Virginia Governor Proposes Largest Budget, Tax Increase in State History

Published February 1, 2004

Virginia Governor Mark R. Warner (D) on December 17 presented his executive budget for the 2005-2006 biennium to the joint money committees of the commonwealth’s General Assembly. Warner’s proposed “Commonwealth of Opportunity” budget and tax reform plan were introduced on January 14 as House and Senate Bill 30, when the General Assembly opened its 2004 session.

The budget request was the largest in the commonwealth’s 216-year history, to be funded by the biggest tax increase ever imposed on Virginia residents.

“In the first 23 months of this administration, we have worked to restore the fiscal integrity of Virginia, to make government more efficient, and to promote new economic opportunities for our people,” said Warner. “These would be ambitious goals in the best of times–but these have not been the best of times.”

The budget also included the unveiling of the governor’s much-heralded “tax restructuring” plan. The plan includes several changes to the tax code–tax increases as well as tax reductions. “We have grappled with more than $6 billion in shortfalls, and worked hard to streamline government and change the ways it does business,” said Warner. “Now we have come to a place where state government must begin to meet its commitments fully.”

“Irresponsible” Tax Increase

Warner’s plan would increase the overall tax burden on Virginia taxpayers by more than $1 billion in the upcoming biennium budget.

“The governor was irresponsible to not even consider where this budget can be trimmed,” accused Delegate L. Scott Lingamfelter (R-Prince William), who has said he will not support new taxes. Lingamfelter said he hopes to look closely at how the state can spend money more efficiently. “We’re already seeing signs of recovery, and the governor should let the economy correct itself.”

The governor has said the tax restructuring plan is needed to “make the system of collecting taxes more fair.” Under the governor’s proposal a new and higher tax bracket would be created for families earning more than $100,000 (from 5.75 percent to 6.25 percent). Furthermore, the governor proposed increasing the state sales tax on cigarettes from 2-1/2 cents per pack to 25 cents per pack, and he also would authorize local governments in the commonwealth to enact an additional tax of up to 50 cents per pack.

“There’s nothing in his plan that addressed the funding imbalances we suffer from,” said Delegate David B. Albo (R-Fairfax), who, like Lingamfelter, said he thinks the government can be run more efficiently.

Regional differences also appear to be a problem for the governor’s plan. “Here in Northern Virginia, we contribute about 40 percent of the state’s income tax, with about a quarter of the population,” said Delegate Vincent F. Callahan Jr. (R-Fairfax), chairman of the House Appropriations Committee. “With the governor’s plan, it could take it to about 50 percent. That concerns me.”

Not Revenue-Neutral

The governor’s plan is not exclusively tax increases. He proposes lowering the state income tax on the first $20,000 of income, increasing the standard deduction and dependent exemption amounts, and lowering the state sales tax on food from 4 percent to 2.5 percent.

However, Senator Bill Bolling (R-Hanover) suggested “the goal of true tax reform must be to devise a tax code that is fairer, simpler, and better positions the Commonwealth to take advantage of future revenue growth in a changing economy. And a guiding principle of true tax reform must be revenue neutrality for the Commonwealth.

“Stated differently,” he continued, “tax reform should not result in an increase in the overall tax burden for Virginia’s families or businesses. If it does, it is not tax reform, it is a tax increase in disguise. Clearly, the governor’s tax plan includes very little in the way of true tax reform. It is primarily a tax increase in disguise.”

Delegate Gary Reese (R-Centerville) added, the “governor’s got it backwards, what we need is budget reform to determine the kind of Virginia we want in the twenty-first century. We need a transparent budget and priorities before tax reform.” Reese authored the Taxpayer Bill of Rights, which passed both houses of the General Assembly unanimously last year and was signed by the governor. It requires the state to produce a readable budget with performance and cost data at its heart.

U.S. Senator George Allen (R-Virginia) expressed concern in a letter to state Senate Majority Leader Walter Stosch (R-Henrico County) that “the positive economic effects for Virginians from the tax reductions we have enacted at the federal level not be undermined or jeopardized by large state tax increases.”

The governor’s proposed biennial budget includes nearly an 8 percent increase in FY 2005 and nearly 4.5 percent increase in FY 2006. The governor has suggested the $1 billion tax package is needed to prevent cuts in the budget, fully fund Medicaid, re-fund the rainy day fund, and implement “standards of quality” (SOQ) improvements in education.

Over the past few years, several tax and expenditure limitation (TEL) bills have been introduced in the Virginia General Assembly. None has passed. In 2003, a bill carried by Assembly Appropriations Chairman Callahan would have limited spending growth to 8 percent a year, which would have allowed the budget to double every nine years. The bill passed the House but was not considered by the Senate.

At least three new TEL proposals have been submitted to the General Assembly for consideration in 2004. They include provisions to limit spending to the rate of population and inflation increases and provide for a stabilization fund, tax refunds, and grants to local governments for special infrastructure projects.

Geoffrey Segal is director of privatization and government reform policy in Reason Public Policy Institute’s Privatization and Government Reform Center. His email address is [email protected].