THE COST OF CUTTING THE CAR TAX Below are the estimated amounts that the state would send to Northern Virginia localities during the first, second and fifth year of Gov. James S. Gilmore III's five-year plan to eliminate the property tax on cars and trucks. The state contributions would reimburse the localities for gradually lowering the tax on vehicle owners. Figures represent millions of dollars
Jurisdiction	1998	1999	2000
Alexandria	$3.6	$7.6	$29.1
Arlington	$4.1	$8.6	$32.8
Fairfax City	$0.39	$0.814	$3.1
Fairfax County	$28.2	$58.9	$225.2
Fauquier County	$1.4	$2.9	$11.3
Loudoun County	$3.7	$7.7	$29.3
Manassas	$0.597	$1.2	$4.8
Manassas Park	$0.148	$0.31	$1.2
Pr. William County	$5.4	$11.3	$43.2
SOURCE: Appropriations Committee, Virginia House of Delegates

By Spencer S. Hsu and Ellen Nakashima
Washington Post Staff Writers
Thursday, February 5, 1998; Page D01

RICHMOND, Feb. 4—Virginia Republicans acknowledged today that proposed rebates this year under Gov. James S. Gilmore III's plan to cut the car tax would have to be treated as taxable income, meaning that for many residents, the tax cut could be worth up to one-third less than advertised.

The news surprised key lawmakers, such as House Finance Committee Co-Chairman Harry J. Parrish (R-Prince William) -- one of four main patrons of Gilmore's plan -- who called tax accountants this week to review the program and advise taxpayers of the unexpected catch. The $493 million tax cut being considered by the legislature would cover the first two years of Gilmore's five-year plan to phase out the property tax on cars and trucks.

"I have asked certified public accountants what the impact will be," said Parrish, who has set a House hearing on the tax cut for Monday. "If you get a check back and that's going to be income, it's going to cost you 28 percent," he said, based on the most common federal income tax rate.

Today, Virginia Secretary of Finance Ronald L. Tillett and Internal Revenue Service officials said that the state rebates would indeed have to be treated as taxable income for those who itemize deductions on their federal and state income tax returns.

In general, a vehicle owner who received a $100 rebate from the state this year would have to pay $28 in added federal income tax and $5.75 in Virginia income tax. For those who do not itemize deductions and therefore do not claim a credit for paying the car tax -- about 70 percent of the state's 3 million filers -- taxable incomes would not be affected by the rebates, officials said.

The wrinkle over the rebates appeared as lawmakers began serious talks on Gilmore's centerpiece budget initiatives, with House and Senate Finance subcommittees set to meet over the next several days.

Meanwhile, the House and Senate voted overwhelmingly today in favor of allowing publicly funded, experimental charter schools. Democrats in both chambers, breaking ranks with party members who said such programs would draw funding from traditional public schools, joined Republicans to end a five-year battle over the landmark shift in public education. Gilmore has said he will sign a charter school bill.

Gilmore aides said today that the additional taxable income that the car-tax rebates would create is insignificant, adding that no taxpayer would suffer from having less of a deduction on the car tax.

"The logical answer is, people are going to have more of their own money to spend," said Gilmore spokesman Mark A. Miner.

Other Gilmore aides said today that the finding was no surprise and had been figured into their campaign estimates. Gilmore's pending state budget includes an additional $12.1 million in income tax collections that finance officials believe they will be able to collect from car-tax refunds in the next two years, compared with the $493 million they plan to pay out.

No comparable federal figure was immediately available from the IRS.

The tax rebates in the first year of Gilmore's plan -- which would be replaced with a voucher system beginning in 1999 -- would require those who itemize deductions on their tax returns to do a bit more math.

Gilmore aides said a car owner who itemizes deductions and pays $500 in car taxes this year, for example, would receive a rebate of $75, or 15 percent of the tax. That taxpayer then would be able to claim a deduction of $425 on the federal return, with the rebate taxed as income.

"It's not rocket science," said Senate Majority Leader Walter A. Stosch (R-Henrico). "If you pay $100 and someone gives you back $20, you've paid $80. It's an accepted practice in tax reporting that . . . you just deduct the net."

Stosch, a certified public accountant, added that "if somebody wants to take their tax relief check and give it to their local church, then of course they can get a full deduction for that."

But Democrats jumped on news of the taxable rebates as another in a series of niggling details they say will further complicate an already daunting tax-cut plan.

"I think that's going to hassle the dickens out of people," said House Democratic Leader C. Richard Cranwell (Roanoke). "People are going to be surprised to know that the money they're going to get back is in fact going to increase their tax burden."

"What [Gilmore] thought was going to be a tax break ends up costing some Virginians more back," said Del. Clifton A. "Chip" Woodrum (D-Roanoke). "It's the doctrine of unintended results."

Although lawmakers in both parties say the probability of passage of some form of car-tax relief is still high, there was more sparring today in the House over the tax cut's fairness.

Some downstate Democrats brandished a new study by House Appropriations Committee analysts indicating that Northern Virginia taxpayers will get 38 percent of the tax relief under Gilmore's plan, although they make up just 25 percent of the state's population.

But Del. Vivian E. Watts (D-Fairfax), a former state secretary of transportation, defended her constituents' rights to the bulk of the benefits from the tax cut, saying that Northern Virginians pay the state's highest tax rates and own relatively expensive cars.

"No one talked to them about using any portion of the very modest relief being proposed for even greater redistribution of wealth," Watts said. "If the [Gilmore] campaign raised different expectations . . . it is most regrettable."

Cranwell replied that Fairfax residents won't "feel the same pain" as Southwest Virginians, whose median household income is about half of Fairfax's $62,000 a year.

He also linked the issue to Democrats' marquee initiative to spend $700 million in lottery profits over two years to build and renovate schools. Cranwell challenged Republicans to support the measure, warning that passing the car-tax cut without addressing school construction needs would force local governments to raise real estate taxes to pay for schools.

"You all are on a roll right now," said Cranwell, pointing to the GOP's recent success at the polls. "As long as you're on a roll, have the courage to govern. Step to the plate and help us do something about financing the cost of construction of schools."

The charter school bills approved by the House and Senate would allow each of Virginia's 135 local school districts to create up to two publicly funded, nontraditional schools that would be freed of some state regulation to encourage innovation. Critics, including many liberal and African American lawmakers, argued passionately that the bills would lead to a "two-tiered" education system that would drain money, ideas and talent from public schools for a privileged few.

"This is a dangerous experiment," said Sen. Henry L. Marsh III (D-Richmond), who said the changes evoke images of Virginia's segregationist past. "We are setting up a system of schools that will exclude most of the students of Virginia."

But sponsors rejected that characterization, saying Virginia will join 29 other states in approving charter schools and will qualify for federal funding under an $80 million program established by President Clinton.

"The public school system is the backbone of the nation," said Sen. Warren E. Barry (R-Fairfax), "but if we don't provide for innovation . . . we're putting our heads in the sand."