Va. Is Warned Of Budget Gap

By Amy Gardner
Washington Post Staff Writer
Thursday, August 2, 2007

A Richmond-based budget watchdog organization warned yesterday that Virginia is likely to face a shortfall of $1.2 billion in the coming two years, threatening such services as public education, Medicaid and mental health programs unless lawmakers raise taxes.

The nonprofit, nonpartisan Commonwealth Institute for Fiscal Analysis, founded last year to follow the state budget on behalf of low- and middle-income Virginians, reported that slowing revenue as well as the continuing cost of car tax relief paints a "precarious" portrait of state finances for the two-year budget cycle that begins July 1, 2008.

The prediction bodes ill for two spending priorities that Gov. Timothy M. Kaine (D) and lawmakers are expected to push for the 2008-2010 budget cycle: expanded pre-kindergarten for 4-year-olds and more spending on mental health to close service gaps identified in the aftermath of the Virginia Tech massacre.

"The situation in Virginia is shifting and changing," said Michael Cassidy, executive director of the Commonwealth Institute. "Obviously we're going to have a big debate on the budget in the coming year. We think it's important that these numbers get out to the public now."

State officials are feeling the pinch of shrinking tax receipts, which they blame on a combination of higher-than-expected tax refunds and Northern Virginia's slumping housing market. Kaine announced in May that program trims would be necessary this year to eliminate a budget deficit between $200 million and $300 million.

Virginia is not alone. Maryland is facing a projected shortfall of nearly $1.5 billion next year, prompting talk of possible tax increases, budget cuts and legalization of slot-machine gambling.

Virginia's Kaine will reveal a more detailed forecast for the 2008-2010 budget cycle Aug. 20, when he is scheduled to address the General Assembly's budget committees. Kaine spokesman Kevin Hall declined yesterday to provide detailed fiscal predictions in advance but agreed generally that tighter budget times are on the horizon.

"We acknowledge -- heck, everybody does -- that the 2008-2010 budget period will feature slower growth than anticipated," Hall said. "But we are not in a position to validate the numbers that the Commonwealth Institute is giving out."

According to the institute's report, the looming budget crunch is the result of a state tax structure too sensitive to the ebbs and flows of Virginia's economy. The budget relies heavily on sales taxes, which are volatile during economic downturns. They are also regressive, meaning that the poor pay a greater portion of their income toward those taxes than do the rich, the report states.

The report said state policymakers must be careful not to approach the budget crunch as a spending problem by slashing state programs. Although low-tax Republican leaders in the General Assembly have decried growth in the state's annual budget in recent years (from about $19 billion in 1997 to $36 billion today), yesterday's report noted that much of that money has gone toward increased costs in existing programs -- such as public education and medical care for the poor -- instead of new or expanded services. The report cited a 2006 legislative study showing that Virginia's budget grew an average of 3 percent a year over the past decade when controlling for population increases and inflation.

In particular, the report decries the 1999 program to eliminate the unpopular car tax -- a phaseout that was capped at $950 million a year in 2004 because of skyrocketing costs. Most car owners pay their local governments roughly a third of their car tax bills today, and the state continues to "struggle" to pay the rest while also "maintaining an adequate level of state services," the report states.

The report concludes that tax reforms are necessary to "stabilize" the state's budget and provide enough money to meet education, health care and public safety needs over the longer term. The institute is one of a number of groups along the political spectrum that will weigh on the state's budget outlook in the coming months.

Staff writer John Wagner contributed to this report.

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