Tax Restructuring Plan Tops Virginia Governor's Agenda

Virginia Gov. Mark Warner (D) is pushing the most ambitious tax package in the nation to maintain his state's renowned education system and shore up its economy. But even Warner agrees he faces a real challenge getting the plan through the Republican-controlled General Assembly, which reconvenes Jan. 14.

"Nobody likes to talk about taxes," Warner told Stateline.org. But he said the state faces "substantial budget shortfalls through at least the end of the decade" without an overhaul of the state tax structure.

Warner's push counters a national trend, including among his fellow centrist Democrats, to stick to a "no-new taxes" mantra. Among the few exceptions: Republican Alabama Gov. Bob Riley whose tax package went down in flames in a 2003 vote.

"The governor's proposal isn't just tweaking the system like you are seeing in a lot of other places. This is a significant proposal," said Scott Pattison, a former Virginia budget director and now executive director of the National Association of State Budget Officers, Washington, D.C., trade group of state finance officers.

Warner's plan includes both tax hikes and cuts in a bid to raise more than $500 million in new revenue for schools and health care and to bolster the state's economy. Tax hikes include:

  • adding one penny to the sales tax; 
  • upping the state cigarette tax from 2.5 cents per pack, the lowest in the country, to 25 cents per pack, and allowing localities to raise the tax up to 50 cents;
  • and levying a higher tax on those earning more than $100,000 (to 6.25 percent from the current 5.75 percent).

 Tax cuts in the governor's package include:

  • phasing out the car tax over the next four years; 
  • reducing by 1.5 cents the sales tax on groceries; and 
  • eliminating the estate tax on all estates valued at $10 million or less.

"Anything that smells like a tax increase is a very hard sell. It's a very risky move for the governor," said Jonathan Watts Hull, policy analyst at The Council of State Governments. Virginia has not approved a significant tax increase since the mid-1980s.

Warner is crisscrossing the Old Dominion to drum up support for his package. He said he is getting a positive response, but also concedes the proposal will likely get reworked. "I am sure the plan will go through some changes, but I think you are seeing a growing sense that we ... can't keep punting on this issue," he told Stateline.org in a telephone interview.

"I think the toughest battle is convincing legislators that this is the year that we've got to do something," Warner said. "If we don't act now, we are going to lose our Triple-A bond rating," he said. A good bond rating can save the state money when it borrows and also signals to investors and businesses that the state is financially sound.

The tax package is part of a budget blueprint released by the governor in December 2003 that spells out two years of spending. The plan assumes the General Assembly will pass the tax hikes. This puts legislators in the tough spot of having to vote against popular projected spending if they kill the tax bills.

Republican House Speaker William J. Howell and Attorney General Jerry W. Kilgore Jan. 8 released a new report that concluded that the governor's 1 cent increase in the sales tax would cost the state $10 billion and 28,000 jobs.

"Every Virginian will suffer if the governor's plan is approved," Howell said in a prepared statement. "If we buck the positive trend spurred by President Bush's tax cuts, we send the message that Virginia has shut its doors to business," Attorney General Kilgore said in a statement.

Small businesses represented by the National Federation of Independent Businesses also outright oppose the governor's plan. "This measure is, by far, one of the most burdensome tax increases in Virginia history," said Gordon Dixon Jr., state director of NFIB/Virginia.

John Nicholson who owns Company Flowers in Arlington, Va., said Warner should focus first on eliminating wasteful spending before revamping the tax system. "It's clear to me that the governor's package isn't going to go through as he proposed. Whether there is going to be any reform at all is a good question," Nicholson told Stateline.org.

Some Virginia retailers, applaud the governor for taking the initiative, but have concerns with elements of the package. Laurie Peterson, president of the Virginia Retail Merchants Association, said she supports the proposal to eliminate the current tax that requires that retailers estimate and pay in advance the amount of sales tax for the month of June. The association, however, has concerns about the sales tax increase and some business tax provisions.

Robert "Jerry" Lawson an associate professor at the University of Richmond who worked more than 30 years in Virginia state government, predicts tough sledding. "I would be shocked if it was not an extremely difficult battle," Lawson said. "There's going to have to be serious compromises," he said.

The governor's Web site has an online calculator that lets Virginians see how the tax reform plan would affect their taxes. 

Tags: Economy