Virginia governor proposes an income tax increase

By Anita Kumar and Rosalind s. Helderman
Washington Post Staff Writer
Saturday, December 19, 2009; B01

RICHMOND -- Virginia's outgoing Democratic governor, Timothy M. Kaine, proposed Friday replacing the long-hated car tax with an income tax increase, a radical restructuring of the state's tax code that was immediately rejected by the governor-elect and other Republican leaders.

Kaine told legislators that the only way to avoid cuts deeper than the $2.3 billion he proposed Friday would be to raise taxes by $1.9 billion to make up for a potential $4.2 billion budget shortfall created by the state's ongoing financial crisis.

"More cuts to education, public safety, health care, state employees and other core services would be directly contrary to the current and future needs of the Commonwealth,'' Kaine said. "They would squander our leadership position and make it more difficult to achieve our goals as we climb out of the national recession."

But Republican leaders -- including Gov.-elect Robert F. McDonnell, who easily won after promising not to raise taxes, and House Speaker William J. Howell -- vowed to kill what would be Virginia's first income tax increase in nearly four decades.

"It is bad economic policy to increase taxes on Virginians, especially as they continue to struggle with the worst economy in generations,'' McDonnell said in a statement.

Kaine unveiled his final two-year $76.8-billion spending plan in a speech to a standing-room-only crowd at the General Assembly's financial committees, in an attempt to solidify his legacy before leaving office next month to begin working full time as chairman of the Democratic National Committee.

Eliminating the car tax would mean abolishing a personal property tax that is embedded in Virginia's constitution and dates to the colonial era, when it was applied to horses, as well as George Washington's snuff box. It would be a change to Virginia's tax code on the order of the adjustments advocated by Gov. Mark R. Warner (D) in 2004, which resulted in one of the most tumultuous legislative sessions in recent memory.

The state now pays its local governments $950 million each year for the costs of giving relief to car owners, a figure that removes some but not all of the burden from residents. Kaine derided the car tax reimbursement program as "a $950 million folly" and accused Republicans of protecting it only for the sake of political expedience. His proposal would allow local governments to phase out the car tax and phase in a 1 percent income tax increase over two years.

The increase would mean a hike in the income tax rate from 5.75 percent to 6.75 percent for those earning more than $17,000, 60 percent of taxpayers.

McDonnell and legislators will use Kaine's plan as a blueprint, but will make alterations based on their priorities and the changing economic forecast.

As has his been his practice for most of his term, Kaine did not try to sell his plan to legislators beforehand. Lawmakers expressed surprise Friday at his proposals, and few were enthusiastic.

Some members of his own party declined to express support for the plan but promised to examine it thoroughly, while members of the opposing party accused him of purposely leaving the new majority a mess as he departs. "It's a last-minute, political poke-the-legislature-in-the-eye proposal,'' House Majority Leader H. Morgan Griffith (R-Salem) said.

Even with the proposed tax increase, Kaine recommended what he called "significant and painful cuts" to public education, mental health services and public safety. He proposed eliminating 1,879 jobs and laying off 664 workers.

McDonnell and Republicans are likely to face even more cuts if they do not agree to Kaine's income tax hike.

"Governor Kaine has now cut almost $9 billion from state government," Sen. Janet Howell (D-Fairfax) said. "He said he can't do any more and sleep at night. And now it's the new governor's opportunity to make additional cuts and see how well he sleeps."

Kaine's proposal would save the state close to a billion dollars a year while still providing more revenue for local governments to use to fund services, potentially forestalling layoffs at the county and city level. The impact to individual taxpayers would vary widely, based on where they live, their income and the value of their car.

Michael Cassidy, executive director of the Commonwealth Institute for Fiscal Analysis, said it would be a "more fundamental change" than Warner's measure. "You're talking about a new source of revenue available to localities and the all-out elimination for the car tax, which has been on the books for a while and hotly debated for years and years and years."

But unlike Warner, who spent months selling his proposals to business and community leaders before asking for legislative approval, Kaine kept his initiative so closely guarded that even fellow Democrats who control the state Senate said they were briefed only Friday morning.

The car tax is a local levy, and its rate varies from place to place. Since 1997, eliminating the car tax has been a central promise of Virginia Republicans and a source of conflict between the parties.

Former governor James S. Gilmore III (R) pledged he would get rid of the tax, promising to hold local governments harmless by reimbursing them for the costs of lost revenue. He blasted Kaine's proposal Friday as nothing like what he had in mind.

"It's a slight of hand," he said. "You can disguise it in all kinds of ways, but it's still a tax increase from people. It takes away money from their household budget."

"We do not think it's appropriate,'' Speaker Howell said. "He [Kaine] believes in bigger government, more government, more taxes, more revenue. I think what Bob McDonnell was elected on and the type of government we're going to put together is one of making due with the resources that you have.''

In Virginia, state revenue projections have been lowered by $7 billion since July 2008, resulting in deep cuts in education, law enforcement and health care, as well as the elimination of hundreds of jobs. An infusion of federal stimulus money helped the state avoid deeper trims.

The latest numbers are based on the state receiving less tax revenue than it had anticipated and being required to spend additional money on certain mandatory programs, such as Medicaid. State officials project a revenue decline of 2.7 percent this fiscal year -- the first time in recorded budget history that the state experienced revenue declines in two successive years.

McDonnell also will have to find millions of more dollars if he expects to honor his campaign promise to reopen 18 closed rest stops at a cost of nearly $10 million and double the funds used to lure business to the state at a cost of $12 million a year.

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