New tax fund will hold big money, require big decisions for future lawmakers

BY MICHAEL MARTZ, Richmond Times Dispatch, March 1, 2019.

A sweeping new tax package that the General Assembly passed and Gov. Ralph Northam immediately signed into law will leave more than $1 billion in tax revenues in a new fund over the next six years for some form of tax relief to Virginians who pay more in state income taxes because of federal tax reforms.

The money represents higher income taxes Virginians are expected to pay under temporary provisions of the Tax Cuts and Jobs Act that President Donald Trump signed in late 2017, but future state lawmakers will have to decide how to provide taxpayer relief with the revenues that will stop flowing after 2025.

“This will certainly put a premium on looking at comprehensive tax reforms, but the dilemma is all of this goes away in six years,” said House Appropriations Chairman Chris Jones, R-Suffolk, one of the architects of the revised two-year budget that represents the limit of the current legislature’s ability to determine what form tax relief will take.

“This is going to require discipline that I rarely have seen in Richmond to get it right,” Jones said.

Sen. Steve Newman, R-Lynchburg, one of the principal architects of the tax plan, acknowledged that lawmakers — whoever they are after elections for all 140 assembly seats in November — will have to take up the issue again in the next two-year budget cycle.

“In 2020, we’ll be advancing tax policy again,” Newman predicted.

This year’s tax package generally conformed Virginia’s tax code to the new federal law, while enacting a number of policy changes in the second year and promising one-time refunds to taxpayers in the fall — $110 for individuals and $220 for married couples.

Republican legislators trumpeted the package as $1 billion in tax relief, but according to the state tax department it is expected to return about $782 million over two years, while sequestering about $85 million in the new “taxpayer relief fund” to enable the state to respond to unforeseen consequences as taxpayers file returns on 2018 income under the new federal law.

Most of the relief will come from the one-time refunds on 2018 taxes, totaling about $420 million from the taxpayer relief fund, and a 50 percent increase in state standard deductions. The deductions will increase from $3,000 to $4,500 for individuals and $6,000 to $9,000 for married couples in the next tax year.

Cap on deductions

The relief does not include $107.5 million in tax revenues the state expects by maintaining a $313,000 cap on total deductions by the wealthiest Virginians, which the Trump tax law removes at the federal level.

The cap, known as the Pease Limitation, essentially protects revenues Virginia already has been receiving, so the revised budget requires the money to flow into the state’s revenue reserve fund, not the new pot of money for taxpayer relief.

“We should not give money back to taxpayers unless they’re going to be harmed,” Secretary of Finance Aubrey Layne said.

Del. Vivian Watts, D-Fairfax, the senior Democrat on the House Finance Committee, insisted on maintaining the cap, especially since the tax reform package already benefits wealthy Virginians by allowing them to continue to deduct more than $10,000 a year in local real estate and other property taxes they pay. The federal law limits the deduction of state and local taxes for federal taxpayers.

Watts thinks the Pease money should have gone into the taxpayer relief fund, where it could be used to help taxpayers left out of the new state law — working families earning less than $22,000, whose tax liability is covered by an Earned Income Tax Credit but who don’t get a refund on the unused amount.

“I regard this as a conscious tax policy change on the federal side and our response to it,” she said of the Pease cap.

Northam had proposed to make the Earned Income Tax Credit refundable, allowing eligible taxpayers to get a check for the amount not used to cover their tax liability. Republicans dismissed the idea as soon as the governor proposed it in August and Democrats were unable to restore it in the budget.

The final budget ensured that more than $330 million will be deposited into the revenue reserve in this biennium — the Pease money and additional tax revenues from the permanent provisions of the federal tax law for businesses. The money represents the biggest chunk of the $565.5 million that will be deposited in the reserve in the budget.

Reserve funds

Combined with deposits in the constitutionally established Revenue Stabilization Fund — a rainy day fund for severe downturns in state revenues — House budget officials estimate that Virginia’s total reserves will exceed $1.4 billion by the end of the two-year budget cycle on June 30, 2020.

Some House Democrats questioned why the state is holding so much money in reserve, rather than spending it to meet pressing public needs. Watts defended the approach as wise in the face of potential cutbacks in federal spending that would hurt the state economy, especially in Northern Virginia.

“We can’t afford to run up to the edge of the cliff,” she said.

The tax package creates a third fund that will receive $165 million to $240 million a year in the five fiscal years beyond the current two-year budget. Altogether, the fund will exceed $1 billion, including almost $350 million in the two-year budget the governor will propose in December for 2020-2022.

“There’s going to be a ton of money for the governor’s biennial budget,” Layne said.

The money represents additional state revenues resulting from the Trump tax law that would not be directly returned to Virginia taxpayers under the policy changes state lawmakers made this year.

The policy changes — primarily the temporary increase in standard deductions — are projected to return more than $300 million each year to affected taxpayers, but the rest of the windfall will go into the taxpayer relief fund.

“Just like any other bill dealing with money, it has to be appropriated,” said Senate Majority Leader Tommy Norment, R-James City, who also is co-chairman of the Senate Finance Committee.

Virginia’s two-year budget cycle prevents lawmakers from deciding how to handle revenues beyond mid-2020. “We took our best shot at it,” said Sen. Ryan McDougle, R-Hanover, chairman of the Senate Republican Caucus.

In the next two-year budget cycle “the revenues for taxpayer relief are going to be substantial,” Newman said, “and we anticipate another policy change or another taxpayer refund.”

Northam endorsed the tax legislation in part because it didn’t decide exactly how the state will provide tax relief, Layne said. “A key to the compromise for the administration is that this money would be used for either further tax reforms or future investments that would be equally beneficial to taxpayers.”

By the time the temporary provisions are scheduled to expire, Virginia will have elected a new governor, a new Senate (twice) and new House (three times).

“This is for future legislatures and governors to decide,” Layne said.

mmartz@timesdispatch.com

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