Column: The Fairness of Virginia’s Income Tax

Column: The Fairness of Virginia’s Income Tax

The Virginia Joint Legislative Audit and Review Commission (JLARC) of which I am a member and former chairman conducts program evaluation, policy analysis, and oversight of state agencies on behalf of the Virginia General Assembly. The staff is nonpartisan and carries on its work in a most ethical and professional manner. In addition to providing information to legislators on subjects directed by the Commission to be studied, the staff of nearly thirty economists, researchers, and social scientists provide policy options for legislators to consider in making policy and passing laws. The Commission staff are the experts who provide legislators with unbiased information on which they can base reasoned decisions.

The Commission is often asked to look at the most controversial, politically charged, and complex issues before the legislature. A recent example is the matter of tax policy. Who should pay for the cost of government and in what proportion? What would fair tax policy look like? JLARC staff does not answer these questions but instead provides legislators with an objective look at current policy and with a serious range of options from which the legislators can choose. In the case of the most recent study, the topic was how to make Virginia’s individual income tax more progressive.

In simple terms, individual income taxes can be made fairer by reducing taxes of lower income filers, reducing taxes on lower-middle and middle income filers, and/or increasing tax rates for higher income filers. The interest in ensuring the progressivity of the tax system is reflected in the differences of income among tax filers. The average income of the 20 percent of lowest incomes is about $5,400 while the top 20 percent averages $287,000. Brackets are needed to ensure that some level of fairness exists among different levels of income.

An important step Virginia took last year to make the state income tax more progressive was the adoption of an Earned Income Tax Credit (EITC) that I and others had been advocating for over many years. The federal tax structure and most states have an EITC that most experts agree is the most effective way to take care of the unfairness of an income tax on low-income taxpayers. An increase in the level of refundability of the Virginia EITC would be helpful to low- income taxpayers.

Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not levy state income taxes, while New Hampshire doesn’t tax earned wages. It is important to remember that states with no income tax often make up the lost revenue with other taxes or reduced services. They may have state property taxes or high sales tax rates. Some of these states have greatly underfunded schools or other state services.

The Governor has indicated an interest in getting rid of the income tax in Virginia, but it is important to realize when these seemingly politically popular proposals are made that “there is no free lunch.” Good schools, safe neighborhoods, and good roads come at a price. The JLARC options demonstrate that there are opportunities to make our tax system fairer without giving up the features of our state in which we have pride. We have the facts; now we need to make good decisions.