Lawmakers Say It’s ‘Time To Take A Look’ At State Taxes
Posted: February 9, 2013
The top bracket of Virginia’s income tax structure hasn’t changed since 1987, spilling everyone who makes more than $17,000 a year into the top bracket. (Photo Illustration by Nikki Fox / DN-R)
Though the cost of living has gone up due to inflation, the minimum income needed to reach the state’s top tax bracket has remained flat at $17,000 in taxable income since 1987.
In today’s dollars, that’s equivalent to more than $34,000.
No adjustments to the income tax brackets means that over time the ratio of Virginians paying the state’s top rate of 5.75 percent has gone up, while the buying power of the money it takes to exceed that threshold has gone down.
“If we presume it was fair when it was put in place, then it would not be fair now,” said Sen. Emmett Hanger, R-Mount Solon, a member of the Senate’s budget-writing committee.
Hanger and some economists say Virginia’s income tax code — which is progressive and includes four different income brackets — is outdated and in need of an upgrade.
“The graduated-rate structure is laughable, all these years after the unchanged structure was put in place,” John Bowman, a retired professor from Virginia Commonwealth University, wrote in an email. Bowman studied the issue and wrote a monograph in 2002 advocating changes to the state’s income tax system.
“The matter has, of course, gotten worse in the intervening decade,” Bowman said.
Personal income tax collections account for about 66 percent of general fund revenue, according to a guide to state taxes for legislators by the Virginia Division of Legislative Services. The document was last updated in 2010.
Virginia’s tax burden, when ability to pay is factored in, is among the lowest in the country, the VDLS guide says.
Code ‘Bogged Down’
Virginia established two income tax brackets in 1919. A three-bracket structure was adopted in 1926, and a fourth bracket was added in 1972, according to Bowman’s monograph, which he prepared for the Weldon Cooper Center for Public Service at the University of Virginia.
Virginia residents use federal adjusted gross income as the basis for the state income tax, according to the Division of Legislative Services guide. Taxpayers then apply various credits, subtractions and reductions to calculate their taxable income.
Under the system, the first $3,000 of income is taxed at 2 percent, the next $2,000 at 3 percent and the next $12,000 at 5 percent. Income above $17,000 is taxed at 5.75 percent.
“Your money gets put into baskets, and each of those baskets gets taxed at a different percentage,” said Scott Drenkard, an economist with the Tax Foundation, a nonpartisan think tank in Washington, D.C.
Drenkard favors a flat tax rate, which could incorporate progressivity by allowing exemptions for up to a certain amount of income, he said.
Virginia’s various rates, however, don’t apply to people who earn less than a certain amount. The minimum filing level is $11,950 for single people and $23,900 for married couples. There are also additional credits for those near the poverty level, but Bowman said the rigidity of the system penalizes people who manage to increase their income slightly above poverty.
Taxpayers who earn above exempted amounts calculate their Virginia adjusted gross income, or AGI, based on a variety of factors.
From their federal AGI, they can subtract unemployment benefits, Social Security payments and up to $20,000 in disability from their federal adjusted gross income.
Then deductions, exemptions and subtractions can be applied to calculate AGI for state tax purposes. Dozens of these have been added over the years, including for senior citizens and members of the armed forces.
“Our Virginia tax code has gotten bogged down with a whole lot of special preferences,” said William Wood, an economics professor at James Madison University. “Each one makes it harder to figure your tax.”
Bowman argued in his monograph that the commonwealth built inequality into its system.
Households of the same size with the same income, for example, could have remarkably different tax burdens because of exemptions on the elderly.
Drenkard said Virginia’s bracket system, because it is not indexed to inflation or regularly adjusted, results in “bracket creep.” Bracket creep occurs when inflation bumps people into higher tax brackets, even though their purchasing power has not increased.
“It’s not like they were able to buy more stuff, but they had a higher tax burden,” he said.
But J. Barkley Rosser, another JMU economics professor, said that phenomenon is a “non-issue” because Virginia’s brackets are so small and the top rate kicks in at low income levels.
Wood said there are benefits to having the top rate apply to a relatively low level of income, such as promoting a strong business environment and revenue stability. But without indexing to inflation or adjusting regularly, the commonwealth has broadened the base of its highest bracket to include those at the bottom, he said.
“You’re saying the real place where the top rate kicks in should get lower over time, and I don’t think we want that,” he said.
‘Time To Take A Look’
Lawmakers and economists say the entire system, not just income taxes, is long overdue for an overhaul.
“We’re working with a system that was put in place 70 years ago, so yeah, it’s probably time to take a look at it and take a look at it comprehensively,” said Del. Steve Landes, W-Weyers Cave, a member of the House of Delegates budget-writing committee.
This session, Hanger introduced legislation to establish a joint commission of the Senate and House of Delegates to review taxation at the state and local levels. The measure, however, was tabled by a Senate committee last week in favor of another approach that could achieve similar results.
Hanger and other local lawmakers participated in a similar effort about 10 years ago. He said some headway was made in revamping the state’s tax code but nothing to directly address problems with the income tax system.
In this latest effort, Hanger said, lawmakers from the House and Senate would be appointed to a committee to study the issue and hold formal hearings. He said he’s confident the joint committee proposal will move forward, but is less sure how effective it will be.
“I believe we will,” Hanger said, but added, “how deep and broadly we get into it remains to be seen.”
Income tax is merely one aspect the committee would look into. Hanger’s intention is a wide-ranging review of taxing authority. It’s of particular interest to local governments, which receive all taxing authority from the commonwealth.
Local government leaders, including Rockingham County officials, have lobbied the state to update the system.
“We’re still using tax bases that were established back in the 1900s, and they haven’t kept up with the changing economy,” Rockingham County Administrator Joe Paxton said.
Landes expects the tax system to be a key part of the upcoming gubernatorial campaign.
One option, he said, may be to do away with the income tax and replace it with a “fair tax,” also called a consumption or sales tax.
Whatever is done should be sure to balance the needs of state and local governments and fairness to taxpayers, Landes said.
It also must be comprehensive, he added.
“I don’t think you could get an agreement by the General Assembly with a piecemeal kind of thing,” Landes said. “People have tried that for years. That’s not ... forward-looking.”
Contact Jeremy Hunt at 574-6273 or firstname.lastname@example.org