Virginia Passes $1.6 Billion Tax Hike: Voters May Not Forget

Example of broken tax promises

After more than 100 days of a bitter legislative session, Virginia lawmakers on April 28 approved a two-year budget totaling $60 billion. The budget includes a record tax increase of $1.6 billion, nearly 38 percent higher than what Governor Mark Warner (D) had originally sought from the Republican-controlled legislature.

“This was hard for a lot of people for a whole host of reasons,” said Warner. The governor supported the final package.

The tax plan carried an original price tag of $1.36 billion but was increased due to a recalculation by the Finance Department. The General Assembly also voted to freeze the state’s popular car tax relief program, which swept Republican James Gilmore III into the governor’s office in 1997.

“We have somehow agreed to top Governor Warner’s historic tax increase,” bemoaned Delegate M. Kirkland Cox (R-Colonial Heights), a no-new-taxes advocate. “Oh well,” he said bitterly, “yet another broken promise.”

What Happened?

In November 2003, Warner broke his no-tax promise and proposed a $1 billion tax increase. He was dramatically one-upped when Senate Finance Chairman John Chichester (R-Stafford) offered his own plan raising taxes $2.5 billion.

The House of Delegates at first stood firm but eventually voted to remove tax breaks from several businesses supportive of the senator’s plan. The senate responded by turning its plan into a $4 billion tax increase.

House Speaker William J. Howell (R-Fredericksburg), Attorney General Jerry Kilgore, and U.S. Senator George Allen (R) all lobbied aggressively against any tax increase. Howell repeatedly argued there was “no need for tax increases when the state’s economy was recovering.”

Kilgore, who is running for governor in 2005, attacked Warner’s credibility with voters. At the same time, tax opponent Allen joined former Democratic Governor Douglas Wilder in urging a referendum on raising taxes–a suggestion quickly nixed by Warner and Chichester.

While the politicians were fighting in the foreground, tax opponents and proponents battled as well. Local and national tax groups organized and rolled out extensive grassroots campaigns in opposition. Their efforts were countered by a massive public relations campaign organized by unions and special-interest groups and coordinated in part out of Warner’s third-floor office at the state capitol. Groups representing teachers, the state police, health care organizations, and local governments all participated in lobbying and advertising for tax increases.

What Passed?

The budget that passed on April 28 includes the first general tax increase in the state since 1986. Some specific features of the measure, which mixes higher taxes with tax relief, are an increase of the state’s sales tax by a half-cent; raising the 2.5-cents-per-pack tax on cigarettes in two steps to 30 cents (20 cents in 2005 and 30 cents in 2006); and a 10 percent wholesale tax on tobacco products.

The plan grants income tax breaks to lower-income individuals and gradually reduces the tax on groceries, but it also limits income tax breaks for older Virginians and corporations and increases the fees for recording deeds from 15 cents to 25 cents per $100 of value.

In the end, Warner got what he wanted: More money for education and other state programs. Proceeds from the sales tax will be split equally between the general fund and direct support for K-12 public education, sending an additional $378 million, on top of the usual funding increase, over the next two years.

“This has to be considered one of the most critical votes in the history of the commonwealth,” said Senate Majority Leader H. Russell Potts Jr. (R-Winchester). “We have taken a bold step in making sure that future obligations are funded and future generations are adequately cared for.”

Delegate Scott Lingamfelter (R-Prince William County) disagreed. “It’s a bad day for families. It’s a bad day for small businesses. It’s a bad day for politicians who promised one thing and, when the pressure came, they caved in.”

Some policymakers were disturbed by the upwards adjustment of the overall tax bite, from $1.36 to $1.6 billion. “We can add; we can subtract; we can calculate–they know and I know what they are doing, and I just don’t like it,” said Senator Stephen Martin (R-Chesterfield). House Appropriations Chairman Vince Callahan (R-Fairfax County), who voted for the taxes, added, “it’s just too cute for me.”

Silver Linings

In more positive news for taxpayers, the bipartisan cost-cutting caucus, spearheaded by Delegate Chris Saxman (R-Staunton), offered several innovative cost saving initiatives this year. Among those signed into law:

  • HB 1043, the Competitive Government Act, requires every state agency to analyze its workforce and identify competition opportunities. The process is similar to the rules and guidelines of the federal competitive sourcing agenda.
  • Senator Jay O’Brien’s (R-Clifton) SB 304 requires performance budgeting for drug and alcohol treatment and job training programs in the state. The concept is simple: Stop funding ineffective programs and focus efforts only on those services that achieve their goals.
  • Two other bills, Saxman’s HB 1037 and Delegate Ed Scott’s (R-Madison) HB 1447, authorize the attorney general to contract for long-term debt collection and require agencies to implement recovery auditing, respectively. By improving the collection of monies owed the state, and by finding and eliminating fraud and overpayment, the state can reduce its reliance on tax increases.
  • Saxman also authored HB 1042, which requires the state Department of Corrections to conduct a cost-benefit analysis between public and private facilities before any new facility can be built in the state. Saxman considers prison privatization an important opportunity to save money in the state budget.
  • An executive order issued by Warner mirrors a bill (HB 973) that passed the house but failed in the senate. It creates a working group to bring more transparency, accountability, and performance into the budget process.

Ballot Box Accountability

Local and national tax opponents have pledged to hold accountable those Virginia lawmakers who voted for the tax increase.

“Taxpayers are going to remember whether a promise made and a promise kept was just another bumper sticker or a promise you made in your heart,” Lingamfelter warned during the tax debate on the House floor.

The budget battle, for which Warner has declared victory, has attracted national attention to the state. It remains to be seen whether that attention will help Warner in a likely bid for U.S. Senate in 2006, since he’ll be forced to run on a record of raising taxes after promising during his gubernatorial campaign not to do so.

Geoffrey Segal is director of privatization and government reform at Reason Foundation.