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January 31, 2013

Cutting Income Taxes to Offset Sales Tax Increases on Low-Income Virginians is a Dead End  

Transportation funding proposals that expand the sales tax to transportation-related services will hit low-income people hardest, and the income tax breaks proposed to offset them won’t provide adequate relief. As a consequence, any new sales tax must be coupled with targeted mechanisms that effectively offset these increases for Virginia’s low- and middle-income families.

Anyone who has a vehicle has to put gas in it, fix it when it breaks and otherwise maintain it. But people with low-incomes spend a far greater share of their income on these necessities than people with high incomes — four-times greater in fact. That means taxes paid on those services and related items take four-times as much of their income, too.

Two options for reducing the negative effects of broad-based tax increases on moderate- and low-income Virginians include:

  • Refundable Earned Income Credit: Making Virginia’s Earned Income Credit (EIC) refundable would be one way to offset part of the disproportionate impact on lower-income Virginians of any new sales or excise tax increases.
  • Tax Rebate: Another option for off-setting the impact of new transportation taxes is to provide a straight rebate to low-income households to offset sales and excise taxes.

Read the full report (pdf)