Hernandez Proposes Florida-Here-We-Come Bill
by Hans Bader
Delegate Phil Hernandez, D-Norfolk, has introduced legislation to raise state income taxes on people making over $1 million per year. Their marginal tax rate would rise from 5.75% to 10%, under HB 2333. This tax increase won’t become law this year, but it might become law under a future Democratic governor.
Virginia already has higher income taxes than most of its neighbors, unlike a decade ago. Back in 2015, Virginia had lower income tax rates than West Virginia, North Carolina, and Kentucky. Back then, the top marginal tax rate was 6.5% in West Virginia, 6% in Kentucky, and 5.8% in North Carolina, compared to 5.75% in Virginia. And the lowest tax rate (for low-income households) was 5.8% in North Carolina, 3% in West Virginia, and 2% in Kentucky, compared to 2% in Virginia (most taxpayers pay the top marginal tax rate in each state).
But in the decade since, most of Virginia’s neighbors have cut tax rates, while Virginia has not. Kentucky now has a maximum tax rate of 4%, North Carolina now has a maximum tax rate of 4.25%, West Virginia now has a maximum tax rate of 4.82%, while Virginia still has a maximum tax rate of 5.75%. Tennessee has no state income tax. As a result, Virginia is now one of the ten-highest taxed states.
Partly due to high taxes in Virginia, people are moving from Virginia to West Virginia and states south of Virginia like North Carolina, Tennessee, and Florida. As James Bacon, former publisher of Virginia Business, notes, “people moving to Virginia in 2021 came mainly from the northeast — New Jersey is at the top of the list — and they’re moving mainly to southern states.” States in the northeast often have even higher taxes than Virginia (such as New Jersey, New York, and Connecticut), while southern states have lower taxes (Florida, Texas, and Tennessee have no state income tax).
People are even moving from high-tax Virginia to southern states whose populations and economies are stagnant, such as West Virginia and Mississippi. Bacon adds, “Perhaps most remarkable is the net migration of Virginians to Alabama, Mississippi, and West Virginia — states not on many peoples’ list of lands of economic opportunity.”
Raising marginal tax rates in Virginia to 10% could stifle the migration of people from Maryland into Virginia. Right now, slightly more people move from Maryland to Virginia than from Virginia to Maryland, resulting a net migration of 2,550 people in 2021.
But a top marginal rate of 10% would leave some rich people worse off in Virginia than in Maryland. (In Maryland, the top marginal tax rate is 5.75% at the state level, plus up to 3.2% at the county level in those counties with the highest county income rates — resulting in a maximum marginal rate rate of 8.95% in the highest-tax Maryland counties).
Some people move to Virginia from Maryland because taxes are lower for them in Virginia. I grew up in Maryland, but moved to Virginia back when taxes were clearly lower for me in Virginia. I had a neighbor who also came from Maryland. He appreciated that taxes were a bit lower in Virginia than Maryland’s Montgomery County, but expressed ambivalence about leaving Maryland behind, saying that people were “friendlier” in Maryland, that Montgomery County had “more character” and better landscapes than northern Virginia, and that much of northern Virginia was a “wasteland” of endless sprawl.
If the tax rates rise in Virginia, many people will leave for southern states like North Carolina and Tennessee, or West Virginia. And some like my former neighbor will move to Maryland or stay in Maryland rather than moving to Virginia.
When Maryland raised taxes on millionaires, many moved out of state, resulting in Maryland raising less revenue as a result. The Tax Foundation described the results:
The Comptroller of Maryland has reported that the number of “millionaire” returns tumbled sharply between 2007 and 2008, a 30% drop in filers and 22% drop in declared income. Rather than income taxes from this group rising by $106 million, they fell by $257 million….One-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008. Some died, but the others presumably changed their state of residence….A Bank of America Merrill Lynch analysis of federal tax return data on people who migrated from one state to another found that Maryland lost $1 billion of its net tax base in 2008 by residents moving to other states.
This bill to increase income taxes in Virginia would presumably be vetoed by Governor Glenn Youngkin, a Republican, just as he vetoed a Democratic bill last year to let Virginia counties increase sales taxes. So, to avoid controversy, Virginia’s Democratic legislature may not even bother to pass it this year, an election year in which polls show the Democratic candidate for governor, Abigail Spanberger, with only a narrow 1% lead over the Republican candidate for governor, Winsome Earle-Sears. But the bill may be a sign that income taxes will rise under a future Democratic governor who is more sympathetic to tax increases.
Hans Bader is an attorney living in Northern Virginia.
