RICHMOND, Va. (WRIC) – A new tax credit is expected to put hundreds of dollars back in the pockets of some Virginians.
Legislators included a partially refundable earned income tax credit (EITC) in the state budget compromise that Governor Glenn Youngkin is considering.
The proposal was not part of the tax cuts package backed by Youngkin but, at least so far, he has not announced any plans to remove it from the deal.
What is the earned income tax credit?
The Earned Income Tax Credit (EITC) is tax relief for low to moderate income workers. It helps reduce or eliminate the amount of state and federal taxes owed by an individual or family.
Ashley Kenneth, president and CEO of the Commonwealth Institute, said about 600,000 Virginians are getting the federal EITC and the majority are expected to take the new state-level option.
“For more than a decade, we’ve been fighting to make our state-level tax code fairer, and that’s why this is such an important achievement,” Kenneth said.
What’s changing in Virginia?
Lawmakers just passed a spending plan that should make the state’s EITC partially reimbursable.
Kenneth said at least 25 states and Washington DC are already doing something similar.
The change generally increases the amount of money eligible Virginians will receive in their refund after filing state taxes.
Here is an example. Let’s say a family is entitled to a $1,000 credit but only owes $800 in tax. Currently, the state would keep the $200 difference. With a refundable credit, the Commonwealth would return $200 to the taxpayer.
How much will each get in return?
Kenneth said it’s hard to say exactly how much each person will receive as a result of this change. She said the calculation involves a formula that takes into account income, marital status and the number of children in a family.
In general, Kenneth said, “low-income working families will now receive hundreds of dollars more at tax time than before.”
Kenneth called it the biggest change in the budget trade-off for low-income Virginians who, in some cases, may not be earning enough money to qualify for other recently enacted tax cutsincluding one-time tax reliefs and an increased standard deduction.
When will the boost start and end?
If Youngkin accepts the plan as passed, Kenneth said the policy change should take effect July 1 along with the rest of the budget.
However, Kenneth said eligible Virginians won’t see the extra money until spring 2023, when they receive refunds for the 2022 tax year.
Those who meet the criteria will benefit each year at least until the 2025 tax year.
Additional General Assembly approval would be required to extend the policy thereafter.
Why didn’t this happen before?
Budget negotiators had an unusually large amount of money at their disposal when crafting the two-year spending plan, paving the way for a bipartisan compromise that cut taxes and increased investment in basic government services.
However, making the EITC refundable has historically faced opposition from Republicans in the General Assembly, who have prioritized other tax code changes and argued that the increase for Virginians to low income be at the expense of the middle class.
“The General Assembly has taken the position for years that we will help people who need help, but we will do it through our assistance programs. Doing this through the tax code, in my view, is just the wrong way to do it,” Sen. Steve Newman (R-Lynchburg) said at a committee meeting earlier this year.
The Commonwealth Institute estimates the change will cost $315 million.
Legislation to provide a larger, longer-term refundable EITC died quickly in the Republican-controlled House of Delegates and never got a vote in the entire Democratic-controlled Senate.
Despite limited public debate on the policy, the idea was later scooped up in closed-door budget negotiations and included in the compromise.