After years of effort, Virginia is giving lower-income workers a major tax break

Mercedes Benson, a single mom who makes a little under $50,000 a year running a coffee shop in Richmond, doesn’t usually expect things to go her way during tax season.

On her state income taxes, Benson said she usually owes money or gets a tiny refund that doesn’t go very far. But as she tries to keep up with credit card bills and higher costs for gas and groceries, Benson, 40, says a recent change to state tax policy has given her hope she’ll be getting a little more help next April.

“The state doesn’t let up on us. We’re always paying something,” Benson said. “I’m just happy to get some kind of break.”

Heading into this year’s General Assembly session, the state was flush with revenue, Republican Gov. Glenn Youngkin was eager to deliver on his promises for big tax cuts, and Democrats still held enough power to insist on at least some of their priorities. Those factors combined to bring about a policy change years in the making: An earned-income tax credit (EITC) that’s now partially refundable.

Making Virginia’s version of the credit refundable, a change done through the new state budget, means that instead of only reducing how much a low-income tax filer owes without giving money back, it can now lead to a bigger refund — or create a refund that otherwise wouldn’t exist.

Proponents say the change will mean hundreds of dollars going back into the pockets of roughly 600,000 working-class earners eligible for the credit next tax season, many of whom don’t make enough to owe state income taxes but pay sales taxes and contribute to state revenues in other ways. The exact size of the credit depends on a tax filer’s income and how many children they have. For the 2022 tax year, maximum credit amounts range from $560 for filers with no children to $6,935 for filers with three or more children, according to the IRS.

Virginia made 15% of that credit refundable on state tax returns, joining at least 26 other states and the District of Columbia with similar policies, according to the National Conference of State Legislatures.

Ashley Kenneth, president and CEO of the progressive Commonwealth Institute for Fiscal Analysis, which has advocated for the change for 15 years, said the strengthened credit will be particularly helpful to Black and Latino workers, who are more likely to have lower incomes that cause them to miss out on other forms of tax relief the General Assembly approved.

“It has an outsized impact on the families that need the most help,” Kenneth said. She added that help for those on the lower end will bring some balance to a “regressive” state system that taxes all income above $17,000 at the same rate.

In the next few weeks, the state will send out 3.2 million tax rebate payments of up to $250 per person, but that money is only going to Virginians who made enough to owe state income taxes.

For a married couple with two children making $24,000 a year, the refundable EITC could be worth $827 next tax season, according to an online calculator the Commonwealth Institute created to estimate its impacts.

Making the EITC refundable was one of the main economic proposals recommended in a report released in January by a commission former Gov. Ralph Northam created to study racial inequality in Virginia and how it could be addressed. Black workers will disproportionately benefit from the change, that study found, because they account for 32% of the EITC-eligible population despite Black Virginians making up roughly a fifth of the state’s population.

“It’s a huge win for us as advocates,” Kenneth said. “But an even bigger win for low-income working families who are now going to see some relief at tax time.”

Why now?

Del. Cia Price, D-Newport News, pointed to several factors to explain the breakthrough on EITC refundability: the work of those who have championed it for years, Senate Democrats “digging their heels in” during budget negotiations and a broad recognition that the COVID-19 crisis hit the poor harder than the wealthy.

“The pandemic just had a way of exposing things in a new light,” said Price, one of several lawmakers who sponsored EITC legislation last session.

Sen. George Barker, D-Fairfax, who helped negotiate the bipartisan tax deal, said a big factor was the state having enough money to let the two parties get part, but not all, of what they wanted.

“We were able to do things where both sides were getting a win out of it,” Barker said.

Bills to enact a refundable EITC in Virginia have been proposed for decades, but the idea got new traction recently due to changes in federal tax policy. That included former President Donald Trump’s 2017 tax-cutting plan, which Democrats criticized as skewed toward the wealthy.

When Northam proposed making the EITC refundable in the first two years of his term, Republican leaders dismissed it as an expensive giveaway that would stick the middle class with the bill. 

The GOP characterized the policy as helping people who don’t pay state income taxes at the expense of those who do.

“We keep talking about tax cuts,” Del. Nick Freitas, R-Culpeper, said at a 2019 committee hearing on a refundable EITC bill that failed. “But if we’re giving the money back to someone that hasn’t paid the taxes, or they’re getting more than what they paid in taxes, is that a tax cut? Or is that spending?”

After Democrats took control of the General Assembly in the 2019 elections, the Northam administration pursued a plan to send out direct tax rebates instead of making structural tax changes. The arrival of the COVID-19 pandemic in 2020 led to a period of fiscal caution as policymakers braced for economic disruption. But by 2021, the state was looking at record revenue surpluses, and Youngkin’s victory in November meant tax relief would be a top item on the legislative agenda. In his final budget proposal, Northam included a partially refundable EITC along with several other tax cuts Youngkin campaigned on.

A signature from Youngkin, but no endorsement

In the past, the EITC concept has drawn support from across the ideological spectrum because it’s a pro-work incentive targeted largely toward people with children. It’s often compared to free-market economist Milton Friedman’s proposal for a “negative income tax,” an anti-poverty idea he said would be more efficient than government aid programs by giving cash directly to lower-income people and letting them use it however they see fit.

Youngkin signed the budget making Virginia’s EITC partially refundable, but he doesn’t spotlight the policy in speeches about the $4 billion in tax cuts the state approved on his watch.

Asked if Youngkin came around to supporting a refundable EITC or if it was mostly a concession to Democrats to get other wins like cutting grocery taxes and increasing the standard deduction on state income taxes, the governor’s office didn’t lay out a clear stance.

“The governor appreciated the work of the House and the Senate working with him to provide a budget that provided the largest tax relief in Virginia’s history while focusing on reforms that can benefit taxpayers,” said Youngkin spokesperson Macaulay Porter. “Regardless of whether the issue is cost of groceries, college affordability, housing, or the tax burden, the governor’s commitment is to lower the rising cost of living as a result of failed leadership and economic policies from Washington.”

During this year’s legislative session, Youngkin administration officials opposed standalone bills to make the EITC refundable.

Republicans pushed back against accusations their policies were leaving low-income Virginians behind, arguing their plan to get rid of the state tax on groceries would help low-income people, who spend a bigger percentage of their income on food. Republicans also pitched Youngkin’s unsuccessful plan for a gas tax holiday in populist terms, insisting even a slight dip in gas prices might not mean much to the laptop class but would help working people who have to drive on a regular basis.

With state revenues still looking strong, Youngkin said last month that he’s planning to pursue nearly $400 million in tax relief next year. Another round of tax negotiations could create another opportunity for Democrats to try to boost the EITC again by upping the percentage of the credit treated as refundable.

“Fifteen percent is just a step in the right direction. There are other states that have up to 30% and more,” Price said. “Eventually, Virginia is going to have to come to terms with the fact that the way we tax people is upside down and unfair, and continues to proliferate wealth gaps among communities of color.”

Benson, the Richmond coffee-shop worker, said she’s not sure how much extra money she’ll get next tax season. Whatever the amount, she said, she’ll probably use it to pay off a bill or stick it in savings.

“I’ll be happy if it was $50,” she said. “Anything would be nice.”