The General Assembly finally passed a full budget for this year. It goes into effect at midnight Friday, Sept. 15, unless the Governor wants to amend it. If he does, there will be another 30-day delay. Politically, I doubt that’ll happen because it would delay taxpayers receiving a tax rebate check just before the upcoming November election of up to $200 for individuals and $400 for married filers.

The virtually unprecedented six-month delay in passing an updated budget, in fact, was all about taxes – just like it was the only other time a budget update wasn’t passed before the start of the budget year July 1. That was 20 years ago and was over cutting the car tax. That year, an update of the second year of Virginia’s two-year budget never was passed.

This year, it was over how much we should permanently cut taxes given that tax cuts reduce Virginia’s revenue available to support education. Even though Virginia is below what most states give local schools, 52% to 55% of Virginia state tax revenue goes to support education.

In July, JLARC (our independent Joint Audit and Review Commission) released an extensive report documenting that Virginia’s level of state funding far under-estimates what local schools actually cost. The state bases its share on just $10.7 billion, while what K-12 actually costs is much, much higher at $17.3 billion. The report concluded it would take an annual increase of over $3 billion in state funding support to address major areas of need it identified.

That JLARC report shifted the budget discussion towards a harder look at total tax relief. We had already cut state taxes over $4 billion last year by removing the sales tax on food, raising the standard deduction, and giving one-time rebates of up to $250/$500. Given the almost $3 billion in permanent tax relief in last year’s cuts, plus documented education under-funding and mounting concern about a federal government shutdown that would affect 30% of Virginia’s economy, the budget compromise we just passed only put an additional $280 million into permanent tax cuts while over $900 million will go back to taxpayers through the one-time $200/$400 rebate.

Over $96 million of the permanent tax cut will go to continuing the challenge of closing the large gap between the standard deduction Virginia taxpayers can take when they figure their state income tax and what they get on their federal income tax. Five years ago, Virginia’s standard deduction was only $3000 for a single filer and $6000 for joint filers. It had been 15 years since it had been raised.  Meanwhile, the federal standard deduction had grown to $12,000/$24,000 pushed by annual increases for inflation and the 2017 federal tax reform. Annual inflation adjustments, since, have increased it to $13,850/$27,700.

Such a large gap is especially unfair to Virginia taxpayers because Virginia’s tax law requires that if you choose the federal standard deduction, you can’t choose to itemize deductions when you file your Virginia tax. Why? Virginia has chosen not to fund the bureaucracy it would take to audit itemized deductions and has always piggy-backed on federal tax audits.

Therefore, in 2018, we increased Virginia’s standard deduction to $4500/$9000 resulting in an ongoing, annual tax savings for approximately 80% of Virginia taxpayers. The 20% that don’t benefit are those who itemize to pay less in federal taxes and tend to be businesses or persons in the top 5% of income. Last year, we again increased the standard deduction making it $8,000/$16,000. Now, we’ve increased Virginia’s standard deduction to $8,500/$17,000.

This constant push to lower taxes for most taxpayers by raising the standard deduction has resulted in Virginia’s income tax being more progressive. In sharp contrast, the original proposal to lower the highest tax rate from 5.75 to 5.5 would have given most of the tax cut to the top 5% of income. They would have gotten thousands of dollars while the majority of taxpayers got less than $50 and many would get no tax relief. 

However, the total effect of our raising the standard deduction from just $3000/$6000 to almost three times that amount is an annual revenue loss of over $1.1 billion. That cost in the face of documented under-funding schools and the mental health crisis was why the General Assembly finally came to agreement that the bulk of the remaining current budget surplus needed to be returned to taxpayers as a one-time rebate and not as an even greater permanent tax cut.