In his first biennial state budget that he introduced Wednesday morning, Gov. Glenn Youngkin called for another $1 billion in tax relief over two years and an overhaul of Virginia’s tax base that would pay for a reduction in the income tax by raising the sales tax rate.
The governor’s plan includes a 12% reduction of all income taxes, with a top rate of 5.1%. To offset the estimated annual revenue loss of $2.3 billion, Youngkin proposes increasing the state’s sales tax rate from 4.3% to 5.2%, including a provision that would close the so-called tech tax loophole on digital goods that are currently classified as tax-exempt services — meaning Virginia would start taxing online music downloads from platforms such as Apple Music if the General Assembly approves the proposal.
Youngkin called his proposal “a big first step” in starting to compete with other Southern states with lower income tax rates, including North Carolina, West Virginia and Georgia, that have made efforts in diversifying their tax base, in addition to Tennessee and Florida, which have no income tax at all.
“And Virginia’s sales tax base is narrower than that of any of the states around us, we tax far fewer goods and services, and our absolute state rate is lower,” Youngkin said.
“In order to meaningfully offset that income tax reduction, but also to diversify our tax receipts which are so weighted toward personal income tax while sales taxes are much more stable from a state receipts standpoint, we are going to close the tech tax loophole and raise the overall state income tax by 0.9%.”
Democrats, who will control both chambers of the General Assembly when the legislature convenes for its 2024 session next month, responded with mixed messages to Youngkin’s proposal.
“While we appreciate Governor Youngkin for sharing his budgetary vision today, it is imperative that we have a thorough examination of his proposal,” said Del. Luke Torian, D-Prince William, the designated chairman of the incoming House Appropriations Committee. “This is the starting point to construct a budget that not only reflects our dedication, but also secures prosperity and fairness for every resident in the commonwealth.”
Senate Democrats in a joint statement called Youngkin’s budget proposal “absolutely disgraceful” and a “slap in the face of our most vulnerable individuals who call our commonwealth home,” adding that the governor’s budget presentation before a joint meeting of the legislature’s money committees in Richmond on Wednesday was merely “the highlight reel,” and that he “omitted the dirty details” of his plan.
Youngkin didn’t mention in his speech that low-income Virginians are already exempt from income tax obligations, but they are likely to feel the squeeze of a sales tax hike.
“Governor Youngkin believes that ensuring more tax cuts for wealthier individuals is most beneficial for low income individuals in our commonwealth. Youngkin continues to show us who he really cares about and that is not the lives of everyday Virginians who make our commonwealth what it is,” the statement said.
Youngkin’s $62.9 billion budget also includes an additional $10 million for the proposed inland port in Southwest Virginia — that’s on top of the $10 million already approved in September in a slate of amendments to the state’s current biennial budget.
“I’m very supportive of the inland port project,” Youngkin said. “Because the budget was passed so late in September, there has not been very much work done between September and December, so the incremental $10 million is to further support the work necessary in order to progress the planning of the inland port.”
Virginia already has one inland port, near Front Royal, which is said to be responsible for up to 8,000 spinoff jobs in the northern Shenandoah Valley. A study earlier this year said that a “modest-sized” inland port in Southwest Virginia could create up to 1,370 jobs.
The proposed inland port in Southwest Virginia — a collection point for cargo either bound for Hampton Roads or coming from the port — has been estimated at $55 million. Washington County has already offered land for the project.
“When the plans are finalized I will be a strong supporter of the full project,” Youngkin said.
The budget also calls for $400 million in additional support for the Interstate 81 Corridor Improvement Fund from half of the additional sales tax revenue generated statewide by Youngkin’s proposal to tax certain services and digital personal property.
Youngkin also asks for $70 million in one-time general fund support to accelerate the I-81 northbound land widening project from mile marker 116 to 128 in the Salem district.
Youngkin said Tuesday that about $3 billion of funded projects are currently underway on I-81 that are in various stages of final permitting to get started, and so some of these projects are accelerated “from way out to just further out.”
“Part of our funding particularly for the project from mile marker 116 to mile marker 128 can be pulled even further forward and therefore is in the sights of something that could truly be accelerated,” he said.
“In addition, with regards to the overall efforts in increasing the sales tax and broadening the tax base or closing the tech tax loophole, there are incremental funds that will be provided to the transportation trust fund, and we strongly support at least half of those funds going to dedicated work on I-81 for the foreseeable future.”
Youngkin’s budget further includes a $100 million deposit to the Virginia Community Flood Preparedness Fund which the General Assembly established in 2020 to provide support for regions and localities across Virginia to reduce the impacts of flooding, including flooding driven by climate change.
“We put money into that fund in the last budget that I signed, and this is an incremental deposit, and it goes to address the kinds of situations that we have seen in Hurley with these devastating floods,” Youngkin said, referring to the historic flood that tore through Buchanan and Tazewell counties in July 2022.
There is currently $39 million available in the Virginia Community Flood Preparedness Fund out of the $105 million that the fund has received to date. “Other parts of the state can access it as well,” Youngkin added.
Youngkin also proposed an additional $350,000 per year for the Center for Rural Virginia, bringing annual state support to $445,000, and renaming the facility the “Senator Frank Ruff Center for Rural Virginia,” named after the Republican state senator from Mecklenburg County, who announced last week that he’d resign due to health reasons.
“While our commonwealth is losing a true faithful public servant, it’s richer for the fact that he has served and led on so many important issues, whether that was pioneering Virginia’s Department of Workforce Development and Advancement or establishing the Center for Rural Virginia,” Youngkin said during his budget presentation Wednesday.
Other budget items related to funding projects in Southwest Virginia and Southside include:
- $100 million to establish a new Virginia Biotechnology, Life Sciences, and Pharmaceutical Manufacturing Network, a partnership between the Virginia Innovation Partnership Authority, the University of Virginia, Virginia Polytechnic Institute and State University, and Virginia Commonwealth University. The Fralin Biomedical Institute in Roanoke would receive $27 million of the appropriation.
- A $35 million one-time support in Fiscal 2025 for the city of Bristol to address ongoing health, environmental, and quality of life issues with its landfill. Funding is contingent on the execution of a memorandum of understanding between Bristol and the Department of Environmental Quality. The funds would be available until expended without future action by the governor or General Assembly.
- $800,000 additional support in Fiscal 2025 for the Spearhead Trails tourism initiative in Southwest Virginia, bringing the total to $1.9 million that year. Funding for the initiative is proposed to be $1.1 million in Fiscal 2026.
In his closing remarks before the money committees on Wednesday, Youngkin urged lawmakers to approve a budget in a timely manner when the General Assembly adjourns in March.
“Finalizing the budget will require collaboration and teamwork, and it will be a sprint,” Youngkin said. “I would ask us to commit ourselves to commit a budget on time when you adjourn sine die in March. Virginians deserve it and I know we can do it.”
