The other day, as I was cleaning out some clutter in my basement, I came across an old copy of The Washington Post featuring a story on the newly elected president, John F. Kennedy, a Democrat.
The story depicted a young president with new ideas. One of his ideas was even revolutionary. With the nation enjoying a growing economy and a healthy surplus as it entered the 1960s, Kennedy sought to return excess federal money to its original source by cutting taxes for middle-income families.
In his immortal words, a “rising tide lifts all the boats.”
That quip is now relevant in regard to the $2.6 billion state surplus that Gov. Ralph Northam disclosed to the Senate Finance Committee on Aug. 18. That staggering sum, which is 10% of our state General Fund budget, is extra cash the commonwealth is holding as of June 30. It is in addition to the $3.5 billion allocated by the General Assembly in its August special session and the $800 million discretionary fund that the assembly also left for the Northam administration — and the next governor — to spend in the next nine months as the commonwealth rises from COVID-19.
In sum, Virginia is holding a lot of cash. That raises two questions. First, is the surplus based on our tax structure? And, two, what do we do with these excess funds?
The answer is “yes” to the former. To the latter, I have a modest proposal … cut everyone’s taxes by increasing Virginia’s minimum standard deduction to the federal level of $25,000.
First, the systemic issue: In 2017, the U.S. Congress eliminated a number of deductions and exemptions from the federal tax code as part of the Tax Cuts and Jobs Act. It also slashed individual rates. Over the next two years, Virginia “conformed” to the federal law at least regarding exemptions and deductions, which left more taxable income on state returns. However, we didn’t reduce our tax rates — rather we gave taxpayers a one-time refund in 2019.
The net result is that Virginia now taxes a higher percentage of its citizens’ personal income by still charging the same rates. That has served as a back-door tax increase, which has led to a major surplus in FY21. It is great for the Senate Finance Committee, which has many spending priorities, but it is an increased cost on working families.
Expanding the minimum standard deduction to $25,000 per family (the federal standard) from $9,000 per family (our current threshold) would help all taxpayers. The greatest help would occur at the lowest income levels by removing small earners from the tax rolls. Incidentally, this reform should be popular with Republicans — it’s a tax cut, after all — as well as Democrats, since it disproportionately helps the working poor.
The critics will say, “We can’t afford it.” Of course we can.
Fully implementing this needed tax reform will cost approximately $1.4 billion annually, barely half of our systemic surplus. It will still leave the commonwealth fully able to meet its constitutional obligations regarding capital reserves, as well as fully funding a state budget that spends a record amount on K-12 education. Finally, it will not touch any of the federal funds, including the $800 million in discretionary funds, that are available to the governor for any contingencies.
Over the past year, our state government has allocated billions of funding to our citizens in the form of unemployment assistance, rental assistance and pandemic relief. As a state senator, I have voted for pretty much all of it. So why not vote for legislation that will allow working people to keep more of what they earned?
That’s what a John Kennedy would do. We should do so also.
Virginia Sen. Chap Petersen, a Democrat, represents the 34th District, which includes part of Fairfax County.