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Va. Surplus Awakens Fight On '04 Taxes
Most of $544 Million Going to Reserve Fund

By Chris L. Jenkins
Washington Post Staff Writer
Friday, July 22, 2005

RICHMOND, July 21 -- Virginia ended its fiscal year with a $544 million surplus, powered by rising tax collections from a healthy real estate market and robust economy in the Washington suburbs, Gov. Mark R. Warner (D) announced Thursday.

But the rosy results for fiscal 2005, which ended June 30, intensified a debate among the candidates for governor over whether state politicians should have raised several taxes in 2004.

Republican candidate Jerry W. Kilgore said the outcome proves that Warner and lawmakers backing his plan should have waited for the economy to rebound before raising taxes. Democratic nominee Timothy M. Kaine, the lieutenant governor, supported the increases. He said Thursday that the tax increases, which amounted to $1.5 billion, were necessary to maintain the state's fiscal integrity.

Warner, who has hung much of his legacy as governor on the bipartisan agreement to raise taxes and spending, said in a statement that the additional state revenue would not be used to start new programs. He said that a major chunk of the extra money -- nearly $437 million -- will go to the state's rainy-day fund and that the rest will be used to replenish funds earmarked for transportation projects and the cleanup of Chesapeake Bay. Warner also said he would set aside $25 million of the surplus to aid Virginia localities, such as Arlington, affected by the federal base realignment and closure process.

"Virginia's economy continues to outperform the nation, and Virginia's unemployment rate is among the lowest in the nation," Warner said. With the extra money, the state's reserve will top $1.1 billion. Several years ago, it hit a low of about $247 million.

"I am proud that we will leave the next governor with a fully funded reserve," Warner said.

State officials said that most of the surplus for the budget, which totals $63 billion over two years, was generated by increased tax collections from residents who made money from stock market gains and other non-wage income. The state also benefited from growth in corporate income taxes and from revenue drawn from taxes and fees on real estate sales, largely in Northern Virginia, administration officials said.

Although the large surplus had been expected, this is the second consecutive year that Virginia has had a surplus in the hundreds of millions of dollars.

Revenue is rising in dozens of states. On Tuesday, Maryland reported a surplus of $1 billion, while the District has accumulated cash reserves of more than $1.2 billion.

The issue of how much money the Virginia government needs was prominent in the governor's campaign even before the final budget numbers were published.

"Today's announced budget surplus is good news for Virginia and yet another reminder that those who supported the historic and bipartisan budget reform of 2004 were right to do so," Kaine said in a statement.

Kilgore's press secretary, Tim Murtaugh, said that the surplus is proof that all state politicians had to do last year was wait for the economy to rebound. "This completely bears out everything Jerry Kilgore has been saying about the tax increase since it was first considered: that the economy would be turning around and that the tax increase was rushed and unnecessary," Murtaugh said.

But the race's third candidate, H. Russell Potts (R-Winchester), who is running as an independent, said that the state's unmet needs -- including future Medicaid and education payments -- called into question whether there was actually any extra money available that could truly be called a surplus.

"There is no surplus when you still have bills in the drawer that need to be paid," he said. Potts supported the 2004 tax increases.

Supporters of last year's tax and spending increases said the economy might not always be as strong as it is right now.

"As good as this news is, we need to keep in mind that most of the revenue surplus comes from revenue sources that have major ups and downs from year to year," said Sen. John H. Chichester (R-Northumberland), chairman of the Senate Finance Committee and Warner's chief ally last year in passing the plan.

But the size of the surplus prompted some in the legislature to renew objections.

"We didn't need a tax increase that was that large," said House Majority Leader H. Morgan Griffith (R-Salem), who suggested that in light of the budget numbers, the General Assembly should consider lowering recordation fees that were raised last year.

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