December 18, 2006

Virginia: Kaine Proposes Hiking Income Tax Threshold

Virginia Governor Tim Kaine is getting positive reviews for his proposal to increase the state's income tax "threshold" (that is, the amount of income you can earn before you start owing income tax). Under Kaine's plan, the amount single Virginians (and unmarried parents) could earn before owing income tax would increase from $7,000 to $12,000. And the threshold for married couples would increase from $14,000 to $24,000.

Without a doubt, this move would provide low-income singles with a tax break. Under current law, a single person earning just under $12,000 would pay about $100 in state income taxes in Virginia in 2006. The Kaine plan would zero out this person's income tax liability completely.

But there are a couple of flies in the ointment.

First, working families with children would actually get remarkably little from the Kaine proposal. In 2006, a married couple with 2 children, with $24,000 in wages, already doesn't owe Virginia income tax-- so they can't benefit from the Kaine proposal. The same is true for married couples with more than 2 children. Similarly, a single parent with one child would see their income tax threshold increase from $7,000 to $12,000 under the Kaine plan-- but a single mom can already earn $16,000 in wages in 2006 without owing any income tax at all. So this plan basically offers nothing to single parents whose income is all wages.

Second, if tax fairness is a problem in Virginia (and it certainly is), increasing the income tax threshold is nowhere near the most effective solution. The Virginia taxes that hit low-income working families the hardest are sales, excise and property taxes. Cutting these taxes for fixed-income families would provide much more meaningful relief, and would go a lot further toward making the Virginia tax system less unfair.

Third, the biggest beneficiaries from the Kaine plan might well be... middle-income seniors. The rules of Virginia's income tax threshold right now say that if your Virginia Adjusted Gross Income (AGI) is less than $14,000 for a married couple, you don't have to file a tax return. But Virginia already provides special tax breaks for seniors by completely exempting Social Security benefits, and allows an additional $12,000 tax exemption for each senior. So under current law, an elderly married couple with $57,999 of income (including, say, $20,000 of Social Security benefits), won't owe any Virginia income tax at all. ($20,000 of Social Security is excluded from Virginia AGI, as is $12,000 for each spouse, for a total of $44,000 exempt from AGI, which leaves this couple with a total AGI of $13,999-- just below the current $14,000 threshold.) The impact of the Kaine plan for seniors is basically to increase the no-tax threshold for this senior couple from $58,000 to $68,000-- hardly the low-end tax break that Kaine presumably has in mind.

This shouldn't be interpreted as a mean-spirited rant against Kaine's plan. The Governor's attention to the plight of low-income Virginians is admirable. And some of the objections we've raised here are technical, and can be fixed quite easily. But if Virginia lawmakers agree with the Governor, in the upcoming legislative session, that improving the fairness of Virginia's tax system is a priority, there are better ways of doing it.


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