By Kenric Ward | Watchdog.org Virginia Bureau
RICHMOND — Virginians earning $17,000 a year pay the same maximum state income tax rate that applies to millionaires and billionaires.
Though $17,000 is barely above minimum wage andthe poverty level, Virginia’s outdated tax formula keeps that figure as the threshold for top-tier earners.
Since the tax tables were last revised in 1990, the ravages of inflation have roughly halved the dollar’s buying power. According to the Bureau of Labor Statistics, $17,000 in 1990 equals $34,452 today.
But in their ongoing quest for tax revenue, state politicians have blown off the economic realities at the public’s expense. By neglecting to index for inflation, as is done in the federal tax code, Richmond effectively pulls more “poverty level” income into its coffers each year, economists say.
“This is bracket creep,” said Scott Drenkard, an economist at the Washington, D.C.-based Tax Foundation. “Taxpayers have slowly become subject to higher tax brackets because those brackets have not been inflation adjusted.”
State Delegate Barbara Comstock said she hopes to bring Virginia into the21st century – or at least the latter part of the 20th century. Her HB 1930 proposal would annually index the state’s tax tiers, which top out at 5.75 percent.
The McLean Republican may have support from the other side of the aisle.
“Many in our caucus believe that we should undertake a thorough review of the tax system in Virginia, including where the top rates should begin,” said David Brown, assistant to House Minority Leader David Toscano, D-Charlottesville.
Another approach has been offered by Sen. John Watkins, R-Midlothian, who proposes to cut tax rates in the lower income tiers. But Watkins’ SB 717 would retain the 5.75 percent top bracket at $17,000.
“In my opinion, Virginia’s current brackets are ludicrous,” said John Knapp, senior economist at UVa’s Weldon Cooper Center for Public Service.
Former Virginia Commonwealth University economics professor John Bowman has long concurred.
“The current tax structure is outdated and flawed,” Bowman wrote … back in 2002.
Back then, Bowman reported that the individual income tax was the source of “over half of all state taxes.” It remains the No. 1 source today, as officials have been loathe to tackle bracket creep.
Bowman pressed for reform 11 years ago, when he declared that Virginia’s tax formulas “need significant revision.”
“There’s an increasing share of poverty income in the tax base,” he wrote. That percentage has only grown in the intervening decade.
Exacerbating the trend, Bowman noted that Virginia’s tax code is larded with special exemptions and credits that further undermine equity.
In addition to shielding military pay, lottery winnings (up to $600) and even “victims of Nazi persecution,” the code could pick up more deductions this year. One bill pending at the General Assembly would enable motorists to write off road tolls.
Bowman said such piecemeal — albeit politically popular — policies just make the tax field even more unlevel.
In 2000, the professor recommended curtailing the income exclusion enjoyed by Virginians 60 and older.
“That was partially adopted,” he recalled.
“Over time — a good bit of time — the change will produce greater equity, but for now, it leaves the full reduction for those born before a certain date while taking it away entirely for those born after that date.
“So there is significant inequity within the elderly group as a result.”
Bowman said the best reform would get poverty-level income out of Virginia’s income-tax trough.
“Rather than fixing on some basically arbitrary date and indexing from that point forward, I would strive to set the exclusions from the income-tax base (personal exemptions plus standard deduction) to approximate poverty thresholds for various family sizes,” he said.
Tax Foundation data show that Virginia is not alone. Top tax brackets kick in at relatively low income levels in several states.
Drenkard said he would prefer “a flat tax with a personal exemption.”
“This would promote transparency, simplicity and neutral treatment of income for the most part,” he said.
In Louisiana, Gov. Bobby Jindal wants to scrap his state’s income tax altogether.
Calling the income tax an impediment to economic development, the Republican governor calls for replacing personal and corporate income levies by raising the 4-percent sales tax – likely to 7 percent.
Delegate Comstock did not respond to repeated requests to be interviewed for this article. House Speaker Bill Howell also declined to comment.
Contact Kenric Ward at [email protected] or at (571) 319-9824. @Kenricward