click link below for full story.
http://archive.virginia-organizing.org/articles/what_impact.php
Virginia’s tax system is regressive. Regressive taxes put a high burden on poor and nearly poor families.
What’s the impact of taxes on low-income families in Virginia? On September 13, Bob Zahradnik of the Center on Budget and Policy Priorities made a presentation to a group in Arlington studying the effects of Virginia’s economy on low-income Virginians. This article is an adaptation of that presentation.
Two major flaws in the Virginia tax system hurt low-income families in our state.First, the poorer you are, the higher your tax burden. Second, the system is unable to fully capture new growth in the economy.budget in deficit as that growth puts stress on public services.
Virginia’s tax system is regressive The definition of aregressive tax is when low-income families pay a larger percentage of their income in taxes than high-income families. This means that poor families, who already struggle to cover food, clothing and shelter, must then pay what, for them, is a significant tax bill. For wealthy families, whose necessities are covered and then some, the tax burden is hardly felt in real-life terms. Under the basic tax principle of fairness, sometimes called “vertical equity,” people with a greater ability to pay should pay more.
Source: Institute on Taxation and Economic Policy
Microsimulation Tax Model, July 5, 2000.
Note: Assumes fully phased-in car tax relief and grocery tex reduction.
Virginia’s taxes are regressive, in part, because about a third of the tax revenue — 29 percent — comes from the regressive sales tax. Low-income families spend a higher percentage of their income on the consumption of taxable goods like food, clothing and other basic necessities. Higher income families are able to save and invest more, thus increasing their wealth.
Virginia’s personal income tax, which also raises about a third of the revenue — 33 percent — is not very progressive. Our top tax bracket begins at $17,000, so our system resembles a flat tax. We also have low personal and dependent exemptions ($800) and a low standard deduction ($5,000 for a married couple). As a result, the income tax does not sufficiently offset the regressivity of the sales tax.
Virginia’s state and local property tax, which is the last third of total revenue — 29 percent — is also regressive. Property taxes on housing hurt poor folks because low-income households spend a larger share of their income on housing than wealthy households. For retired people living on a fixed income, the tax assessments on their homes may grow faster than their income.
Regressive taxes put a high burden on poor and nearly poor families. In 2000, the lowest fifth of the Virginia population paid 10.4 percent of their income in state and local taxes. In contrast, the top one percent paid only 4.9 percent.
Among the 42 states with income taxes, Virginia levies the fourth highest income tax, $483, on single-parent families of three with income of 125 percent of the poverty level. Only Alabama, Hawaii, and Kentucky levy higher. Such families would be entirely exempt from the income tax in 18 states and 11 provide refundable tax credits to them.
Virginia can make its tax system more progressive by adopting a refundable Earned Income Tax Credit (EITC) modeled on the federal credit and by re-working its obsolete personal income tax.
An EITC would benefit lower-income, working families by returning some or all of their tax payments, based on a sliding scale. Under a refundable EITC, working families would receive a refund check if the size of their tax credit exceeds their tax bill, effectively lifting all working families out of poverty in Virginia. With the current, non-refundable credit, families cannot receive back more than they paid in income tax, ignoring the significant amount they pay in sales tax.
The personal income tax could be improved dramatically with three changes. First, revise the rates and brackets so that Virginians pay 5 percent on the first $35,000 of income, 5.5 percent on the next $30,000, and 6 percent on income above $65,000. Second, eliminate the old-age deduction, which goes to everyone over 62 whether they are rich or poor. Finally, increase the standard deduction and personal and dependent exemptions, which would improve the fairness of the tax for everyone and effectively remove sub-poverty income from the tax base.
Virginia’s tax system needs more revenue to cover its deficit Virginia is a Low-Tax State -- There is Room to Raise Taxes
State and Local Taxes as a % of Personal Income (1999)
Source: Census Government Finance Data and U.S. Bureau of Economic Analysis.
Due to the size of the of the budget shortfall — $1.5 billion — it is ridiculous to approach tax reform with a demand for revenue neutrality, which refuses to consider raising new funds. As the chart shows, Virginia is a low-tax state and has room to reasonably raise taxes.
All options should be on the table, especially those that also make the system more progressive at the same time. First, Virginia should retain its estate tax. Current federal policy erases the tax by 2010, but Virginia does not have to follow suit. It would result in the loss of substantial revenue: $68.3 million in 2004, $108.1 million in 2004, and $145.3 million in 2006. Also, the estate tax is very progressive, affecting only relatively wealthy estates upon the death of their owner.
Second, we should revitalize the corporate income tax. The amount which corporations pay in taxes has dropped dramatically over the years in comparison to the personal income tax, as the chart shows. Virginia should increase the tax rate from 6 to 7 percent, and it should also close the loopholes that allow crafty corporations to transfer their income to low-tax states.
Third, reform of the personal income tax could be designed to bring in dramatically more money at little cost to the individual taxpayer. Rates on upper tax brackets could be boosted by a quarter to a half percent, or a temporary top bracket could be added on to the structure to capture more revenue at higher incomes. A trigger could be built in so that the bracket would be removed when the budget picture improves.
Corporations are Not Paying Their Fair Share of Taxes in Virginia
Corporate Taxes as a % of Personal Income (1999)
Source: Census Government Finance Data and U.S. Bureau of Economic Analysis.
Fourth, Virginia should broaden its sales tax. We could easily tax amusements, services and repairs that are currently exempt. For example, taxing the services of accountants could produce $23.6 million, that of engineers $108.4 million, and that of lawyers $71.3 million. There are many services primarily used by higher income taxpayers that would have little impact on poor families.
Finally, we should increase the tobacco tax. Virginia has the lowest tax in the country by far at 2.5 cents per pack. The U.S. median tax rate on cigarettes is 41 cents per pack. Cigarette taxes are quite regressive and grow slowly over time as people choose to stop smoking rather than pay more. But a reasonable cigarette tax increase as part of a package which reduces taxes on lower-income families in other areas would still make sense.
703 Concord Avenue
Charlottesville, VA 22903-5208
Phone: (434) 984-4655 Fax: (434) 984-2803
Two major flaws in the Virginia tax system hurt low-income families in our state.First, the poorer you are, the higher your tax burden. Second, the system is unable to fully capture new growth in the economy.budget in deficit as that growth puts stress on public services.
Virginia’s tax system is regressive The definition of aregressive tax is when low-income families pay a larger percentage of their income in taxes than high-income families. This means that poor families, who already struggle to cover food, clothing and shelter, must then pay what, for them, is a significant tax bill. For wealthy families, whose necessities are covered and then some, the tax burden is hardly felt in real-life terms. Under the basic tax principle of fairness, sometimes called “vertical equity,” people with a greater ability to pay should pay more.
Source: Institute on Taxation and Economic Policy
Microsimulation Tax Model, July 5, 2000.
Note: Assumes fully phased-in car tax relief and grocery tex reduction.
Virginia’s taxes are regressive, in part, because about a third of the tax revenue — 29 percent — comes from the regressive sales tax. Low-income families spend a higher percentage of their income on the consumption of taxable goods like food, clothing and other basic necessities. Higher income families are able to save and invest more, thus increasing their wealth.
Virginia’s personal income tax, which also raises about a third of the revenue — 33 percent — is not very progressive. Our top tax bracket begins at $17,000, so our system resembles a flat tax. We also have low personal and dependent exemptions ($800) and a low standard deduction ($5,000 for a married couple). As a result, the income tax does not sufficiently offset the regressivity of the sales tax.
Virginia’s state and local property tax, which is the last third of total revenue — 29 percent — is also regressive. Property taxes on housing hurt poor folks because low-income households spend a larger share of their income on housing than wealthy households. For retired people living on a fixed income, the tax assessments on their homes may grow faster than their income.
Regressive taxes put a high burden on poor and nearly poor families. In 2000, the lowest fifth of the Virginia population paid 10.4 percent of their income in state and local taxes. In contrast, the top one percent paid only 4.9 percent.
Among the 42 states with income taxes, Virginia levies the fourth highest income tax, $483, on single-parent families of three with income of 125 percent of the poverty level. Only Alabama, Hawaii, and Kentucky levy higher. Such families would be entirely exempt from the income tax in 18 states and 11 provide refundable tax credits to them.
Virginia can make its tax system more progressive by adopting a refundable Earned Income Tax Credit (EITC) modeled on the federal credit and by re-working its obsolete personal income tax.
An EITC would benefit lower-income, working families by returning some or all of their tax payments, based on a sliding scale. Under a refundable EITC, working families would receive a refund check if the size of their tax credit exceeds their tax bill, effectively lifting all working families out of poverty in Virginia. With the current, non-refundable credit, families cannot receive back more than they paid in income tax, ignoring the significant amount they pay in sales tax.
The personal income tax could be improved dramatically with three changes. First, revise the rates and brackets so that Virginians pay 5 percent on the first $35,000 of income, 5.5 percent on the next $30,000, and 6 percent on income above $65,000. Second, eliminate the old-age deduction, which goes to everyone over 62 whether they are rich or poor. Finally, increase the standard deduction and personal and dependent exemptions, which would improve the fairness of the tax for everyone and effectively remove sub-poverty income from the tax base.
Virginia’s tax system needs more revenue to cover its deficit Virginia is a Low-Tax State -- There is Room to Raise Taxes
State and Local Taxes as a % of Personal Income (1999)
Source: Census Government Finance Data and U.S. Bureau of Economic Analysis.
Due to the size of the of the budget shortfall — $1.5 billion — it is ridiculous to approach tax reform with a demand for revenue neutrality, which refuses to consider raising new funds. As the chart shows, Virginia is a low-tax state and has room to reasonably raise taxes.
All options should be on the table, especially those that also make the system more progressive at the same time. First, Virginia should retain its estate tax. Current federal policy erases the tax by 2010, but Virginia does not have to follow suit. It would result in the loss of substantial revenue: $68.3 million in 2004, $108.1 million in 2004, and $145.3 million in 2006. Also, the estate tax is very progressive, affecting only relatively wealthy estates upon the death of their owner.
Second, we should revitalize the corporate income tax. The amount which corporations pay in taxes has dropped dramatically over the years in comparison to the personal income tax, as the chart shows. Virginia should increase the tax rate from 6 to 7 percent, and it should also close the loopholes that allow crafty corporations to transfer their income to low-tax states.
Third, reform of the personal income tax could be designed to bring in dramatically more money at little cost to the individual taxpayer. Rates on upper tax brackets could be boosted by a quarter to a half percent, or a temporary top bracket could be added on to the structure to capture more revenue at higher incomes. A trigger could be built in so that the bracket would be removed when the budget picture improves.
Corporations are Not Paying Their Fair Share of Taxes in Virginia
Corporate Taxes as a % of Personal Income (1999)
Source: Census Government Finance Data and U.S. Bureau of Economic Analysis.
Fourth, Virginia should broaden its sales tax. We could easily tax amusements, services and repairs that are currently exempt. For example, taxing the services of accountants could produce $23.6 million, that of engineers $108.4 million, and that of lawyers $71.3 million. There are many services primarily used by higher income taxpayers that would have little impact on poor families.
Finally, we should increase the tobacco tax. Virginia has the lowest tax in the country by far at 2.5 cents per pack. The U.S. median tax rate on cigarettes is 41 cents per pack. Cigarette taxes are quite regressive and grow slowly over time as people choose to stop smoking rather than pay more. But a reasonable cigarette tax increase as part of a package which reduces taxes on lower-income families in other areas would still make sense.
703 Concord Avenue
Charlottesville, VA 22903-5208
Phone: (434) 984-4655 Fax: (434) 984-2803
