Staff Report

RICHMOND – Virginians will now see the effect of several changes in state tax laws as a result of the sweeping budget and tax reform compromise adopted with bipartisan legislative majorities in 2004.

Beginning today, the state sales tax on food will be cut by 1.5 percent, and the tax on cigarettes will go up by 10 cents per pack. In addition, all Virginians will be able to claim higher exemptions, deductions, and thresholds for filing their tax returns beginning January 1, 2006.

After an extended General Assembly session in 2004, the governor signed the tax reform compromise into law. The changes allowed the Commonwealth to make investments in public education, public safety, natural resources, and health care, prompted Wall Street to remove the state from &uot;credit watch,&uot; and helped Virginia earn straight A’s as the nation’s best-managed state in a non-partisan evaluation by the Government Performance Project and Governing magazine.

&uot;We worked hard last year to get our fiscal house in order, and Virginians continue to see the benefits both in tax reductions and through significant new investments in our shared priorities, such as public schools and the environment,&uot; Governor Warner said. &uot;From the reaffirmation of our Triple-A bond rating, to our recognition as the nation’s best managed state, the tough decisions we made in 2004 have strengthened Virginia’s economy for the long term.&uot;

Starting July 1, the state sales tax on groceries will be cut by 1.5 percent – from 4 to 2.5 percent. This eliminates the state General Fund portion of this tax entirely. The food tax originally was scheduled to be reduced over three years, in half-cent increments, but Governor Warner and the General Assembly agreed last January to accelerate the tax reduction due to better-than-expected revenues from Virginia’s rebounding economy. The tax cut does not apply to food bought in restaurants or food purchased for immediate consumption, but does apply to most groceries.

The food tax cut will save a family of four with a household income of $60,000 about $83 a year. A family of four with a household income of $100,000 will save about $105 a year.

&uot;Reducing the tax on food will help all Virginians, but it will provide the greatest benefit to working Virginians because they spend a larger proportion of their income on food,&uot; said Virginia Tax Commissioner Kenneth W. Thorson.

The lower food tax rate does not apply to the one-percent local tax, the one-percent that is dedicated for public schools, or the one-half percent dedicated to transportation.

In January, Virginia was the only state in the nation to receive straight A’s in the Government Performance Project &uot;Grading the States 2005&uot; report, the nation’s only comprehensive, independent analysis of how well each state is managed. The group cited Virginia’s tax and budget reform efforts as an important factor in awarding the Commonwealth top grades across a wide range of fiscal and management categories.

Other significant elements of tax reform took effect this year and will be reflected when Virginians file their state income taxes after January 1, 2006, including:

Reducing income tax owed by raising the personal and dependent exemption from $800 to $900.

Reducing income tax owed by raising the standard deduction for married taxpayers filing jointly from $5,000 to $6,000, and the standard deduction for married taxpayers filing separately from $2,500 to $3,000.

Reducing income tax owed by raising the filing thresholds for single taxpayers from $5,000 to $7,000; for married filing jointly from $8,000 to $14,000; and for married filing separately, from $4,000 to $7,000, taking about 142,000 filers off the tax rolls altogether.

Additionally, effective January 1, 2006, low-income families may choose either Virginia’s existing low-income credit of $300 per family member, or 20 percent of their eligible federal earned income credit, whichever is higher.

In addition, the 2004 tax reform compromise increased the general sales tax by a half-percent, from 4.5 percent to five percent, effective last September, repealed the sales tax exemption for public service corporations, raised the recordation tax on real estate transactions from 15 cents to 25 cents per $100 value, and imposed an excise tax at the rate of 10 percent of the wholesale price on tobacco products other than cigarettes.