By A.J. Kaufman, Managing Editor
The main aspect of Gov. Glenn Youngkin’s proposed state budget involves reducing Virginia’s income tax rate while raising the sales tax. Reducing the former is unsurprising, since Youngkin has pushed the idea since he was a candidate in 2021; however, his proposal to raise the sales tax is not something the governor’s mentioned in the past.
Youngkin contends that a lower income tax makes Virginia competitive with other states, in order that the commonwealth is not greatly dependent on income tax. He’s not wrong. Virginia is far more dependent on income tax than most states, the source of 70% of its general fund revenues. Fewer than 20% of state revenues across the country come from income taxes. Tennessee gets none.
Though a late December budget concept is often a starting point for negotiations, the proposed sales tax increase is an unwelcome idea across Southwest Virginia, areas that helped get the governor elected. If the sales tax gets raised for everyone, the poorest would pay and fund Youngkin’s proposed income tax cut for wealthier residents, who often live in Northern Virginia. Some might deem that regressive.
While Democrats generally believe that those with the most money should pay the most, Republicans generally don’t, because they argue that income tax punishes success. Nearly all states lacking a personal income tax, including Tennessee, vote Republican these days. The states with the highest income tax support Democrats.
As the two major political parties realign, however, a more working-class base has begun supporting the GOP. Few states witness this geographical switch more than Virginia, as the Democratic vote has grown in the affluent suburbs near Washington D.C. and collapsed in Southwest.
Virginia’s top income tax rate of 5.75% is the same as neighboring Maryland’s. But Virginia is more typically compared to economic rival North Carolina, where the top income tax rate is below 5%. Tennessee, which would be the primary economic rival to Southwest Virginia, has no income tax. Virginia is tied for the second highest income tax rate of any state south of the Mason-Dixon Line. Nearly 30 states have a lower income tax rate than Virginia.
Youngkin points out that certain Southern states, including Tennessee, have been gaining population more rapidly than the commonwealth, frequently due to transplants. Virginia has been gaining population at a much slower rate. For a decade, Virginia has seen more people moving out than moving in; most of those have relocated to other Southern states. Is that because their taxes are lower? We can’t pry into people’s personal rationale, but a common consensus is that’s the reason.
Whereas the pros and cons of income tax can be disputed, it’s hardly debatable that raising the sales tax increases the tax burden on lower-income earners.
The argument in favor of sales taxes is that these are voluntary taxes based on choices we make. But then again, everyone needs shoes and water. Another argument in favor of sales taxes is that some will get paid by tourists passing through the state. That’s valid, but how much?
Politically, folks who supported Youngkin in Lee or Scott County will end up paying a higher percentage of their income on crackers and jeans than six-figure earners in Fairfax and Loudoun County.
“Perhaps if a sales tax base that provided for staples, like food and clothing, to be taxed at a lower level for some phase-in period, it may have more appeal,” Powell Valley National Bank President and CEO Leton Harding told the Business Journal. “With the split legislature and heavy Northern Virginia influence, I think the greater likelihood is for this to become a study bill — a legislative mechanism to allow those proposing something to claim victory while also providing opposing parties to negotiate.”
Tennessee lacks income tax in part because its sales tax is tied for the second highest in the country. Either way, if taxes really are a motivating factor in people moving from one state to another, that is due to lower income taxes, not sales tax, because many high-growth states have higher sales taxes than the commonwealth.
Some parts of Virginia, like the Southwest, depend more on state spending than others. The preponderance of funding for rural school systems emanates from the state government. If less revenue arrives in Richmond, there could be less money to fund schools in Bristol and Abingdon. If we reduce the income tax, and raise the sales tax, does that make it likelier that more people and employers will relocate to Gate City and Pennington Gap? Or does it mean that with less money for services, people and jobs may go elsewhere?
Rural Republicans may be concerned about absorbing a higher sales tax. They surely realize the prosperous progressive denizens of Alexandria will be fine. This will only augment the sociocultural divide in Virginia.
The two-year spending plan is dubbed “the unleashing opportunity budget.” It also includes, among much else, $450 million to develop sites for economic development projects, $100 million for teacher retention bonuses, and $100 million for Richmond to help stop the city’s sewer system from overflowing.