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Virginia's Flawed Income Tax In Need Of Major Revisions, Analyst Warns

July 16,, 2002-- Virginia’s income tax is outdated and seriously flawed, adversely affecting those with little ability to pay and often imposing very different tax liabilities on Virginians with the same income, an economist warns in an analysis published by the University of Virginia's Weldon Cooper Center for Public Service.

Because the tax is the largest revenue source of Virginia's state-local tax system and is likely to become even more dominant, it needs major revisions to make it fairer, according to John H. Bowman, professor of economics at Virginia Commonwealth University. His in-depth analysis, aimed at helping Virginians make informed choices in current debates about taxes, is the first in a new U.Va. series of fiscal monographs, ≥Virginia Issues.≤

Among Bowman's recommended revisions:

  • increase tax-free levels (personal exemptions plus standard deduction) at least to correspond to poverty levels;
  • phase in an end to special preferences for age and blindness because they are flawed proxies for ability to pay, which is better measured by income;
  • index the personal exemptions, standard deductions and bracket widths to increase with inflation, or review them for fairness every few years;
  • end blanket exclusions for some sources of income, such as Social Security; and
  • change the overall rate structure, possibly to a single rate for all taxpayers. A single-rate tax offers several advantages, including improved fairness among all types of filers at a given income level, Bowman said. Moreover, he shows that a single-rate tax, combined with realistic tax-free amounts, results in a progressive distribution of the tax burden.

Today's income tax is the result of piecemeal changes, and the basic rate structure has been unchanged for nearly 75 years, Bowman said. The personal exemption of $800 and standard deduction of $3,000 for single taxpayers and $5,000 for married couples haven't been adjusted in over a decade and are too low today to provide fair relief, he said.

A recently added credit for low-income individuals provides relief for most Virginians below the poverty level, Bowman said. But "it does nothing for those with income above the poverty level," and the abrupt cut-off actually imposes very high effective rates for those just above the poverty level, he said.

Two other major weaknesses he cited in the income tax are:

  • blanket exclusions for some sources of income, such as Social Security; and
  • the high ($6,000) special deduction for taxpayers who are 62 to 64 years old and the even higher one ($12,000) for those over 65, regardless of their income.

As a result of these breaks, taxpayers with the same income level may actually be taxed at widely different rates, Bowman said.

"Disregarding large chunks of income on the basis of income source or age of recipient ä is inappropriate and inequitable," he said.

Making the income tax fairer is especially important because of Virginia's dependence on it, even though Virginia is generally a low-tax state, he said. In 2000, Virginia was one of only four states that obtained more than half of all its state tax revenue (not just general fund tax revenue) from the income tax, he said. Virginia obtained 54 percent from the income tax, or 1.5 times the national average of 36 percent.

In the monograph, Bowman puts forward several possible alternative individual income tax structures. All were designed to be revenue neutral, based on revenue simulations conducted by the Virginia Department of Taxation. Revenue neutrality means that the alternatives would yield the same revenue as the current tax in a base period. This standard was adopted to focus attention on tax structure issues, Bowman said, and does not presume that the current revenue level is the best one. Policy makers may wish to raise more revenue, or less, but whatever level of income tax revenue is desired, he said, a better income tax structure should be adopted.

Contact: Carol Wood, (434) 924-6189

For interviews or additional information John H. Bowman may be reached at or (804) 828-7187.

A copy of the full study is on the Web at If you have trouble accessing via the Internet, we can e-mail you a Word document. Call Sally Barbour at (434) 924-7116 for help. To purchase a print edition from the Cooper Center, go to our publications Web page:

FOR ADDITIONAL INFORMATION: Contact the Office of University Relations at (434) 924-7116. Television reporters should contact the TV News Office at (434) 924-7550.

SOURCE: U.Va. News Services


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