At the request of Governor Tim Kaine, the Virginia legislature will be convening in a special session next month to figure out how to pay for much-needed transportation maintenance. The solution most observers expect to come out of that session will involve some combination of increases in the gas tax, in the sales tax, and/or in vehicle-related fees. Unfortunately, each of these options is regressive, taking a larger share of the income of lower- and middle-income taxpayers than from their wealthier neighbors. A recent report from the Virginia-based Commonwealth Institute offers a couple of inexpensive options for policymakers to offset the disproportionate impact these tax increases will have on more vulnerable low-income families.
Along the same lines as a program recently enacted in Minnesota, the report recommends coupling any gas or sales tax hike with a $30 credit per family member for families earning less than $20,000 per year ($40,000 for married families). By limiting the credit to only low-income families, this option would be a very inexpensive way of protecting families in need from further strain upon their already tightening budgets. The credit would cost only $80 million per year, while a one cent sales tax increase would raise $940 million and a ten cent gas tax hike would raise about $500 million. Even states not contemplating a gas tax hike should give consideration to the idea of new or expanded low-income credits. A refundable credit of this sort is much preferable to the gas tax holiday shenanigans being floated at both the federal and state levels as a solution to the squeeze many families are feeling.
In addition, the report suggests making the state's Earned Income Tax Credit (EITC) refundable. Of the over twenty states that currently offer an EITC, Virginia is one of only three that fails to refund amounts of the credit beyond one's income tax liability. The result of this is that for those low-income families who owe little or no income tax, the EITC is of very little use in offsetting the impact of regressive sales and property taxes. Failing to make the EITC refundable denies assistance precisely to those families who need it the most.