Youngkin Budget: income tax cuts, higher state sales tax

RICHMOND, Va. (WRIC) – Gov. Glenn Youngkin wants more tax cuts in Virginia – but also an increase in the state’s sales tax.

Youngkin (R) presented his budget plan Wednesday for the next two fiscal years — from July 1, 2024, to June 30, 2026 – to the Virginia General Assembly’s money committees in the House and Senate.

The governor’s two-year spending plan — which he dubbed the “Unleashing Opportunity budget” — proposes several tax changes in Virginia, more funding for behavioral health and child care and to pay state employees and teachers.

With Virginia operating on a two-year budget cycle, the new plan Youngkin pitched Wednesday is the only one he will be involved in from beginning to end.

But he will have to work with Democrats to get his priorities passed after the party won control of the state legislature. Based on Democrats’ initial reaction to the budget, Youngkin is facing an uphill battle.

Youngkin’s tax policy proposals include cutting 12% in income tax rates “across the board” for taxpayers, lowering the state’s top income tax rate from 5.75% to 5.1% and increasing the sales tax rate by 0.9% to 5.2%.

Virginia’s state sales tax rate is 4.3% but localities impose an additional tax, meaning some residents pay up to 7% while most pay 5.3%. Youngkin said the sales tax increase would “offset the cost” of the 12% decrease in income tax rates.

How Youngkin’s proposed income tax rate cuts would look:

• $0 – $3,000 tax bracket: From 2% down to 1.75% (13% reduction)
• $3,000 – $5,000 tax bracket: From 3% down to 2.65% (12% reduction)
• $5,000 – $17,000 tax bracket: From 5% down to 4.40% (12% reduction)
• $17,001+ tax bracket: From 5.75% down to 5.10% (11% reduction)

The reduction in individual income tax rates is expected to cut $1.1 billion from the state’s general fund revenues in fiscal year 2025 and $2.3 billion in fiscal year 2026, per Youngkin’s administration. The sales tax increase would add $520 million in fiscal year 2025 and nearly $1.3 billion in fiscal year 2026.

Youngkin also wants to expand the state’s sales tax to cover digital goods, such as data storage and streaming music, saying the move would close the “big-tech tax loophole” because the goods have been classified as services and Virginia hasn’t been able to collect taxes on them.

The budget plan from Youngkin also calls for increasing the state’s earned income tax credit from 20% to 25% of the federal earned income tax credit, a proposal Democrats have backed that would give low-income Virginians a tax break.

The governor’s administration estimates Youngkin’s plan would total $1 billion in net tax relief over the 2024-2026 biennium.