns might give savings back to the state, which expects a $594.2 million increase in the first year and $611.1 million in the second, primarily from provisions of the federal tax law for individual taxpayers that will expire after 2024. The business provisions of the tax law are permanent.

The House GOP leadership also proposes to increase the state standard deduction to help taxpayers who don’t itemize their returns, which will compete with a number of other legislative solutions proposed by Republicans and Democrats to adjust the state’s tax policy in the 46-day session that began Wednesday.

Northam served notice in August that he wants to return more than $200 million from the expected windfall to Virginians earning less than $54,000 a year by refunding the portion of the earned income tax credit they don’t use to cover their state tax liability.

The governor then unveiled a series of spending proposals that culminated in his presentation of a revised budget on Dec. 18 that includes plans to spend “limited time” revenues from individual income tax returns to, among other things: bolster the state’s cash reserve; begin a five-year plan for expanding access to broadband telecommunications networks in rural areas; improve water quality in the Chesapeake Bay; and jump-start a bipartisan plan to make $2.2 billion in desperately needed improvements to Interstate 81 primarily with toll revenues.

The additional money also freed Northam to propose a number of budget initiatives with recurring revenues, such as an additional 2 percent pay raise for teachers and a 1 percent, one-time bonus for state employees, state-supported local employees and college faculty.

The budget adopted last year already includes a 3 percent raise for teachers, which local school divisions would have to share, and a 2 percent raise for state employees, with an additional 2 percent for merit pay increases.

“When you’ve got $1.2 billion … it gives you a lot of flexibility so you can make a lot of promises to people,” said Jones, who promised after the meeting that the committee would be “looking carefully at all the spending items in his budget.”

mmartz@timesdispatch.com

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