Virginia legislative leaders have reached an agreement, endorsed by Gov. Ralph Northam, that would return $976 million to taxpayers during this biennium and would allow the state to begin processing more than a half-million tax returns that already have been filed for this season.
The agreement adopts the plan the Senate approved last week to give $420 million in refunds next fall to compensate taxpayers for higher state taxes they will pay on 2018 income as an unintended consequence of the Tax Cuts and Jobs Act that President Donald Trump signed more than a year ago.
Individual taxpayers would receive $110 and married couples $220 in October, the month before elections for all 140 seats in the General Assembly’s two narrowly divided chambers.
Senate and House leaders promised to expedite the new bill’s passage on Monday so it can go to the governor to sign within seven days.
The plan also would raise the standard deduction by 50 percent — to $4,500 for individuals and $9,000 for couples — the first increase since 2005. It would protect Virginia taxpayers from some provisions of the new federal tax law by not capping the deduction of local property taxes on itemized returns, shielding income from corporate overseas investments, and allowing businesses to deduct a portion of the interest that they can’t claim on their federal returns.
The plan would reserve $80 million in anticipated income tax revenue, resulting from the federal law, in a taxpayer relief fund to address unanticipated changes in the way taxpayers file their returns.
“Every Virginian who pays personal income taxes will see lower taxes under our plan,” Senate Majority Leader Tommy Norment, R-James City, said in a prepared statement by Republican leaders in both chambers on Friday morning. “When fully implemented, we will return nearly $1 billion to the hard-working taxpayers of Virginia. This is simple, direct and tangible tax relief.”
The Senate Finance Committee voted on Friday morning to substitute the compromise for legislation passed by House Republicans that would have taken a much different approach to tax policy, which the Senate and governor opposed.
Most importantly, the committee amended the new bill to restore an emergency clause. It would enable the measure to take effect immediately upon the governor’s signature, rather than on July 1, two months after the May 1 deadline for filing state taxes. In order to pass with an emergency clause the legislation will need the support of 80 percent of the House and 80 percent of the Senate.
The House Finance Committee also restored the emergency clause to legislation carried by Norment, who also is co-chairman of Senate Finance, and approved it late Friday morning on a 20-1-1 vote. Del. Lee Carter, D-Manassas, voted against the bill and Del. Mark Keam, D-Fairfax, abstained.
The compromise won immediate support from the Virginia Society for Public Accountants, which said it would allow accountants to begin filing returns they had been holding back because of the political impasse over conforming Virginia’s tax code with changes made by the federal Tax Cuts and Jobs Act.
“We’re happy on behalf of our clients and those they represent,” said retired Sen. Walter Stosch, R-Henrico, a former accountant who lobbied for the society.
The deal also was hailed by the National Federation of Independent Business, which has been urging immediate conformity of the tax codes so small businesses can take advantages of major changes in the federal law.
“Virginia hasn’t made significant changes to its tax code in over 30 years,” said Nicole Riley, the organization’s state director. “Our members applaud the General Assembly and Governor Northam for working together to provide real relief to Virginia’s taxpayers.”
Republicans will need Democrats in both chambers to help provide the 80 percent tally they will need to pass the compromise with an emergency clause. House Appropriations Chairman Chris Jones, R-Suffolk, who briefed House Democrats on Friday morning, emphasized that the deal was produced “by members on both sides of the aisle and at both ends of the Capitol.”
Senate Democratic leaders were pleased with the agreement, especially after Senate Republicans agreed to $22.5 million in spending increases on a half-dozen priority initiatives in the budget that passed the Senate unanimously on Thursday, even though it didn’t include the “limited time spending” Northam had proposed.
“It’s all about compromise,” Senate Minority Leader Dick Saslaw, D-Fairfax, said after the committee approved the substitute bill unanimously. “We got a lot of stuff that was important to our constituents.”
“I feel good about the budget,” said Sen. Janet Howell, D-Fairfax.
In the House, Democrats were upset about being denied credit for a solution that more closely resembles legislation Del. Vivian Watts, D-Fairfax, introduced than the tax policy bill sponsored by Del. Tim Hugo, R-Fairfax, which House Republicans passed on a party-line vote on Monday.
Watts, the ranking Democrat on the House Finance Committee, introduced legislation that also included a 50 percent increase in the standard deduction, but it was sent to the Rules Committee, headed by House Speaker Kirk Cox, R-Colonial Heights, where it died without a hearing.
Hugo’s bill, championed by Cox and other House Republican leaders, “was not giving back money to the people hit hardest by the Trump tax plan,” she said Friday.
Watts said she is working with Norment and other legislative leaders to amend the compromise to retain a cap on total deductions of more than $313,000 that the federal tax law removes for the wealthiest taxpayers. Keeping the cap would save Virginia about $80 million a year, she said.
Norment acknowledged potential amendments and said, “I am receptive to the changes — it’s just a question of when in the process.”
Democrats had blocked emergency legislation in the Senate a week ago and in the House on Monday. They objected to tying conformity of the tax codes to proposed changes in tax policy — or sequestration of the additional revenues in a special fund — until agreement was reached on returning the money to taxpayers.
Secretary of Finance Aubrey Layne, who played a pivotal role in the agreement, attended both committee meetings to express the governor’s support.
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“I am pleased we have reached an agreement on tax policy that is equitable for all Virginians and allows them to keep more of their paychecks,” Northam said in a statement.
“I want to thank Secretary Aubrey Layne for his hard work on this compromise, which will ensure that Virginians will have certainty this tax season and can file their returns in a timely manner,” the governor said.
Northam has been under political siege since a scandal erupted a week ago over publication of a racist photo on his medical school yearbook page in 1984. He has been pressured by Democratic and Republican leaders to resign, but he has made clear that he will not step down while he attempts to clear his name.
Norment, the Senate Republican leader, credited both parties and chambers in reaching the compromise, but lamented its relative obscurity because of the furor over the successive scandals that also have engulfed Lt. Gov. Justin Fairfax and Attorney General Mark Herring, both Democrats in the line of succession for the governorship.
“The recognition and appreciation for what the legislative branch has accomplished has been drowned out,” he said.
Hugo, who had sponsored the House tax plan, appeared in support of the compromise at both Finance Committee meetings on Friday.
“This money will put nearly $400 back in the pockets of a middle-class family over the next two years, and that makes a real difference,” he said in the joint statement by House and Senate Republican leaders.
Republicans have insisted on tax relief since the Northam administration released a tax consultant’s report in August that estimated the likely effects of the federal tax law on different groups of tax payers.
“The proposition for the General Assembly this year was simple: Do we spend taxpayer money or give it back?” said House Finance Chairman Lee Ware, R-Powhatan. “The legislation we’re advancing today provides an unmistakable answer: We are giving it back.”
Cox, who would be third in the line of succession if Northam were to resign, emphasized the political importance of the deal in a critical election year.
“Under Republican leadership, the House and Senate have agreed to the most significant tax relief package in at least 15 years,” he said in the joint statement.
The House and Senate adopted revised two-year budgets on Thursday that repudiate Northam’s proposal to return about $216 million of the additional tax revenues to taxpayers earning less than $50,000 a year through a refund of the unused portion of their earned income tax credit.
However, Layne said the compromise still would protect lower-income earners. “We really treated people under $50,000 fairly,” he said in an interview.
“We want to take care of the people, and that’s what this plan does,” House Minority Leader Eileen Filler-Corn, D-Fairfax, said in an interview.
Sen. Ryan McDougle, R-Hanover, chairman of the Senate Republican Caucus, said the Senate tax plan always aimed to provide tax relief from “top to bottom” in a simple way that taxpayers can easily understand.
“It’s the most elegant of solutions possible,” McDougle said.
Steve Haner, a longtime political operative and lobbyist, had advocated a broader plan by the Thomas Jefferson Institute that would have doubled the standard deduction and cut corporate income taxes, but he liked the compromise.
“The good news is that the process truly works,” Haner said, “and they’re where they should have been six months ago.”