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Economic experts say Youngkin tax cuts could continue underfunding Virginia’s essential services

School building
Experts say Gov.-elect Glenn Youngkin's proposed cuts to Virginia's taxes could worsen funding challenges for the state's schools. (Photo: Crixell Matthews/VPM News)

Gov.-elect Glenn Youngkin is proposing tax cuts and changes to Virginia’s taxation system that experts say would severely underfund the commonwealth in education, transportation and social services.

Youngkin made a commitment to cutting consumer taxes, giving back income taxes and reducing future income taxes in a speech last Friday at an event hosted by the Virginia Chamber of Commerce.

“We will press forward with doubling the standard deduction and immediate one-time tax rebate, eliminating the grocery tax [and] suspending for one year of the most recent increase in the gas tax,” Youngkin said.

According to the non-profit, non-partisan tax policy organization the Institute on Taxation and Economic Policy, these cuts and changes to Virginia’s tax system would cost the commonwealth about $2.9 billion in revenue annually.

While those cuts might result in modest individual savings, experts say they would cut essential services that many Virginians rely on.

Last year, the Virginia General Assembly passed legislation that increased the gas tax from 21.2 cents per gallon to 26.2 cents per gallon over two years. Most of the revenue from this tax increase was directed to two funds that both finance the maintenance and construction of roadways in Virginia.

If the gas tax is suspended, that funding will decrease by $268 million annually. According to Chris Wodicka, senior policy analyst at The Commonwealth Institute for Fiscal Analysis, due to the pandemic, Virginia’s transportation revenues are already down.

“There are some projects that my understanding is that they basically have been put on hold or are delayed. And so that would really add to those issues, and if we were to move forward with the things that were already passed as part of that law, we'd be able to get back on track sooner rather than later,” Wodicka said.

Grocery items in Virginia currently carry a 2.5% tax, which is a lower rate than the general sales tax in the commonwealth. Most of that revenue, 80%, is split between supporting K-12 education and local governments, according to Wodicka. The remaining 20% is directed towards transportation needs in the commonwealth.

If that funding is cut, ITEP estimates that K-12 education and transportation initiatives in Virginia will each lose $227 million in revenue annually. Transportation revenue, according to the institute, will also lose about $114 million if the grocery tax cut is approved.

In addition to state-level cuts to education, Wodicka says local governments will have to balance their losses in funding through the grocery tax with cuts to essential services like K-12 education.

“Without any kind of additional policies, or new flexibilities or new revenues provided to local governments, they would be in a position where they might have to either raise other local taxes that are also very regressive, or make offsetting budget cuts to things like K-12 education,” Wodicka said.

Analysis conducted by TCI found that on average, Virginia residents with incomes between $45,000 and $76,000 will save $118 every year as a result of the proposed grocery store tax cuts. Virginians in the highest 1% of the state’s income distribution would save slightly more, around $317 a year, though that represents a smaller percentage of their income.

“It's not nothing. But that does work out to not a huge amount of money per month if you were to spread it out over the course of the year,” Wodicka said.

When individual Virginians are filing their taxes, they have the option to exempt a portion of their income, called the standard deduction, to reduce their tax bills. Currently, the standard deduction for single individuals in Virginia is $4,500. Married couples have a standard deduction of $9,000.

Under Youngkin’s plan, those standard deductions would double, meaning that a smaller portion of Virginians’ income will be taxed if they take that deduction. But, the ITEP found that by doubling the standard deduction, the state government will lose $681 million in annual revenue.

That revenue is directed towards the state’s general fund, which is the portion of the state’s budget that lawmakers have discretion to assign during legislative sessions.  Wodicka said the programs that money funds, like education and healthcare services, could face additional cuts if the general fund suffers a loss in revenue.

“Most of that money right now goes to K-12, education, higher education, and health and social services,” Wodicka said. “And we want to be in a strong position to meet our commitments to things like education, things like healthcare.”

Youngkin has previously said that he supports sending Virginians a $300-$600 one-time tax rebate. The ITEP says that would cost the general fund $1.4 billion.

Youngkin asserted during his speech last week that these tax cuts are necessary because they will lower the cost of living in Virginia.

“We're gonna address the core cost of living challenge in Virginia by reducing taxes,” Youngkin said.

But according to the Joint Legislative Audit and Review Commission, which conducts research for the state legislature, Virginia’s local and state tax rates are moderate relative to other states. The commonwealth ranks 24th in the nation for the highest state and local taxes. Also, taxes are only one piece in the calculation that determines each state’s cost of living. According to the Missouri Economic Research and Information Center, Virginia has the 27th highest cost of living in the country, which again puts the commonwealth around the median cost of living for the nation.

Youngkin also pointed to the commonwealth’s revenue surplus as a reason to cut taxes, saying the surplus is evidence that Virginians are being overtaxed.

“Surplus represents taxing more than you need,” Youngkin said.

Virginia currently has a record-breaking surplus in revenue of $2.6 billion. But rather than looking at that money as extra savings, Wodicka said it’s a sign that the government is underinvesting in its citizens.

“You can imagine lots of scenarios where the state might actually be underfunding things…. and that ends up giving them a surplus at the end of the year,” Wodicka said.

Youngkin has not yet specified where he plans to cut spending in order to offset his proposed tax cuts. He assumes the governor’s office on Jan. 15.