The highest tax bracket in Virginia’s state income tax system begins at just $17,000, a figure that has not changed since 1990.
According to a new state analysis, because tax brackets remained unchanged as incomes increased during three decades of inflation, an increasing amount of Virginians’ income is now taxed at the highest rate of 5.75 percent. The survey indicated that the state’s median income had increased by 108% since 1990. During the same period, the amount of taxes owing by single filers with a median income increased by 173%.
In its report on ways to make Virginia’s tax system more equitable, the Joint Legislative Audit and Review Commission stated, “Tax specialists refer to this phenomenon as ‘bracket creep.'” “Over time, incomes increase, but income tax brackets do not.
Low- and middle-income filers bear the brunt of bracket creep, according to the analysis, because persons at the bottom would pay less if Virginia adjusted its tax brackets for inflation, as the federal government and many states do.
Del. Joe McNamara, R-Salem, a certified public accountant who sponsored a failed bill to begin updating tax brackets for inflation, stated at a legislative hearing earlier this year, “32 years ago, $17,000 put you in the highest tax bracket.” We’re still considered wealthy at $17,000.
JLARC showed that if the brackets were updated for inflation, the highest bracket would begin at $35,348 of adjusted gross income, with equivalent rises for the three groups below. Because less of Virginians’ income would be taxed at the highest rate, the state budget would be reduced by $959 million.
The JLARC study found that the bipartisan tax agreement reached earlier this year by Governor Glenn Youngkin and the General Assembly made the state’s tax system significantly more progressive by nearly doubling the standard deduction on state income taxes and making the earned-income tax credit partially refundable.
For Young all I could find was this, an article about strawberry farming too long to screenshot https://t.co/db21U0s5E0, another article too long to screenshot about strawberry pesticides https://t.co/67ILpTeE6w, and his LinkedIn pic.twitter.com/1VLo3RakhU
— Pranav Choudhary (@PranavC_) October 12, 2022
These modifications reduced the effective tax rate for filers with the lowest incomes (up to $14,000 in income) from 0.8% to -1.2% since these workers are now eligible for a refund that they were not previously. For filers earning between $14,000 and $36,000, the effective tax rate decreased from 2.4% to 1.2%.
Combined, these modifications made Virginia’s tax structure more progressive than the national average, according to JLARC. According to the research, Virginia’s tax structure has historically been ranked as less progressive than average and less progressive than adjacent North Carolina, West Virginia, Maryland, and the District of Columbia.
The state has not increased taxes on the wealthy, but the JLARC paper outlines many options for doing so, including imposing higher rates for the top 1% of filers, those with incomes over $600,000, and the smaller group of filers with incomes over $1 million. Raising taxes on the wealthy is the only method envisioned in the report that would simultaneously raise state income and the degree of progressivity.
This seems unlikely given that Governor Glenn Youngkin and the Republican House of Delegates are stressing broad tax cuts rather than tax increases.
In a letter in response to the JLARC analysis, Youngkin Secretary of Finance Stephen Cummings stated that the majority of states with which Virginia competes to attract individuals and businesses have no state income tax or are seeking to cut their rates. Cummings wrote that southern states with lower taxes are recovering from the COVID-19 pandemic faster than northern areas with higher taxes.
— Pranav Choudhary (@PranavC_) October 12, 2022
Cummings noted that businesses’ decisions to generate well-paying, high-quality employment in the Commonwealth depend on the tax burden on Virginia families.
Youngkin stated that he will advocate for additional tax cuts during the 2023 General Assembly session.
In response to a question on whether Youngkin favors changing tax bands for inflation, the governor’s office stated that Youngkin is currently formulating a budget proposal that would be submitted in December.
In an interview following the release of the JLARC report, Del. Vivian Watts, D-Fairfax, stated that efforts to increase taxes on the wealthy are unlikely to succeed given the present political climate. She stated that the report’s facts and data provide “a foundation” for further debate on Youngkin’s ideas.
Watts said, “This helps keep the conversation honest and true.”
Watts said that addressing “bracket creep” and making sure that tax brackets keep up with inflation could be priorities for both parties.
Watts said, “When you don’t index and let time go by, 30 years later you have a huge hit.”
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Lawmakers on the commission that got the tax report didn’t say right away how they might change taxes, but the report will likely come up in any tax debates that happen next year.
Sen. Janet Howell, D-Fairfax, who chairs JLARC and co-chairs the Senate Finance Committee, said, “There’s no doubt in my mind that this is going to be an issue we’ll have to work on during the next regular session.” “So, thank you for all of this work.
— Pranav Choudhary (@PranavC_) October 12, 2022
McNamara said in an interview that he plans to reintroduce his bill to start indexing the brackets to inflation going forward. This will keep the budget from taking a big hit from having to adjust for 32 years of inflation all at once. But he said that the problem could also be fixed by raising the standard deduction even more.
McNamara said, “I don’t think there will be a desire to do both.”
According to the JLARC report, a bigger change to the tax brackets would be the best way to make things fairer. With this option, there would be six income brackets instead of four, with lower tax rates for people making less than $50,000 and higher tax rates for people making more than $50,000. In that case, 7.5% of income over $93,000 would be taxed in the highest tax bracket.
READ MORE: The IRS Reminds Taxpayers to Use These Deductions and Credits
The JLARC report says, “For a married taxpayer with an annual income of $50,000, which is about the average for the middle-income group, this would mean a $770 tax cut and a 1.5% increase in income after taxes.” “On the other hand, a married taxpayer with an annual income of $300,000, which is about the average for the top 20% of taxpayers, would have to pay about $2,700 more in taxes, which would mean a 0.9% drop in income.
Watts said she doesn’t think the brackets should be changed to charge higher rates to people in the middle to upper middle of the income range. This is because the cost of living in Virginia varies a lot, so a $60,000 income in Northern Virginia is very different from a $60,000 income in Southwest Virginia. Watts said this is why she is more likely to agree with making new tax brackets for the highest earners.
She said, “At that level, I’m not talking about just getting by.”
JLARC says that a 10% tax rate on the about 17,700 Virginia filers with incomes over $1 million would bring in an extra $1 billion for the state each year.
