BY MICHAEL MARTZ Richmond Times Dispatch, January 27, 2019
House Republicans have an answer to calls by Gov. Ralph Northam and his Democratic allies to immediately conform the state tax code to federal tax law as the filing season begins: bring it on.
House Appropriations Chairman Chris Jones, R-Suffolk, said he plans to amend his legislation on tax conformity on Monday to include the creation of a “Taxpayer Relief Fund” that would capture more than $300 million in estimated new revenues from the 2018 tax year and return them to taxpayers who pay more to the state because of federal tax reform.
The General Assembly would determine in a fall special session — before November elections that will determine partisan control of both narrowly divided chambers — how to refund the revenues in the new fund and change tax policy for future years under the substitute bill the House Finance Committee will consider early on Monday.
“Conformity is very important,” Jones said in an interview, “but just as important is protecting the taxpayers from the unintended consequences of the Tax Cuts and Jobs Act.”
The law, which President Donald Trump signed 13 months ago, has created a dilemma for Virginia policymakers by generating an anticipated $1.2 billion in additional state revenues, primarily from taxpayers who traditionally itemize their deductions, including deductions for state and local taxes that the federal law would cap.
It also sets up a showdown between House Republicans and Northam, a Democrat, who has proposed to return a portion of the anticipated windfall to families earning less than $55,000 a year and investing the rest of “limited time” revenues generated by temporary provisions of the federal law on state budget priorities, including its reserves.
The Appropriations Committee already has taken the additional revenues out of the two-year budget.
“This will ensure that we don’t spend it, but we will send it back to taxpayers,” Jones said of his new proposal.
House Finance Chairman Lee Ware, R-Powhatan, called for a similar approach in a speech on the House floor last week. Ware called for the legislature to immediately conform the state and federal tax codes, sequester the additional revenues, and then debate changes to tax policy, including refunds for taxpayers who get hurt this year.
The new proposal by Jones would “fall along the lines I laid out,” Ware said, but he still wants the House and Senate to produce their own tax plans during the legislative session that is scheduled to adjourn Feb. 23, rather than in continuing special session in the fall.
“It would be my desire for it to happen sooner,” he said.
The Senate Finance Committee is poised to produce its proposed income tax policy as early as Monday as it prepares revisions to the state budget for public release next Sunday. Currently, Senate Republican leaders say they are focusing on changes that would help affected taxpayers in the simplest way for the state to carry out while ensuring relief for those who pay the most for core services of state government.
They have rejected Northam’s proposal to refund money to lower-earning taxpayers under the Earned Income Tax Credit, but Senate Majority Leader Tommy Norment, R-James City, said last week that he favors a solution that would help all classes of taxpayers.
“They can’t be totally left out of the equation,” Norment said of those who would benefit from the governor’s plan, “but those who are paying the most ought to get greater relief.”
House Speaker Kirk Cox, R-Colonial Heights, and other House Republican leaders have thrown their weight behind legislation proposed by Del. Tim Hugo, R-Fairfax, that would effectively “decouple” the decision by taxpayers on whether to itemize deductions on their state returns from how they define their income for federal taxes.
Under current Virginia law, taxpayers cannot itemize deductions on their state returns if they claim the standard deduction on their federal taxes. The federal deduction doubled under the Trump tax law, making it more attractive to taxpayers, including about 600,000 who would lose a portion of their deductions on state tax returns.
Hugo’s legislation also includes a modest increase in the state standard deduction — from $3,000 to $4,000 for individual taxpayers and from $6,000 to $8,000 for married couples — and no cap on deduction of local property taxes from taxpayer income, which is a major concern in affluent suburbans where real estate taxes are high.
Cox had challenged a state estimate of the costs of the proposed legislation, but the Joint Legislative Audit and Review Commission has confirmed the tax department projections that the bill would increase the cost of administering the tax system by $1 million and reduce revenues by $611 million in the first fiscal year.
Virginia’s suburbs are likely to be the major political battleground for elections on Nov. 5 for all 140 seats in the General Assembly, as Democrats seek to win majorities in both chambers, now narrowly controlled by Republicans. Republicans hold 51 House seats to Democrats’ 48 pending the outcome of a Feb. 19 special election. In the Senate, Republicans hold 21 seats and Democrats 19.
With tax filing season about to begin Monday, Democrats have sought to blame Republican legislators for failing to conform the state tax code to federal law in time for taxpayers and their accountants to prepare returns for the 2018 tax year, which has a May 1 deadline.
Northam rolled out his tax plan, including $216 million in proposed refunds for lower-earning taxpayers, in mid-August when he updated the assembly money committees on Virginia’s revenues for the fiscal year that ended June 30 and the biennium that began July 1.
“This is normally a very smooth process, but the General Assembly this year has failed to act, despite knowing of the short timeline that we have,” Del. Rip Sullivan, D-Fairfax, said in a speech on the House floor Friday.
“We have jeopardized the entire collection process, potentially throwing the filing season into chaos and needlessly delaying the refunds many of our constituents are expecting and on which many of them rely,” Sullivan said.
The Northam administration and the state’s certified public accountants have warned that it is too late to make changes in tax policy for the 2018 tax year, with more than 600,000 returns expected to be filed in the next week without guidance from the state or the ability to issue refunds.
Under the substitute bill proposed by Jones, the assembly would conform the state and federal tax codes immediately, which would require 80 percent approval by each chamber to enact emergency legislation that would take effect as soon as the governor signs it, rather than on July 1.
The additional revenues that Virginia would collect because of the federal tax law would be held in the “Taxpayer Relief Fund,” rather than be included in the budget.
The substitute bill would require the Department of Taxation to report to the General Assembly in mid-August with a plan for returning additional state income tax revenues to the taxpayers who paid them. That would allow “a robust debate” on tax policy before the elections in November, Jones said.
If the assembly and governor do not reach an agreement on tax policy this year, the proposed legislation would direct that additional revenues collected in 2020 for the 2019 tax year also go into the fund, as well as money in subsequent tax years until the temporary federal provisions for individual taxpayers expire at the end of 2025.
“This ensures there will be a debate on tax policy,” Jones said. “It will not be allowed to happen by default.”