As a new Democratic Party trifecta looms in Virginia, a progressive policy group has floated a long list of old and new ways to soak Virginia’s upper-income residents through taxes in order to fund additional state spending.
The Commonwealth Institute for Fiscal Analysis doesn’t use the word “spending,” of course, but speaks of “investments” in “quality public education, health care, affordable housing, access to food.”
According to the most recent report on state government spending trends, put out by the Joint Legislative Audit and Review Commission, the state’s payments to localities for school operations have grown 7% annually, about double the rate of inflation, and the cost of the Medicaid program has grown 12% annually, more than three times the rate of inflation. Those two by themselves have added $22 billion to the state budget in ten years.
But the appetite for more is on full display following the election. Later this week, the money committees for both the House of Delegates and Senate will hold retreats away from the capital to hear likely warnings that the projected revenues are inadequate for a host of “unmet needs”, what a Republican Finance Committee chairman used to call “bills in the drawer.”
The Commonwealth Institute has the path to financial salvation:
It would like to impose one or perhaps two new top tax brackets within the income tax. It offers four scenarios, two of which failed in the 2025 General Assembly. With two new brackets, a higher 7% tax rate might be imposed on incomes above $600,000, and then a 10% rate on incomes above $1 million.
Taxing incomes is one thing, but the new progressive trend is to directly tax wealth. Another proposal in their paper is to impose a 1% tax on net investment income if the taxpayer is reporting $200,000 in taxable income as an individual or $250,000 as a couple. An outside advocacy group claims that change would raise about $260 million from Virginians.
A related proposal would impose a 2% surtax on realized capital gains, already taxed as income. That would be in addition to the current tax liability the gains already generate and could add $400 million for the legislature to spend. There is no reason the state could not do both, impose a new tax on investment income, and then impose the added 2% tax when that income converts to a capital gain.
Yet another way to drain personal wealth into the state’s treasury would be to impose higher transfer taxes on real estate transactions based on the value of the property. Buyers and sellers now pay a state recordation tax at the time of sale, but it is a flat amount with no reference to property value. The Commonwealth Institute suggests a “mansion tax” that kicks in at 2% with a sale price of $900,000 and rises as high as 4% on the most expensive properties.
There is no mention of whether this would be just residential sales or would include business and commercial sales. But what progressive would vote for such a bill if it hit only individual homeowners? The District of Columbia has some version of this already.
One justification for targeting the upper-income taxpayers, beyond “that’s where the money is,” notes that the higher-income households spend a smaller percentage of their money on state and local taxes. Virginia’s state and local taxes are, to use an economic term, regressive.
But the Commonwealth Institute also endorses a massive expansion of the Virginia sales tax onto services, including digital services and digital products. Outgoing Governor Glenn Youngkin also proposed that two years ago, but coupled it with compensating reductions in other taxes. Most middle and even lower-income families buy those services, too, and would end up paying more in taxes, not less. The idea ended up being vetoed.
Another tax increase enacted by the General Assembly but vetoed by Youngkin would allow scores of Virginia localities to impose an additional 1% local sales and use tax. The sales and use tax is the most regressive tax of all. At least this didn’t make the Commonwealth Institute’s wish list, but when it reappears, odds are they will stay silent.
They will also stay silent when the General Assembly revisits the vetoed idea of a state-managed and tax-financed paid family and medical leave program. The 2025 legislation to create that program triggered a fiscal impact statement predicting it would require a payroll tax of about 3/4 of 1 percent on everybody’s salary or wages, even those earning minimum wage. Like most government entitlements, this would grow quickly from acorn to oak, and that tax would have to rise.
Ignored by the Commonwealth Institute is how the state and local taxes are less regressive today than they were just four years ago, because under Youngkin, the state’s standard deduction for the income tax has grown substantially, from $6,000 to $17,500 for a married couple. Continuing that trend would be a great way to lower the burden on working families.
The tax burden is also less regressive than four years ago because the state’s sales tax on groceries has gone away, and a huge tax break has been given to retired military families, many of them retired enlisted and hardly wealthy. Under Youngkin, the state also expanded the Earned Income Tax Credit, something the progressives who despise him will never thank him for.
No, the Commonwealth Institute doesn’t want to make the tax code more “progressive” by lowering taxes on the poor or the middle class or opposing new taxes on them. Its only interest is raising higher taxes on the rich, with some proposals setting that threshold at a joint income of $250,000 and a home value of $900,000. Surely some legislators will recognize which region of the state would end up parting with the most money under those proposals, the vote-rich political base of Virginia Democrats in Northern Virginia.
