TAX NEWS - 2010

Virginia Tax: Income tax burden shifts to higher-income Virginians

While high-income Virginians are paying proportionally more income tax than a decade ago, analysts warn income tax alone gives an incomplete picture of how the state's tax burden is spread out.

Back in 1998, the eight percent of Virginians earning more than $100,000 paid 47 percent of the total income tax liability, according to figures from the Virginia Department of Taxation. In 2007, the most recent year for which numbers were available, 15 percent of Virginians earned at least six figures and paid 64 percent of the state's income taxes.

The shift has brought Virginia to a breaking point where extracting more tax dollars from the wealthy could become hurtful to the state economy, says state Sen. Walter Stosch, R-Glen Allen.

"We're now in a position where relatively few of the people pay the tax burden in Virginia," Stosch said. "If it becomes oppressive, if higher income people use that as a reason not to expand business, that hurts everyone."

At the other end of the spectrum, the 73 percent of Virginians earning less than $50,000 paid 24 percent of the state's income tax burden in 1998. Nine years later, 63 percent of Virginians fit that category and paid 13 percent of the income tax.

Chiefly responsible for the shift was the 2004 tax package passed under former Gov. Mark Warner, which aimed to ease the income tax burden on lower-income earners. The package expanded a tax credit for earners at or below the federal poverty level, raised the personal tax credit and based an age exemption for those older than 64 on income level.

Additionally, lawmakers in 2004, and then again in 2007, raised the filing threshold indicating how much someone can earn before they must pay income taxes. Now, those singles earning less than $11,650 and married couples earning less than $23,300 are exempt. Before 2004, the threshold was $5,000 for singles and $8,000 for married couples.

Personal income tax relief for the low-income has been a trend this decade, said Mark Haskins, policy development director for the Virginia Department of Taxation.

"There's been a movement to exclude low-income from the tax banks," Haskins said.

But Haskins warns that many other factors are in play, with one of the biggest being inflation. A $100,000 income in 1998 had the same purchasing power as $127,000 in 2007.

And despite the shift, Virginia continues to rank among states with flatter tax structures. According to a November 2009 study by the Institute on Taxation and Economic Policy, only eight of the 42 states with broad-based income taxes have more regressive systems, meaning that the percentage of income paid in taxes declines as income increases.

That's because the trend nationwide has been to shift more of the income tax burden to the upper end of the income scale, mainly by approving earned income tax credits for lower-income earners, says Matt Gardner, executive director of the Washington, D.C.-based group that advocates for tax fairness.

"Virginia did something on the margin for low-income earners, but at the same time the nationwide story happening at the same time was that more and more states are enacting earned income tax credit," Gardner said.

And income taxes make up just part of the picture of how Virginia's tax burden is distributed. Earners in the lowest income bracket pay 8.8 percent of their income in taxes, while earners in the highest bracket pay 6.9 percent, according to another study by the ITEP.

To Gardner, the discrepancy adds up to an unfair tax system.

"If you ask the question, 'is Virginia a high-tax state,' the answer for upper-income families is almost certainly no, and the answer for low-income families is almost certainly yes," Gardner said.

While the poor were favored by income tax changes in the 2004 tax package, the legislation also raised the cigarette tax—a revenue said to disproportionately affect lower-income earners. And Virginia is joined by only Delaware in offering an earned income tax credit that is nonrefundable. That means that those earning less than the filing threshold–$11,650 for singles and $23,300 for married couples—aren't eligible for the credit.

It's misguided to use solely the income tax structure to determine how much lower-income earners are being taxed, said Michael Cassidy, director of the Commonwealth Institute for Fiscal Analysis, a nonprofit group that favors progressive taxation.

"There's a strong argument to make that high income households are being taxed less," Cassidy said. "I think it's a troubling development that people like the governor and general assembly have a misperception that somehow the tax burden is too heavy on people making over $100,000 a year."