RICHMOND, Va. (WRIC) — A big-ticket tax cut is blocking compromise in the General Assembly as lawmakers leave the State Capitol once again without a budget deal.
Doubling the standard deduction for state income tax has by far the highest price tag of Governor Glenn Youngkin’s tax reform proposals, potentially costing the state roughly $2 billion over two years.
It’s among the sticking points splitting House and Senate spending plans in a divided government.
The plan, backed by Youngkin and the Republican majority in the House of Delegates, would raise Virginia’s standard deduction from $4,500 to $9,000 for individuals. For married couples, it would increase from $9,000 to $18,000.
The standard deduction is a portion of income exempt from taxation. The amount is set by the General Assembly.
According to Jared Walczak, Vice President of State Projects for the Tax Foundation, a higher amount would translate to more savings for Virginians when they file state income tax each year.
“That’s about $260 dollars in tax savings. It would be about twice that for a married couple filing jointly,” Walczak said. “What we’re talking about potentially is $520 in tax savings per year for a family so it’s quite meaningful.”
Walczak said, if lawmakers approve the proposal, it would make Virginia’s standard deduction more competitive with other states and more aligned with recent federal reform. He said, when people file their federal taxes for 2022, the standard deduction will be $12,900 for individuals and nearly $26,000 for married couples.
“There would still be states that are higher, mainly because they’re conforming with the federal standard deduction, which this will still be below. But it makes Virginia much more competitive on the standard deduction, much more in line with other states, and importantly, doesn’t force Virginians to increase their own state tax liability because they’re making the right decision for their taxes at the federal level,” Walczak said.
At the state and federal levels, Virginians can choose to forgo the standard deduction and instead itemize deductions for things like mortgage interest and charitable contributions.
However, since Congress increased the standard deduction at the federal level under President Donald Trump, Walczak said far fewer people are opting for itemized deductions because they aren’t saving as much money in comparison. He said that is causing problems for some Virginians who are obligated under state law to choose the same option for their state and federal taxes.
Still, the Senate–controlled narrowly by Democrats–decided not to include doubling the standard deduction in its budget proposal.
A plan to hold off and study the idea in greater depth ahead of the 2023 session got bipartisan support.
In a subcommittee meeting in February, Senate Finance and Appropriations Committee Chair Janet Howell (D-Fairfax) raised concerns about the price tag.
It comes as Senate Democrats are advocating for larger investments in K-12 schools and early childhood education, among other priorities.
Senator Emmett Hanger (R-Augusta), a Republican budget conferee, fears the state’s current budget surplus is not stable enough to justify major long-term changes to Virginia’s tax structure.
“Because we have an uncertain economy facing us, a lot of the surplus we have available to us right now should be spent on one-time deals,” Hanger said.
Delegate Marcia Price (D-Newport News) argued in a floor debate that doubling the standard deduction would exclude some low-income Virginians. The Commonwealth Institute echoed those concerns in an analysis in January.
“It’s five times more expensive and leaves behind more people than other proposals like the earned income tax credit,” Price said, referencing another tax reform that Senate Democrats are backing in their budget.
With localities eagerly awaiting final details to craft their own spending plans, both sides acknowledge that compromise will be critical to reaching a deal.
Delegate Emily Brewer (R-Isle of Wight), another lead Republican budget negotiator, considers doubling the standard deduction one of their top two tax reform priorities, along with exempting a portion of veteran retirement pay from taxation.
“I would hope that Senate Democrats would come to their senses on this and realize what this can really mean for everyday Virginians,” Brewer said.