Virginia Lawmakers Use State Budget to Revive Failed Local Sales Tax Proposal

RICHMOND, Va. — Democratic lawmakers in the Virginia General Assembly are using the state’s budget process to revive a proposal that would allow counties and cities to levy a 1% local sales tax, a measure that previously failed to pass as standalone legislation. The maneuver, confirmed by key legislators in recent weeks, would bypass the traditional legislative process and a potential gubernatorial veto. The provision is based on a bill, SB 1307, that did not become law in a prior session. According to State Senator Creigh Deeds, a veteran Democrat, the plan is to include language authorizing a local referendum on the tax directly within the state budget. “The plan is for it to be part of the bill that passes,” Deeds stated during a Charlottesville radio interview, acknowledging the unconventional path for the proposal. This legislative tactic involves inserting policy language into a must-pass appropriations bill, making it difficult to oppose without risking a government shutdown. The strategy is not entirely new to Richmond. During the previous administration, former Governor Glenn Youngkin’s team used a similar method to fund a first-time homebuyer assistance program after its enabling legislation had failed. Documents from the Virginia Association of Counties from the 2025 session show that advocates for the local tax openly urged budget conferees to include the language in the budget as an alternative route for implementation. This move is part of a broader shift in Virginia's fiscal policy following the 2025 elections, which gave Democrats unified control of the governorship under Abigail Spanberger and both legislative chambers. The party is advancing several tax-increase proposals, positioning the state in stark contrast to its neighbors. Among the other proposals introduced this session is HB 378, which would impose a 3.8% net investment income tax on individuals, trusts, and estates for taxable years beginning in 2027. If enacted, this would raise Virginia’s top marginal income tax rate on investment income to 9.55%. Another proposal seeks to create a new 10% tax bracket for individuals earning more than $1 million annually. Currently, all income over $17,000 is taxed at a top rate of 5.75%. These proposals represent a complete reversal from the tax policies of the previous administration. Former Governor Youngkin had advocated for a 12% across-the-board income tax cut, which would have lowered the top rate to 5.1%. Democrats, who now hold slim majorities in the House and Senate, argue the new revenue is necessary to fund services for working families. The push for higher taxes in Virginia is an outlier in the region. North Carolina’s flat tax rate fell to 3.99% in January, with plans to lower it to 2.49% in the coming years. Georgia’s income tax rate also recently decreased, and its state senate is considering a full phase-out. West Virginia is similarly in the process of eliminating its state income tax. This growing divergence creates a challenging competitive landscape for Virginia as it seeks to attract and retain businesses and high-income earners. In addition to direct tax hikes, Governor Spanberger has announced her intention to have Virginia rejoin the Regional Greenhouse Gas Initiative (RGGI), a multi-state cap-and-trade program that critics argue functions as a carbon tax by increasing utility costs for businesses and residents. For businesses operating in Virginia, the revival of the local sales tax option through the budget introduces significant uncertainty and potential compliance complexities. If the measure is included in the final budget, each of Virginia's counties and independent cities could hold a referendum to decide whether to impose the additional 1% sales tax. This could result in a patchwork of different sales tax rates across the state, complicating sales and use tax collection for companies that operate in multiple jurisdictions. This kind of legislative maneuvering makes long-term financial planning difficult for businesses. When major policy changes are embedded in must-pass budget bills rather than debated as standalone legislation, it creates an unstable and unpredictable tax environment. In our experience, uncertainty is one of the biggest impediments to business investment and growth. A patchwork of local sales taxes would create immediate operational headaches, requiring businesses to update point-of-sale systems and remittance procedures on a locality-by-locality basis. Navigating these constant shifts requires diligent monitoring and proactive strategy. This is precisely the type of challenge where our tax preparation and compliance services provide critical support for business owners. To ensure your business is prepared for these potential changes, contact C&S Finance Group LLC at csfinancegroup.com for guidance. Virginia business owners and taxpayers will now be closely watching the budget conference committee, where House and Senate negotiators will reconcile their respective versions of the state budget. The final language of the appropriations bill will determine whether localities are granted the authority to put a 1% sales tax increase before their voters later this year.