Most people’s wish lists in the run-up to the New Year include things like losing weight, better health, planning a long-delayed vacation, or spending more time with family and friends. That’s probably how it should be.
But economists—and especially public finance economists in places like Fairfax County—tend to see the world a little differently. Collectively, we have had a tumultuous year, with chaotic DOGE-led federal reductions-in-force; rescission of about $9 billion in previously approved funding from USAID and the Corporation for Public Broadcasting (CPB); the adoption of One Big (but perhaps not so) Beautiful Bill risking reduced SNAP and health care funding for Virginians; and continued high prices and tariff uncertainty.
Whereas things are unlikely to change structurally at the federal level in 2026, the election in November gave hope for policy changes at the state level. I suspect many Fairfax residents are looking forward to an Attorney General who supports their Commonwealth Attorney, rather than one who wastes state resources on making a politicized referral to the DOJ. Likewise, I suspect many NoVA residents won’t miss a Lieutenant Governor who didn’t understand why federal layoffs were a big deal, or a Governor who sent the Virginia National Guard to Texas on their dime, and who collaborated in the arrest of their neighbors merely for being undocumented, while claiming them to be hardened criminals without evidence.
While some challenges will melt away with the changing political winds in Richmond, other problems are likely to persist in 2026. High property taxes, underfunded schools, inefficient local taxes, and tensions that result from fiscal imbalances within the Commonwealth are not accidents. They are the result of a fiscal system and political economy forces that structurally fail to effectively aligns authority, responsibility, and fiscal resources within Virginia.
So, mine is an admittedly unconventional wish list for 2026. It’s not about bigger government or smaller government, nor even about partisan advantage. It’s about moving toward a stronger Commonwealth by fixing some long-standing mismatches in Virginia’s fiscal architecture—between the roles of the state and the localities, between who pays taxes and who benefits from public services, between constitutional commitments and budgetary realities, and between a tax system designed for the mid-20th century and a 21st-century economy. Here are my wishes:
1. Allow localities to adopt a modest local-option income tax
First, the economic diversity in the Commonwealth is not well-served by the current one-size-fits-all fiscal system. As a first step towards more responsive and more democratic local governance system, Virginia should allow localities to levy an optional local income tax of up to 2 percent. This would not mandate higher taxes anywhere; it would simply give local governments an additional, modern revenue tool, with a low rate and a broad base. Some localities might choose to adopt it, others would not. That choice should be local: let the voters of each locality decide!
For Northern Virginia jurisdictions, a local option income tax would provide a way to rebalance local tax systems—lowering property tax rates or eliminating inefficient and unpopular taxes such as the car tax or the restaurant meals tax. These current taxes have a small base and a higher rate, thus making them inefficient and inequitable. Other options, such as local sales taxes, tend to be more regressive.
Yet, even with a modest local income tax of two percent, NoVA counties would remain lower-tax jurisdictions than neighboring Montgomery County and Prince George’s County in Maryland, or the District of Columbia (which currently have marginal state-plus-local tax rates of 8-8.5% for many households). And quite frankly, denying Fairfax County and other local (particularly Northern Virginia) jurisdictions access to greater own source revenues would be indefensible, given that—on net—Northern Virginia contributes 2.8 billion dollars to intergovernmental redistribution each year, and the Commonwealth currently only returns 50 cents to the dollar to Fairfax taxpayers.
Just as importantly, a local option income tax would help rural and economically stressed regions remain competitive within their respective regions. Counties in Southwest Virginia, Southside, and Appalachian Virginia already compete with North Carolina, Kentucky, and West Virginia for residents and employers. Instead of statewide income tax increases, a flexible local tax instrument would allow them to remain competitive with the lower income taxes in neighboring states.
2. Cap the car tax rate at the real estate tax rate
Virginia’s local personal property tax—most visibly, the car tax—is surely the least popular tax in the state. It is also potentially quite inefficient and inequitable. In many parts of the state, local personal property taxes heavily tax a narrow slice of household (or business) wealth while leaving a much broader base—real estate—comparatively undertaxed.
One option would be to abolish local personal property taxes altogether, but that would merely rob localities of much-needed local revenue sources. A simpler, less drastic reform would be to cap personal property tax rates at the local real estate tax rate. After all, taxes should be broad-based and low-rate. If localities genuinely need more revenue, they should raise property tax rates transparently or pursue broader tax bases—not over-rely on a narrow base that is likely to be more regressive than other local revenue options.
3. Fix the SOQ to reflect the Virginia Constitution and public education reality
Virginia’s Constitution promises a system of public education that is both high-quality and equitable. For decades, however, the Standards of Quality (SOQ) defined by the General Assembly have fallen well short of that promise. For political reasons, the current SOQ norms underestimate the true cost of education by roughly 5,000 dollars per student (on average: 9,066 per student, instead of 14,659 dollars), while embedding deep distributional biases that penalize high-cost regions like Fairfax County.
Yet, the General Assembly already has a roadmap how to fix this. Although not perfect, recommendations on Virginia’s K-12 funding formula prepared by the General Assembly’s own Joint Legislative Audit and Review Commission (JLARC 2023) provide a defensible and data-driven set of updated SOQ norms. Fully implemented, they would result in a total state-plus-local SOQ obligation of $21.35 billion, or about $16,800 per student. These norms are not perfect, but they are far more equitable—and far more honest—than the current system. But (most likely for political reasons), the JLARC team proposed holding off with the most impactful reforms for nearly a decade, suggesting that they “could be phased in by the FY33–34 biennia, if funding is available”.
Critically, the numbers show that local governments in Virginia already contribute $9.84 billion toward public education. Thus, to fully fund the updated SOQs, the state would need to increase its contribution by about $2.4 billion from current state funding levels. Given that Virginia has a budget surplus of nearly $2.7 billion, there is no fiscal reason to delay implementation of the General Assembly’s own recommendations on what is likely to be the state’s top political and economic priority for another eight years. It can—and should—be achieved within the next biennial budget cycle.
4. Allocate state education grants based on local school divisions’ actual ability-to-contribute to local education
Adopting JLARC’s recommended public education spending norms that reflect the true cost of public education is only half the task. While JLARC’s recommendations recognized the persistent under-estimation of public education spending norms as a major concern, it did not correspondingly recognize that, in reality, local governments in Virginia already contribute close to 50% (9.84 billion dollars) toward public education. Instead, JLARC’s recommendations cling—unhelpfully—to an unrealistic policy ambition of a 60/40 state-local split. Instead, the distribution of state education grants must recognize the reality of local public education funding by allocating state grants based on the difference between the total SOQ spending norms—on one hand—and each locality’s actual ability to contribute to local education on the other. An objective measure of revenue potential or ability-to-contribute, such as the Representative Revenue System (originally developed by the now-defunct U.S. ACIR), should thus be based on the current $9.84 billion local contribution as the baseline. This approach would eliminate today’s fictionally low local contribution requirements and replace them with a transparent, fair system, recognizing that both state and local governments have an important role to play in funding public education.
To prevent public education from worsening in places that have been relatively over-funded in the past, as part of the transition to the new, more objective, realistic, and equitable formula, all school divisions should be held harmless—so that no locality should lose state grant aid in the transition from their current allocations. As a result, all school divisions would benefits from an updated SOQ formula–or at worst, stand pat. The system as a whole would benefit from realistic and equitable spending norms as well as greater state funding–without unnecessary delays.
That said, over time, localities must also be expected to contribute to local public education in line with their actual revenue potential, based on statewide average effective tax rates. But in the meantime, there is no reason for the state to continue to distribution state public education grants based on outdated, underfunded, and unequitable norms.
5. Broaden the state sales tax base to include more (online) services
Next, Virginia’s sales tax still reflects an economy dominated by goods rather than services. In line with Delegate Vivian Watts’ legislative priorities, broadening the sales tax base to include spending on consumer services—including digital services consumed by Virginians—would create a more stable and neutral revenue source, better aligned with modern consumption patterns.
Expanded sales tax revenues at the state level could help fund the state’s commitment to public education, not only at the K-12 level, but also by making higher education in Virginia more affordable. While the presence of a highly-educated workforce has been the engine of success for (Northern) Virginia, SCHEV reports that the Commonwealth continues to fall short of its legal commitments to funding higher education.
In addition, the added state revenue from sales taxes would help to fund emerging public service gaps, including those facing rural communities in the Commonwealth. Increased state revenues will be needed to offset the impact of declining federal funding—caused by changes in federal policy—that are likely to increase the cost of living and reduce access to health care and nutrition program. In addition, it would be prudent for the state government to invest in a “One Commonwealth” policy, for instance, by making investments in statewide public media, state parks, promotion of tourism, greater connectivity between different part of the state (including rail), inter-regional economic development programs, and cultural programs that strengthen the ties within the Commonwealth.
6. Rethink the long-term structure of state and local government functions and finance
Finally, 2026 should mark the beginning of a deeper conversation about who does what—and who pays for it—in Virginia.
Why are local roads in Virginia still a state function, as opposed to being funded mainly from local property taxes—like in the rest of the United States? And if we want to ensure equitable access to public education, why is half of public education funding contributed through the local property tax, rather than from state resources? Why is a portion of general sales taxes directed towards infrastructure funding, while property taxes fund services with broad social spillovers like education?
And more structurally: isn’t it time to empower local governments by allowing counties and cities to write their own charters—provided they don’t contradict state law? While state law makers stripped this provision from the draft Virginia Constitution in 1971, a diverse and modern commonwealth is strengthened by allowing its localities the power and flexibility to respond to local needs.
Such questions used to be addressed by the Virginia Advisory Commission on Intergovernmental Relations. While the commission was abolished some years ago, there is still a need to answer key questions related to intergovernmental relations in the Commonwealth.
These questions are not ideological. They are practical. And answering them is essential if Virginia wants a system of governance and public finance that is transparent, efficient, and fair—whether you live in Fairfax County or beyond.
