Governor Tries to Replace Taxes Thrown out by Va. Supreme Court

Published July 1, 2008

Barely three months after the Virginia Supreme Court struck down hundreds of millions of dollars in taxes and fees intended to fund transportation, Gov. Tim Kaine (D) launched a campaign to raise taxes and fees to replace the ones ruled unconstitutional.

In early June Kaine announced a plan to raise the retail sales tax from 5 cents to 6 cents on the dollar in the Hampton Roads and Northern Virginia areas. He also proposed raising the areas’ sales tax on cars from 3 percent to 4 percent, adding $10 to the yearly auto registration fee, and increasing taxes on home sellers. The money, he says, would be used to address traffic congestion in the affected areas.

At press time Virginia lawmakers were expected to go into special legislative session beginning June 23 to take up the matter.

Skeptical Lawmakers

The governor’s proposals immediately received a skeptical response from some key lawmakers.

“A major problem with the governor’s tax plan is that it will further hurt two of our hardest-hit industries, real estate and automotive sales,” said Virginia House Speaker William Howell (R-Stafford).

Stafford noted in 2002 voters in the Northern Virginia and Hampton Roads areas strongly opposed tax increases smaller than those the governor is proposing. He said the governor’s message is, “We know what you said to those tax increases, but oh well.” Giving his own opinion on the matter, Howell said, “Tax increases are rarely good, but these regressive taxes are especially bad because our real estate and auto sales industries are truly suffering.”

Howell also said he is “not convinced the Virginia Department of Transportation will spend the money wisely, as they already spend more than $4 billion a year. One thing I would like to see done is a complete audit of VDOT so that people know if the money they are already giving is being spent wisely.”

Unanimous Court Decision

Kaine’s proposal comes in response to a February 29 decision by the Virginia Supreme Court, which unanimously ruled $300 million in new taxes levied by the Northern Virginia Transportation Authority (NVTA) were unconstitutional.

NVTA and the Hampton Roads Transportation Authority were created as part of a 2007 transportation funding package. The two authorities, whose voting members were appointed to their positions, subsequently levied $300 million and $168 million in taxes, respectively. The Hampton Roads authority decided not to collect its taxes pending the outcome of the state supreme court decision.

Virginia Del. Bob Marshall (R-Manassas) and more than a dozen taxpayers challenged the legality of the transportation authorities, and the court agreed, ruling “the General Assembly may not delegate its taxing power to a non-elected body such as NVTA.” Therefore, the court decided, “such taxes and fees that NVTA has already imposed are null and void.”

Refund Process Begins

On March 25 Kaine signed a bill authorizing refunds of the taxes illegally collected by NVTA. The process could take up to three years and cost hundreds of thousands of dollars, according to NVTA, because there are seven taxes and fees, including taxes on home sales, hotel room rentals, and car rentals, making the bookkeeping extremely difficult.

Kristina Rasmussen, one of the plaintiffs who successfully challenged the legality of the taxes and fees imposed by the unelected transportation authorities, said she believes more tax hikes would hurt the Virginia economy as well as businesses and individuals.

“Northern Virginia has the reputation of being the low-tax alternative to live and work when compared to Washington, DC and Maryland,” said Rasmussen. “If legislators in Richmond keep beating the drum for higher taxes, Northern Virginia may very well lose its competitive advantage.

“Taxpayers will not let Governor Kaine push his tax hikes through without a fight,” said Rasmussen, who works as director of government affairs for the 362,000-member National Taxpayers Union, based in Washington, DC. “The folks in Richmond will be getting an earful from many of NTU’s 9,000 Virginia members during the special session.”

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.