Youngkin’s budget proposal would cut income taxes while raising sales tax

RICHMOND — Gov. Glenn Youngkin unveiled a two-year state budget proposal Wednesday that would reduce income taxes while simultaneously raising sales tax and expanding the state’s tax base.

“The heart of this budget focuses on the key investments that we must make as a commonwealth in order to unleash opportunity,” said Youngkin, speaking before a joint meeting of the Senate and House finance committees.

The Republican governor called for a 12% cut to income taxes across all income brackets. He said this would provide $400 million in tax relief in fiscal year 2025 and just under $600 million in 2026.

Youngkin said this would discourage residents from seeking greener pastures elsewhere.

“We are still exporting Virginians,” he said. “In stark contrast, North Carolina has gained nearly 70,000 people per year for 10 straight years …This is a major, major step toward competing.”

The top income tax bracket in the state, for anyone who makes over $17,000, would drop from 5.75% to 5.1%. Other income brackets would see the following reductions: Taxes for $0-$3,000 (2% to 1.75%); $3,000-$5,000 (3% to 2.65%); $5,000-$17,000 (5% to 4.40%). The state’s income tax brackets have remained the same since 1990.

To offset lost funding from the income tax cut, Youngkin said he would close the “big tech tax loophole” on digital goods and include those products as part of the sales and use tax base.

“Virginia has always taxed goods and over the last decade the definition of goods has evolved to new economy goods like software packets and digital downloads, streaming music and videos and cloud storage,” he said, adding the state currently doesn’t tax any of those products.

The budget proposal would also raise the state sales tax from 4.3% to 5.2%. Localities also levy their own sales tax, which brings the total tax rate up as high as 7% in some parts of the state.

“This will diversify our tax base and, when combined with closing the tech tax loophole, meaningfully offset the cost of the 12% across the board reduction in personal income taxes,” said Youngkin.

The governor further called on the General Assembly to help him permanently eliminate the “hated” locally-imposed car tax. He said it would be a complex, but worthwhile, endeavor.

“I believe it can be done but only with full cooperation from Democrats and Republicans, House and Senate members and local and state leaders,” he said, adding it could be replaced with a further increase in local sales tax.

“The car tax belongs in the trash can, not in your mailbox,” Youngkin added.

Personal property tax rates on vehicles vary from city to city. Vehicle assessments spiked following the coronavirus pandemic, as supply chain issues in the auto industry caused car values to soar. Some Hampton Roads cities provided personal property tax relief this year to reduce the burden on residents.

Following Youngkin’s budget presentation, Sen. John Edwards, D-Roanoke, raised concerns that the state didn’t have the authority to abolish the local car tax.

“It’s a constitutional issue,” he said, adding he believed the General Assembly would need to amend the constitution before it could proceed with the proposal.

The governor previously announced other policy initiatives he wants to fund through the budget plan, including $448 million annually to bolster child care, $500 million for conservation and flood mitigation efforts, and $500 million for mental health initiatives. He also wants to allot $150 million to modernize the state’s information technology systems to improve cybersecurity.

After Youngkin departed, Virginia Secretary of Finance Stephen Cummings told legislators the governor’s proposal took into account a “mild” recession expected to begin in the fourth quarter of fiscal year 2024.

He said there were several factors to keep in mind, including the escalating conflict in the Middle East and a potential federal government shutdown in January or February.

“We continue to maintain our posture of having a cautious outlook,” Cummings said.

The budget must be approved by the General Assembly. Democrats will control both chambers when it convenes on Jan. 10.

Sen. Louise Lucas, the incoming chair for the Senate Finance and Appropriations Committee, told The Virginian-Pilot she wasn’t impressed with the governor’s budget plan.

“The thing that was most concerning to me was the car tax,” said Lucas, D-Portsmouth. “We are heading to a recession, so how are you going to talk about cutting the car tax? I have been through that before with (Gov. Jim) Gilmore.”

Gilmore, a former Virginia governor who served from from 1998 to 2002, made an infamous push to repeal the car tax during his term.

House Speaker-designee Don Scott also criticized the proposal in a news release, arguing that lowering taxes for wealthy residents while raising the state sales tax would shift the burden to those who could least afford it.

Del. Barry Knight, the current chair of the House Appropriations Committee, gave it a better review.

“I think it’s a good proposal, but like any proposal, it’s a proposal,” said Knight, R-Virginia Beach. “Every governor’s budget is put out there and then we take it and go through it from there. But I think this is a very good start.”

Katie King, katie.king@virginiamedia.com