RICHMOND, Va. (WRIC)- A new tax credit is expected to put hundreds of dollars back in the pockets of some Virginians.
Lawmakers included a partially refundable Earned Income Tax Credit (EITC) in the state budget compromise that Gov. Glenn Youngkin is currently reviewing.
The proposal was not part of the tax cuts package that Youngkin supported but, at least so far, he hasn’t announced any plans to take it out of the deal.
What is the Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) is a tax break for low-to-moderate-income workers. It helps reduce or eliminate the amount of state and federal taxes owed by an individual or family.
Ashley Kenneth, President and CEO of The Commonwealth Institute, said about 600,000 Virginians get the federal EITC and the majority are expected to benefit from the new option at the state level.
“For over a decade, we’ve been fighting to make our tax code at the state level more equitable and that is why this is such a significant achievement,” Kenneth said.
What’s changing in Virginia?
Lawmakers just passed a spending plan that’s expected to make the state EITC partially refundable.
Kenneth said at least 25 states and Washington D.C. already do something similar.
The change generally increases how much money eligible Virginians will get back in their refund after filing state taxes.
Here’s an example. Let’s say a family qualifies for a $1,000 credit but only owes $800 in taxes. Right now, the state would keep the difference of $200. With a refundable credit, the Commonwealth would give $200 back to the taxpayer.
How much will each person get back?
Kenneth said it’s hard to say exactly how much each person will get back because of this change. She said the calculation involves a formula that takes into account income, marital status and the number of children in a family.
In general, Kenneth said, “low-income, working families will now get hundreds of dollars more back at tax time than they got before.”
Kenneth called it the biggest change in the budget compromise for working, low-income Virginians who, in some cases, may not make enough money to benefit from other recently passed tax cuts, including one-time tax rebates and an increased standard deduction.
When will the boost start and end?
If Youngkin accepts the plan as passed, Kenneth said the policy change is expected to take effect July 1 along with the rest of the budget.
However, Kenneth said eligible Virginians won’t see the additional money until the spring of 2023 when they get refunds back for the taxable year 2022.
Those who meet the criteria will benefit annually at least through the taxable year 2025.
Additional General Assembly approval would be required to extend the policy after that.
Why hasn’t this happened before?
Budget negotiators had an unusually large amount of money at their disposal while crafting the two-year spending plan, paving the way for a bipartisan compromise that cut taxes and increased investments in core government services.
However, making the EITC refundable has historically faced opposition from Republicans in the General Assembly, who have prioritized other changes to the tax code and argued the increase for lower-income Virginians would come at the expense of the middle class.
“The General Assembly has for years taken a position that we’re going to help people that need help but we’re going to do it through our assistance programs. Doing this through the tax code, in my opinion, is just the wrong way to do it,” Senator Steve Newman (R-Lynchburg) said during a committee meeting earlier this year.
The Commonwealth Institute estimates the change will cost $315 million.
Legislation to provide a larger and longer-term refundable EITC died quickly in the Republican-controlled House of Delegates and never got a vote in the full Democrat-controlled Senate.
Despite limited public debate over the policy, the idea was later salvaged during closed-door budget negotiations and included in the compromise.