Virginia will need nearly $142 million to modernize its tax management system and other “ancient technology” for running the Department of Taxation to avoid a potential breakdown of operations that handle more than 12 million tax returns and collect $30 billion in revenue each year for core state government operations.
Most of the costs included in Gov. Glenn Youngkin’s proposed budget — $131 million — would pay to replace the Integrated Revenue Management System, which is more than 25 years old and features technology that no longer is available. The remaining $10.9 million requested would pay for replacement of other “end of life technology systems,” upgrades in IT security, increased postage costs for mailed tax notices and filling vacancies in staff for appeals and resolving errors.
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Gov. Glenn Youngkin shakes hands with Sen. Louise Lucas, D-Portsmouth, before giving the State of the Commonwealth address on Monday.
“We’re at a critical stage in regard to technology that is driving our tax system,” Tax Commissioner James Alex told the Senate Finance subcommittee on general government Tuesday.
The five-year process for implementing the new tax revenue management system would extend through 2029, under the next governor, if the General Assembly appropriates money in the revised two-year state budget to let the tax department proceed with awarding a contract for the new technology. The assembly gave the department $1 million in the current budget for this year to proceed with planning the replacement and the state asked for contract bids in July.
Even if the legislature lets the work proceed, Virginia would not be able to implement a new IRS program for taxpayers to file their state and federal income tax returns for free before the 2028 tax year, which would be handled through returns filed in 2029. Youngkin balked last year at Virginia’s participation in the free tax filing system, which the IRS created with money from the Inflation Reduction Act adopted in 2022 and now facing potential rollback under President-elect Donald Trump and a Republican Congress.
Youngkin said Virginia could not legally participate because of a 2010 law that prohibits the state from offering a free tax filing system, outside of one handled by private tax preparation companies, and the tax department’s current tax management system couldn’t handle it.
Sen. Jeremy McPike, D-Prince William, has filed Senate Bill 1306 to repeal the 2010 law and let the tax commission establish the free tax filing program, beginning with the 2028 tax year, “notwithstanding any federal government action to repeal or otherwise terminate the IRS Direct File Program.”
McPike said Tuesday that the delay in creating the program “is a little frustrating,” but “understandable” given the constraints of the current tax management system and the need to replace it with modern technology.
“We’ll get there, but it will take a couple more years to wait for the new system,” he said.
McPike said replacement of the system is “clearly long overdue.”
Virginia is one of eight states, along with North Carolina, Florida and Texas, that still rely on archaic tax management systems. Maryland and 11 other states are upgrading their systems. Thirty other states, including West Virginia, already have modernized their systems.
As a result, Alex said states with modern systems, such as Georgia, can process income tax rebate checks two and a half times faster than Virginia can.
Virginia Democrats are leaning toward proposing one-time income tax rebates this year, instead of a $1.1 billion in tax credits that Youngkin has proposed for some taxpayers, depending on how much they earn and where they live, to offset local personal property taxes they pay on their vehicles, the so-called car tax.
Senate Finance Chair Louise Lucas, D-Portsmouth, signaled Tuesday that she will look for ways to deliver “more immediate relief” to Virginia workers and their families.
“It is my intent that the Senate budget will provide relief to working families and individuals, and invest in their education and well-being, while maintaining the commonwealth’s long-term fiscal health,” she said in a brief meeting of the full Senate Finance & Appropriations Committee.
“Working families are feeling the impacts of inflation, and we’re working to provide more immediate relief,” Lucas said, acknowledging the economic concerns that appeared to have been decisive in Trump’s election in November, along with Republican majorities in the U.S. Senate and House of Representatives.
Lucas also promised to focus on public education, based on recommendations of a joint legislative subcommittee. It is addressing the concerns the Joint Legislative Audit and Review Commission outlined in a sweeping report two years ago that found Virginia lagging other states in funding for education.
She also noted the need for more than $632 million in new state funding for Virginia’s Medicaid program, serving elderly, disabled and low-income residents, as well as additional funding for people in psychiatric crises or other behavioral health improvements.
“We have significant one-time funding, and we will use it wisely,” she said.