House Appropriations leader expects fall special session on tax reform


The chairman of the House Appropriations Committee said Wednesday that he expects the General Assembly to convene a special session next fall to adjust Virginia’s tax code in response to sweeping federal tax reforms that President Donald Trump signed late last year.

“We would probably want to meet some time after Oct. 1 in special session,” Appropriations Chairman Chris Jones, R-Suffolk, told finance officials for Gov. Ralph Northam on Wednesday afternoon.

Jones made his desire known after a presentation by Secretary of Finance Aubrey Layne and state tax officials who testified to the committee that they won’t have a good idea of how the enactment of the Tax Cuts and Jobs Act will affect Virginia taxpayers and state revenue collections until after the extended filing deadline for 2017 federal income tax returns in mid-September.

“We won’t have the answers while you’re in session,” Layne told the Appropriations Committee in a briefing on state revenues that showed state income tax collections growing by twice the rate projected in the budget for the first seven months of the year.

Northam has not made any decision about whether to seek a special session on tax reform, his finance secretary said in an interview Wednesday.

“Let’s determine what the parameters are,” Layne said. “The governor’s open. There are pros and cons to having a special session on it.”

Senate Majority Leader Tommy Norment, R-James City, who is co-chairman of the Senate Finance Committee, also said it’s too soon to seek a special session on tax reforms as the assembly prepares to introduce competing versions of the budget on Sunday.

“My reaction is it’s a little premature for us to be talking about a special session in October,” Norment said in an interview. “I think we’re going to have to work our way through our budget process a little more.”

He also said circumstances could change between the assembly’s scheduled adjournment on March 10 and its reconvened session on April 18 to consider the governor’s proposed amendments to the budget and other bills and his legislative vetoes.

“We’re watching what’s going on in Washington very carefully,” Norment added.

Total state revenues, also boosted by strong corporate income tax collections, have risen by 5.8 percent for the year to date, compared with a 3.4 percent projected increase.

However, Layne cautioned the House committee, as he had Norment’s committee earlier in the day, that the soaring increases in estimated income tax payments not withheld from paychecks in the past two months had much to do with tax planning by wealthy individuals who want to limit their federal liability by maximizing their early payment of state taxes.

“I would be very careful,” Layne told the Senate committee on Wednesday morning.

Northam also is treading carefully by not proposing to raise the revenue forecasts in light of increased collections, which is consistent with the wishes of leaders of both assembly money committees.

Jones made clear that his committee is not counting on additional revenue for the two-year budget that it will adopt on Sunday afternoon, when the Senate committee also is scheduled to act on its own spending plan.

“We’re not going to spend any extra in what comes out on Sunday,” he told Layne.

Norment said he agreed with the finance secretary that the assembly should “be conservative in our approach.”

Layne, a former certified public accountant who served as transportation secretary under then-Gov. Terry McAuliffe, said individual income tax collections — accounting for 70 percent of state general fund revenues — are running at double the annual forecast for the first seven months and total revenues are more than $400 million ahead of projections.

He warned that much of the money collected in the past two months came from estimated income tax payments that could result in big refunds in May, as savvy taxpayers and their accountants try to make the most of state tax deductions in their federal returns in the face of major changes in federal tax law adopted before Christmas.

“While we don’t have all the answers, it is clear that some of this is tax planning,” he told the House committee.

Non-withholding income tax payments, generally made on capital gains and returns for sole proprietors, soared by almost 145 percent in December after Trump signed a sweeping tax law that will limit taxpayer deductions on their state and local tax payments. The collections grew by 1.4 percent in January, or more than 40 percent for the two-month period.

Layne said those payments include big checks from 400 new filers for a total of $150 million — a statement that drew gasps from members of both committees. A payment of $1 million would signify “a wealth event of $17 million,” he said, adding that one check received in December totaled $20 million.

The bottom line for the budget is what happens in May, as the end of the fiscal year approaches on June 30.

“We won’t know until May 1 what type of refunds we’ll be giving back,” the finance secretary said, although refunds issued by the state this month could give tax officials a clue of what to expect.

Layne also told both committees on Wednesday that Northam plans to propose 34 amendments to legislation pending in both sides of the General Assembly to conform Virginia’s tax code to the federal tax code that existed on Dec. 1, 2017, or three weeks before Trump signed the Tax Cuts and Jobs Act.

The amendments reflected changes made earlier this month in the federal budget act that would affect 2017 returns by Virginia taxpayers.

“We’re simply conforming to make sure our taxpayers are getting those breaks in their 2017 returns,” Layne said.

Layne advocated a cautious approach to any changes in state tax law in response to federal reforms, as state finance officials continue to work with a Northern Virginia consultant on analyzing the interactions between federal and state tax laws in almost a dozen areas that could affect taxpayer behavior and future revenue collections.

The biggest wild card remains non-withholding income taxes, the most volatile source of revenue for the state general fund. Those collections fell precipitously in May 2014 compared with the previous year, when estimated income taxes far exceeded projections as taxpayers cashed out stock at the end of 2012 in anticipation of higher federal taxes on capital gains. The result was a projected $2.4 billion projected revenue shortfall for the biennium, although state revenues recovered the next year.

The rest of the state’s revenue picture appears more stable, especially income taxes withheld from paychecks, accounting for almost two-thirds of state general fund revenues. Withholding payments rose 14 percent in January and 6.3 percent for the last two months, as the state picked up the extra payroll deposit day it had lost in December.

Sales tax collections continue to lag after a disappointing Christmas holiday season for retail receipts, and collections of recordation and insurance taxes also have trailed behind budget forecasts.

“At the end of the day, our revenues are still good,” Layne told the House committee.