My Plan to Fix Our Tax System So We Can Invest in the Middle and Working Class
It is long past time to replace Republican tax plans that suffocate real growth in Virginia.
Vice President Joe Biden always says, “Show me your budget, and I’ll tell you what you value.” He was right, and as governor, I won’t ever forget this lesson. Our tax code is about more than dollars and cents; it’s a reflection of our values. Reforming Virginia’s tax system is a crucial first step to reducing inequality, growing our small businesses, and investing in Virginia’s future. We need a tax code that is fair, focused, and most importantly, lays the foundation for a generation of authentic, middle class driven economic growth. In light of President Trump’s announcement that he will dramatically reduce taxes for big corporations and the wealthy, it is even more important that Virginia prioritize economic security for working families, a level playing field for small business, and a fair tax code for the middle class.
The middle class in Virginia has not seen a real raise in two decades. This is the inevitable result of a Republican legislature in Richmond that every year insists on an anti-growth, pro-consolidation economic theory that preserves tax cuts and loopholes for the biggest corporations and costs Virginia families thousands of dollars per year. Their repeatedly debunked theory is to choke the middle and working class to ensure tax cuts and loopholes for the biggest companies and wealthiest few. It has suffocated pro-growth investments in infrastructure, in higher education, and in workforce development. These Republicans have pursued a tax-and-spend approach that wastes billions of dollars on prisons and incarceration instead of using our limited public dollars to invest in human capital. Worse yet, they’ve made the middle class pay a hidden tax of higher health insurance premiums for their ideological misadventures on Medicaid expansion.
The middle class in Virginia has not seen a real raise in two decades.
Not only does my tax plan eliminate loopholes and fight back against economic consolidation at the top, but it also helps pay for growth-oriented programs that benefit every Virginian. The priorities outlined here will fund fiscally sound investments in the middle and working class that pay for themselves in the long-term. These reforms also reduce the burden on working families and hold corporations accountable when they try to avoid taxes.
It’s also important to put this tax plan in the context of Virginia’s past efforts to invest in the middle class. In 2004, Governor Mark Warner led a bipartisan effort to raise the $1.4 billion in revenues necessary to invest in transportation and education. Even Governor Bob McDonnell understood that economic growth was at risk if Virginia didn’t pass his $1.25 billion gas tax increase. These were sizable but pragmatic and ultimately affordable investments that would have otherwise caused median incomes to stall out. We stand at a similar precipice today as President Trump’s threats to significantly slash middle class spending will cause further stagnation if they come to fruition.
Let me be clear: Virginia’s badly outdated tax system contributes to runaway inequality, corporate consolidation, and concentrated wealth and income at the top. Virginia’s income tax has not been seriously reformed since 1987, and as a result, tax brackets not adjusted for inflation have allowed more of the tax burden to fall on the middle class. Making matters worse, loopholes in the corporate tax allow too many corporations to shift profits out of Virginia, often avoiding paying the tax entirely.
If Democrats lose in November, this inequality in the tax code will get even worse. Republican frontrunner Ed Gillespie (who spent the 2004 election championing the disastrous Bush tax cuts) has proposed another massive, unfunded handout to the wealthiest that will lead to cuts in services working and middle class families count on. For the $1.3 billion Gillespie redistributes from Main Street Virginians to the wealthiest few, Virginia could fund universal pre-K, two years of free community college, paid family leave, and other investments outlined in my working families plan. It’s time we finally put to rest the myth of trickle-down economics and reject the Bush/Trump/Gillespie approach of cutting taxes for the wealthy once and for all.
A More Progressive Tax Code for Virginia
Asking the Wealthiest Virginians to Invest Their Fair Share in Growth
In Virginia, someone making $18,000,000 a year is in the same income tax bracket as a full time worker who earns $18,000 in taxable income. Combined with the rest of Virginia’s tax code, poorer Virginians pay a larger share of their income in taxes than the wealthy. In fact, from 2009 to 2013, the richest 1% of Virginians captured all (that’s right, all) of the income growth in Virginia.
Making Virginia’s tax code more progressive will help us invest in schools, career and workforce development, and social mobility to reduce inequality in our Commonwealth. That’s why I propose gradually raising income tax rates 1 percentage point on those making more than $500,000 and 1.5 percentage points on those making more than $1,000,000. I will pair this change in rates with a change to make Virginia’s Earned Income Tax Credit (EITC) refundable.
For context, any Virginian making more than $406,000 in income is in the top 1% of earners, and the average member of the 1% makes $988,000. Making more than $5,000,000 puts a Virginian close to the 0.1% mark. As a result, well over 99% of Virginians will see no tax change from this reform.
Reducing Taxes for Middle Class Families
Too many working and middle class families in Virginia spend more on childcare than they do on housing. Center-based childcare often costs more than $1000 a month, as two-thirds of Virginia children under age 6 have all available parents in the workforce. Making childcare more affordable is essential to economic security for Virginia families in a modern economy. As governor, I will push for a $500 refundable childcare tax credit to provide direct relief to working families.
Rewarding Work by Making the Earned Income Tax Credit (EITC) Refundable
Unlike most states, Virginia fails to properly incentivize work by making the EITC non-refundable. According to the Commonwealth Institute, low-income Virginia households spend roughly 9 percent of their income on state and local taxes, while high income households pay 5 percent. It’s time to make the EITC fully refundable to help working families offset the costs of transportation and childcare.
Reducing Gender Inequality in the Tax Code
Women make up the majority of low-wage workers, who will disproportionately benefit from making the EITC refundable and raising the minimum wage. However, those policy changes do nothing to address the other aspects of Virginia’s tax code that continue to perpetrate gender inequality.
With a regressive tax code that relies more heavily on taxing goods than services and disproportionately burdens working families, women end up devoting larger portions of their income to state taxes than men do. Further, there are specific taxes that apply only to women. For example, while nearly 150 services are tax exempt, women are charged the full sales tax for tampons and sanitary napkins. As Governor, I will end the tampon tax and move towards a creating a tax code that is more fair to women.
Ending Special Exemptions That Benefit the Wealthy
For the average Virginian, sales taxes are a serious expense. That’s because Virginia taxes goods like groceries and clothing but gives broad exemptions to services that are typically used by the wealthiest Virginians. This rigs the tax code against working families and skews the burden away from the rich.
This isn’t a recent discovery — sales tax reform is long overdue. A non-partisan commission in Virginia in 2001 recommended closing this gap between goods and services. Simply removing the carveout for high-end services — while ensuring small businesses and everyday consumers are protected — would restore enough revenue to pay for debt-free community college or trade school for almost all Virginians.
Reforming our Corporate Tax Code
Corporate tax reform will ensure that Virginia businesses have the trained workforce and public infrastructure necessary to support robust growth. These reforms also give small businesses a fair shot to compete on a level playing to drive growth.
Closing the “Reporting” Loophole
Right now, large corporations with operations across multiple states can avoid taxes by artificially shifting their profits to low-tax or no-tax states. Many corporations do this by reporting the profits of their subsidiaries separately. One way to address this kind of tax avoidance is through “combined reporting,” which requires multistate corporations to account for all of their subsidiaries on a combined basis, so that they can’t make income effectively disappear to low-tax or no-tax states. Virginia should join the 25 states (and D.C.) and adopt combined reporting. This common sense reform — with explicit protections for small businesses — will generate over $100 million in revenue a year and could fund a massive expansion of early childhood education in Virginia.
Creating a Minimum Tax Floor for the Most Profitable Corporations
Over 60% of Virginia’s corporations pay no corporate taxes at all. In downturns, when companies may have losses, that’s to be expected, but we see this “pay no tax” trend even when business is booming and corporate profits are rising. I will push for a minimum corporate floor that exempts small businesses but makes sure big, profitable companies aren’t gaming the system to avoid taxes entirely.
Funding Our Progressive Priorities
Cutting Wasteful Spending, Tax Credits, and Cash Grants
Even well-managed states have room in their budgets to find savings. In Virginia, Republicans in the General Assembly routinely push cash grants and tax credits that disproportionately (and inefficiently) favor their preferred interests and then claim fiscal impoverishment when asked about increased funding for education, health care, and workforce development. This has to stop.
I will always look for cuts in the budget, and unlike Ed Gillespie (R-K Street), who hasn’t named a single spending cut he would support, I’m not afraid to advocate specific cuts:
- Reform the State Lottery — administrative costs have risen to nearly $100 million, and the more we divert away from bloated advertising budgets, the more can go to fund education spending.
- Stop Paying High External Investment Fees — Every year, the Virginia Retirement System spends an estimated $372 million on “management fees.” Increasingly, states are learning that high fee investment plans don’t always perform better than low-fee, indexed approaches once the cost of these fees are taken into account. I will move toward reduced fee investment strategies, increasing transparency in how funds are invested, and reinvesting any savings back into funding Virginia’s pension plans.
- Reform Virginia’s Net Operating Loss Carryback System: Virginia is in the minority of states that allows businesses to deduct losses on past tax returns and generate a new tax refund. While this system helps small businesses weather tough times, it’s not apparent that large, otherwise successful companies truly need the help. I will reform this deduction to specifically benefit small business while generating savings for taxpayers.
- Phase out the Airline Common Carrier Exemption — This is another tax credit that mostly goes to big airlines. Virginia’s audit and review commission has questioned its effectiveness and noted it rarely promotes greater airline equipment sales. We should reinvest this money in workforce development, primarily in the aviation industry.
- End Pension Spiking By Elected Officials — Too often, we see state politicians of all political stripes influenced by the prospect of a big bump in their pensions if they leave office and take a high-ranking position elsewhere in state and local government. This creates perverse incentives to take back-room deals to leave office or switch parties. Let’s stop playing this game and save taxpayers some money at the same time.
Creating a “$100 Million Savings Task Force”
Virginia’s review and audit commission has done great work identifying ineffective and wasteful tax credits, but now we need to take action. I will appoint a task force with a mandate to identify $100 million in spending reforms that will be introduced alongside the Governor’s budget. This will ensure that we are investing taxpayer dollars responsibly.
Shining a Light on the Line-items of Public Budgets
Right now, it’s impossible for most Virginians to understand how taxpayer money is being spent. Topline budget numbers cloak information that should be public and is vital to assessing the value of government spending. I will support making these line-items publicly available, but delaying their release by one year in order to give departments some measure of independence in developing their budgets.