Looming budget battle: Northam’s spending plan relies on tax changes Republicans say hurt the middle class

Gov. Ralph Northam has proposed a $2.1 billion increase to Virginia’s $117 billion budget passed earlier this year to support new education funding, broadband investment, cleaner waterways and making the earned income tax credit refundable for some taxpayers, among other spending hikes.

“We’re taking this opportunity to make investments that we’ve discussed for years,” Northam said when he presented his proposal to lawmakers Tuesday. “And we’re being responsible stewards of government, by putting money into reserves and budgeting for bills we can foresee, and some we can’t.”

But where is the money to pay for them coming from?

The changes will use revenue from conforming to new federal tax changes, a new internet sales tax and an increase in revenue unrelated to tax changes, said Secretary of Finance Aubrey Layne.

A Supreme Court case that requires online retailers to pay sales tax in states where the business isn’t physically located will net Virginia about $155 million more a year, budget staff estimated. A portion of it is earmarked for education funding.

Plus, the state has received more regular tax payments than originally estimated, mostly in the form of payroll taxes.

And thanks to federal tax reform, Virginia is expecting $594 million more this year and up to $980 million more in later years until some provisions of tax reform end.

Most of that money will fund one-time investments —- which can last for several years but aren’t permanent, like salaries — in broadband internet, water quality efforts and some educational funds.

The state doesn’t want to use most of the money from federal tax changes for recurring expenses because of the vulnerability of federal tax reform since Democrats took control of the U.S. House of Representatives, Layne said.

Many of those candidates said President Donald Trump’s tax reform benefited the wealthy and campaigned on repealing parts of the new law.

Northam’s proposal includes more than $660 million in permanent costs, including $87.6 million for teacher raises; $36 million for more school counselors; $9.7 million for Virginia’s preschool initiative; $20.7 million to support college financial-aid programs; $463 million for Medicaid; $24 million to provide more capacity and programs at state hospitals;  $2 million for eviction-diversion programs; $18.9 million for inmate health care; and $2.5 million to add 16 positions at the Department of Environmental Quality.

His proposal also includes one-time costs, which may be paid out over several years: $179 million for programs related to improving water quality, $80 million for school construction loans, $40 million for one-time state employee bonuses, $66 million for economic development projects like broadband and site preparation, $75 million for the Virginia Transportation Infrastructure Bank and $8 million for workforce development.

Republicans take aim at tax reform windfall

This year, the governor also wants to use $216 million of the $594 million from tax changes to make the earned-income tax fully refundable. The change would end in 2026 and only affect taxpayers who make less than $50,000 a year.

That’s been a point of contention for some Republican leaders, who see it as the middle class funding a break for low-income taxpayers.

“There’s no insensitivity to the low-income earners but there needs to be some sensitivity for the middle class,” said Sen. Tommy Norment, R-James City, co-chairman of the Senate Finance Committee.

There are about 30 changes in new federal tax policy that are landing the state more money, Layne said.

But if the state doesn’t “decouple” — allowing people to itemize their state taxes while taking the new, higher standard deduction at the federal level — then the majority of the $594 million in state revenue from tax reform is coming from money that isn’t refunded to middle-class taxpayers by way of writing off costs like mortgage payments on their state returns.

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.

“I don’t know where we start with a budget because we’re not going to assume the assumptions that (the governor) has that we’re going to have $600 million paid by Virginia taxpayers because of inaction by Virginia,” said Del. Chris Jones, R-Suffolk, chairman of the House Appropriations Committee.

Layne has said the state isn’t taking money from the middle-class or hiking their taxes, just forcing them to make a choice in how they file their taxes.

“This is an anomaly created by the Trump tax package that’s falling on Virginians because the people in Washington didn’t think it through carefully enough,” said Del. David Toscano, D-Charlottesville, House Democratic leader.

“This is not easy. Whether we want to take it to the next step, which might involve increasing the standard deduction … I think there will be a debate. But right now we haven’t heard anything about what the Republicans want to propose.”

Speaker of the House Kirk Cox, R-Colonial Heights, said Republicans will put forth a tax plan by the end of January.