The last time I heard anyone say something about increasing revenue without raising taxes, I looked at them as if they had grown horns. (I can’t recall the legislator, but it was during LG Bill Bolling’s blogger’s day a couple of years ago. And yes, he got legislation passed that fills the coffers of Virginia without officially raising taxes.) So I was naturally skeptical when I received an email pointing me to a report from the Institute on Taxation and Economic Policy in which they claim to do just that – at least on low and middle income families.
What I found was pretty interesting.
In a recent report, the ITEP takes a look at how states can reform itemized deductions.
Itemized deductions cost more than 30 states billions of dollars in income tax revenue annually while undermining the fairness of state tax systems, a new report shows. Moreover, federal tax changes enacted during the presidency of George W. Bush have gradually made itemized deductions even more unfair and expensive over the last five years, automatically passing tax cuts onto states’ wealthiest residents even as state governments face unprecedented budget challenges. Itemized deduction reform could play a positive role in making state tax systems fairer and more sustainable.
The authors propose five different ways for reforming itemized deductions and provide, on a state-by-state basis, the estimated effect of adopting each. For Virginia (pdf):
- Repeal itemized deductions entirely and increase the standard deduction. Under this scenario, 43% of Virginia taxpayers would receive a tax cut, while state revenues would increase $400 million per year.
- Capping the total value of itemized deductions at $40,000 per year for couples and $20,000 per year for singles. This would raise $306 million per year while affecting 7% of Virginia taxpayers.
- Converting itemized deductions to credits equal to a percentage of the deduction’s value, capped at certain limits. This option would raise $386 million while providing tax cuts to 35% of Virginia taxpayers.
- Enacting stand-alone phaseouts starting at federal adjusted gross income of $150,000 for couples and $75,000 for singles. This would raise $148 million and impact 10% of Virginia taxpayers.
- Decoupling from federal Pease repeal, which is a gradual phaseout of the itemized deductions limitations, and an option that may occur anyway if the Bush tax cuts are not extended. This would raise $76 million and affect 6% of Virginia taxpayers.
Virginia has what is pretty close to a flat tax. A long time ago, our current governor headed up a group studying changing the tax structure. Perhaps, since that study went nowhere, the governor is willing to consider it again. These ideas are a good place to start.
VIVIAN J. PAIGE | All Politics is Local 
The ITEP has grown horns. All of these proposals raise taxes on some taxpayers. If you cap the amount I can deduct, you have raised my taxes. There ain’t no such thing as a free lunch.
Um, you must not have read the proposals. If the standard deduction is greater than your current itemized deductions, then it doesn’t raise your taxes, it lowers them.
Think Bert’s point is correct. If you are increasing revenue, someone is paying more. We always hope it is not us, but sometimes it is.
Based on these scenarios, I would pay more, not a lot, and my thought is it would be worth the amount to solve the issues. At least if the issues solved are the issues I want solved. But, I still pay more.
The idea behind the semantics of it all seems to be about increasing revenue (and narrowing budget deficits) in a politically more-palatable manner than adjusting the actual tax rate.
I think the comments here illustrate how that’s a bit of a pipe dream. Letting a tax cut expire at a the end deadline codified by law is now considered akin to raising taxes. It’s not just considered tantamount to — it’s considered the literal equivalent.
At some point during the second four year frame of the George W. Bush Administration people started talking about meddling with entitlements like social security and taxes became the new third rail in politics.
Good points.
Eliminating or capping itemized deductions could reduce the incentives for some businesses to invest in new equipment and training programs.
I am always for objective examinations of revising our tax structure, especially if those revisions can be shown to stimulate the creation and retention of jobs here in Virginia.
If our government decides to tinker with the tax code, they should focus on providing incentives that will restore our strategic manufacturing base, point us toward energy independence and ensure that we are creating: Jobs, JOBS and more JOBS!
Um, itemized deductions have nothing to do with businesses.
ITEP may call itself “non-partisan,” but the organization’s misuse of the word “fair,” and referring to itemized deductions as “tax giveaways,” clearly indicate it’s leftward tilt.
I challenge anyone to get a dictionary definition of the word “fair,” and to explain how any of the proposed changes fit that definition.
Now to examine each proposal.
Option 1 — Repealing itemized deductions and increasing the Standard Deduction by 180%.
I have no problem with that. It is simple and impartial.
Option 2 — Capping the value of itemized deductions.
I do have a problem with that. That would be showing favoritism in the tax code. However, I have no problem with capping or eliminating the mortgage interest deduction. It does nothing but increase the price of housing, and encourage people to take our larger loans.
Gambling losses are also NOT deductible already, and that is good.
Medical expenses are only deductible to the extent that they exceed 7.5% of one’s AGI, so that moves farther out of range as one’s income increases.
Option 3 — Converting itemized deductions to credits, with the credit value set at 4.35%
No. Why should one be taxed on money he does not have? If you give away $100 to charity, you still get taxed $2.15 on it? Now, if they want to set that credit at or above the maximum tax rate, I would have no problem with the idea.
Option 4 — Enacting stand-alone phaseouts
Again, that is showing favoritism, so I am against it.
Option 5 — Decoupling from Federal Pease repeal
See #4 — it’s the same thing. Allowing deductions for some people but not for others shows favoritism.