RICHMOND, Va. (WRIC) — Tax Brackets in Virginia haven’t been substantially updated since the 1990’s, but a new report to the General Assembly suggests legislators tackle the issue head on in their next session.
The report, titled “Options to Make Virginia’s Individual Income Tax More Progressive,” was presented by the Joint Legislative Audit and Review Commission (JLARC) at a public hearing on October 17.
“There’s no question in my mind that this is gonna be a topic we’re gonna wrestle with during the upcoming regular session,” said Senator Janet Howell (D-Reston).
Among it’s key findings were recommendations for different ways the General Assembly could shift more of the tax burden from poor residents to the state’s highest earners and an analysis showing that reforms adopted earlier this year have already made some progress in that direction.
The report was aimed at helping Virginia adopt a system that will “reduce taxes for many filers, but especially low and lower-middle income filers.”
Among the scenarios were a 10% “millionaire’s bracket” and separate bracket for the top 1%, which would increase state tax revenues, as well as proposals to adjust brackets for inflation, which would reduce the tax burden on lower-income residents, but also reduce overall tax revenue.
That’s because Virginia’s tax brackets have become wildly outdated since they were introduced in 1990. Currently, the highest bracket — with a tax rate of 5.75% — is for Virginian’s with taxable income over $17,000. In the 90’s, that highest tax bracket included less than 10% of all taxpayers, but now it includes just under half.
That means that somebody making just a little bit more than the average wage pays the same percentage in state income tax as a multi-millionaire.
If adjusted for inflation, those same tax brackets would improve the ‘progressivity’ of the state income tax, but would also decrease tax revenues overall by about 6% — over a billion dollars.
When weighing the proposals, the General Assembly could also choose to embrace a combination of options to balance the budget. For instance, a combination of adjusting the existing brackets for inflation and adding a new ‘millionaire bracket’ would be revenue neutral.
The state has already made some progress in improving ‘progressivity’ by increasing the available deduction and making a tax credit for low-income residents refundable.
Refundable credits served as “essentially a tax subsidy for low income filers, meaning some in the bottom 20% actually paid an effectively negative tax rate. The increased deduction, meanwhile, means filers pay state income tax on a smaller portion of their actual income — and can even be bumped down an entire bracket.