Who pays for Gov. Ralph Northam’s plan to make the earned-income tax credit fully refundable?
Technically, nothing’s coming out of anyone’s pocket.
But under current Virginia tax law, middle-class residents making between $50,000 and $150,000 a year will be the ones supplying most of the money to pay the new tax refunds.
Northam, a Democrat, wants to use part of a projected $594 million increase in annual revenue to make Virginia’s earned income tax credit fully refundable. That money comes as a result of President Donald Trump’s tax plan, passed last year, Northam’s administration has said.
More specifically, the money will come from taxpayers who opt not to itemize their state taxes so they can take advantage of a new higher federal standard deduction, said Virginia Secretary of Finance Aubrey Layne.
Congress doubled the standard deduction as part of Trump’s tax plan, meaning taxpayers don’t have to itemize their taxes to get more money back. Virginia didn’t change its standard deduction, so it could still be useful for many taxpayers to itemize their state taxes for costs like mortgage-interest payments.
However, Virginia law doesn’t allow taxpayers to take the standard deduction on the federal level and then itemize their state taxes.
And that’s a problem for Republican leaders who think limiting that ability and then using the revenue generated for the tax credit will hurt the middle class.
It’s a “redistribution of wealth,” said Del. Steve Landes, R-Verona, in a House and Senate finance committees joint meeting last week.
“We’re taking from one to give to another,” he said.
Northam’s plan to make Virginia’s earned income tax credit fully refundable evens the playing field, he told lawmakers last week.
“We want to make sure all Virginians are treated fairly under new federal tax changes,” Northam said. “To make sure our middle- and working-class families get relief too.”
What is the earned income tax credit?
The earned income tax credit is available to working low- and moderate-income families on their state and federal taxes. Virginia’s isn’t refundable, meaning if the credit amount is more than a person’s tax bill, they don’t get the difference.
The Commonwealth Institute for Fiscal Policy, a nonpartisan research organization, published a report last month about the potential benefits of making Virginia’s earned income tax credit fully refundable. Families who get the refunded credit would likely spend it on home repairs, debt payments and vehicle purchases or maintenance, according to the report.
“Low-income families are especially likely to make larger purchases with the refund, which puts money into the local economy,” the report stated.
While lower and moderate income Virginians get more money back with a refundable state tax credit, middle-class residents will have to choose how to optimize their tax filings, Layne said.
“If you don’t want your state taxes to increase, file your taxes so they don’t,” he said. “It’s a choice they can make.”
A “tax increase” on the middle class
Speaker of the House Kirk Cox, R-Colonial Heights, said the proposal is “problematic.”
“I think we have been pretty clear in our earlier statements that we see that as a tax increase on the middle class, especially the 640,000 people that would itemize if they could,” he said of Northam’s plan.
The gap between the federal and state standard deduction now — an $18,000 difference for a couple filing jointly — means a family would need to have $24,000 in deductions to make it worth itemizing federally and on the state level.
For people who don’t have that much to itemize, but have more than the state’s standard deduction — $6,000 for a couple — they leave money on the table if they take advantage of the higher standard federal deduction. That would make up part of the new state revenue to pay for a fully refundable earned income tax credit.
Making the earned income refundable would use about $250 million of the projected $594 million annual revenue increase. The rest could be used for workforce development and broadband internet access around the state, Northam said.
Republicans aren’t opposed to the earned income tax credit — it was a program expanded under Ronald Reagan in the 1980s — but they want to see more people benefit from tax changes in the state.
House Republicans will likely begin solidifying what that looks like in coming weeks, said Parker Slaybaugh, Cox’s spokesperson.
Landes said the legislature should probably look at updating all state tax policy.
“Some of it has been on the books since the ’50s and ’60s,” he said. “It’s out of date.”