Virginia's Highest Tax Bracket and the Call for Updates

Overview

• Virginia's highest state income tax bracket starts at $17,000, unchanged since 1990.
• Over the past three decades, median incomes have risen by 108%, leading to more income being taxed at 5.75%.
• This phenomenon is known as "bracket creep."

Impact of Bracket Creep

• Affects low- and middle-income earners most; they would benefit from inflation-adjusted tax brackets.
• If adjusted for inflation, the top bracket would start at $35,348, affecting state budget by $959 million.

State Tax Revenue and Income Inequality

• Virginia relies heavily on individual income taxes, which constituted 70% of the general fund revenue in 2021.
• Income inequality is rising: the wealthiest 1% accounted for 16% of total income in 2018, up from 11% in 1990.

Recent Changes and Proposals

• Recent bipartisan tax deal made the system more progressive by increasing the standard deduction and making the earned-income tax credit partially refundable.
• Effective tax rate changes for low-income filers show a decrease, making Virginia's tax code more progressive than average.

Proposals for Tax Code Adjustments

• Addressing Bracket Creep: Adjust brackets for inflation to prevent future bracket creep.
• Raising Taxes on High Earners: Proposals to introduce new tax brackets targeting the top 1% (incomes above $600,000).
• Potential Overhaul: Introduce six brackets instead of four, with varying rates, to improve progressivity.

Political and Economic Considerations

• Current political climate, led by Gov. Glenn Youngkin, favors tax cuts over raising taxes.
• Comparison with other states shows varied approaches; some lower-tax states are recovering better post-COVID-19.

Legislative and Future Debates

• Del. McNamara plans to reintroduce a bill for indexing tax brackets to inflation.
• Potential future debates may focus on a broader overhaul of the tax system.

Conclusion

• The JLARC report provides a foundation for future discussions on making Virginia's tax system fairer.
• Dialogue continues on the best methods to adjust tax brackets and rates to reflect current economic realities.