The sun rises over the Virginia Capitol. (Ned Oliver/Virginia Mercury)
It’s not just the federal government shutdown that could delay tax refunds this year.
If Virginia lawmakers can’t decide what to do about federal tax changes and an estimated $594 million more coming to the state because of some of those changes, correct state tax refunds could take some time to make it back to taxpayers.
Typically those two decisions — tax conformity and tax policy — are handled separately and cause no delays in the state refund process. But there’s already disagreement on the tax policy around expected revenue increases that will come from federal tax changes, and the legislature has to pass conformity with a super-majority for conformity to take immediate effect.
“We must align policy discussion with any discussions on conformity,” said Speaker of the House Kirk Cox, R-Colonial Heights, on Friday. “They just go hand-in-hand.”
Congress doubled the standard deduction as part of President Donald Trump’s tax plan so taxpayers don’t have to itemize their federal taxes to get more money back. Virginia didn’t change its standard deduction, so it could still be useful for some to itemize their state taxes for costs like mortgage-interest payments.
But Virginia law doesn’t allow taxpayers to take the standard deduction on the federal level and then itemize their state taxes.
The same situation has existed for people in lower income brackets because Virginia’s standard deduction hasn’t matched the federal deduction. Before now, people who could itemize between $6,000 and $12,000 worth of items every year had to choose to take the standard deduction or leave money on the table.
Republicans have said that money should go back to taxpayers and presented a plan that would allow taxpayers to “decouple” and take the federal standard deduction and itemize state taxes. The plan would also raise Virginia’s standard deduction for single people from $3,000 to $4,000 and $6,000 to $8,000 for a married couple. Raising the standard deduction would benefit lower-income people who typically wouldn’t itemize their taxes, Cox said.
Itemizing could save middle class families $800, House Republicans estimated in their proposal. The higher deduction would save 2.7 million Virginians about $115.
The Republicans’ plan also includes a one-time deduction filers can take on next year’s returns for the expected delay in implementing the new policy and would allow the state to continue allowing homeowners to write off property tax payments. That was taken away in the federal tax code because of the higher deduction.
“This plan is exactly what we need right now to make sure the Trump tax cuts are fully implemented in Virginia,” said Del. Lee Ware, R- Powhatan, chair of the House Finance Committee.
All of the Republicans’ proposed changes would cost $441 million, according to an estimate calculated by the state tax department. It’s almost all of what the state would get to keep from changes to how individuals file taxes under the new law.
The state would still get revenue from other tax changes, like a new internet sales tax and better payroll tax collection.
In a policy paper, the Virginia Society of Certified Public Accountants estimated that doubling the state’s standard deduction would cost $400 million, but didn’t calculate what a smaller increase in the deduction would cost. The organization also noted decoupling could “make it difficult to make accurate revenue projections and create corresponding instability in the commonwealth’s budget.”
The organization suggested adopting conformity and dealing with tax policy during the next budget biennium. Taxes could be filed at the usual time and the extra money the state gets can be set aside to be redistributed or spent later.
Conformity typically passes as emergency legislation, which requires a super-majority. Emergency bills, once signed by the governor, go into effect immediately.
Taxpayers can still file taxes before conformity is adopted, but it would also likely mean those filers will need to go back and file amendments, which can be confusing and costly, the CPA society said.
“The longer we wait to have conformity or if conformity doesn’t happen, there’s a point at which we begin to disrupt the normal tax filing process,” said Gary Thomson, chair-elect of the Virginia Society of Certified Public Accountants and a CPA in Richmond. “All these things are imminently doable — but they key is not what the policies are, but can you get that 80 percent vote?”
People who typically itemize may want to wait to see what happens, Thomson said, but even people who won’t change how they file may have to wait as the state holds off on releasing appropriate forms.
“Without conformity, I don’t know people will know how to file their taxes,” said Aubrey Layne, the state’s secretary of finance.
House Republicans said they know a debate could create a delay could create.
“We need the governor to come to the table as soon as we get into Richmond and have a discussion on an agreement on tax policy,” said Del. Chris Jones, R-Suffolk, chair of the House Appropriations Committee. “If that could occur, there is a chance we could have these changes apply to the 2018 tax season.”
But conformity and policy are “inextricable,” Ware said, and will help the legislature make decisions on Northam’s proposed budget amendments.
“We cannot separate the tax policy question from the budget because of the resources that have been embedded in the introduced budget by Gov. Northam,” Jones said.
Those were part of Northam’s proposed $2.1 billion increase to Virginia’s two-year budget funded in part by the increased tax revenue coming from Trump’s tax plan. Other funding would come from increased sales tax revenue and better payroll tax collection.
A portion of the funding for those budget amendments would come from the taxpayers who have to decide to itemize or take the higher federal deduction.
“Our proposal keeps more money in the pockets of Virginians without costing the state one penny,” said Del. Tim Hugo, R-Fairfax, the caucus chairman, who will patron the tax bill. “Even after providing this tax relief, the state will have more money for teachers, transportation and other key services than it did last year.”
Virginia Democrats called the Republicans’ plan a “set of reckless tax proposals that would shortchange education, transportation, and public safety needs in order to further enrich the wealthiest Virginians.”
It’s not clear if Republicans intend to support all or any of Northam’s new spending proposals, but Layne said allowing itemization of state returns while claiming the higher federal deduction will eat up the state’s expected revenue from federal tax changes, and then some.
“I don’t know where they got their numbers, but I would disagree with them,” Layne said.
Once Hugo files his bill, budget staff will evaluate the impact of the proposal.
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