Arlington, Loudoun and several other Virginia counties stand to lose millions of dollars in tax revenue on rental car receipts, as Gov. Mark R. Warner (D) looks to local coffers in his effort to close a $2 billion gap in the state budget.
While every community with even one rental car outlet would be affected, Arlington, home of Reagan National Airport, and Loudoun, home of Dulles International Airport, would feel the sharpest impact, state and local officials say. Both counties get millions of dollars in taxes each year because of the high concentration of rental car companies near the airports.
The 4 percent local tax on rental car fees is collected by the state and then passed back to the local governments. That allows finance officials in Richmond to argue that the revenue is state funding earmarked for local communities and cut it if they choose. That has been the case since 1981, when collecting the tax became a state responsibility in the name of efficiency.
Under Warner's plan -- disclosed to local officials in a letter late last week -- Richmond would withhold 10 percent of the tax on rental cars this year and 13 percent next year. The withholding would save the state $3.2 million this year and $4.1 million in fiscal 2004.
The state's biggest loser, Arlington, would forgo $750,000 immediately, while Loudoun would lose close to $600,000. Henrico County, home of Richmond International Airport, stands to lose nearly $400,000, an official there said.
Local leaders said Warner's plan sets a dangerous precedent of the state raiding local funds to balance its own books.
"I think it's bad tax policy," said Arlington County Board member Paul F. Ferguson (D). "We understand what the state is going through, but if a tax is imposed by a locality, I don't know if it's right for the state to be dipping into it."
The state's move also comes as Northern Virginia voters consider a sales tax increase earmarked for transportation projects. If approved Nov. 5, the increase would raise $5 billion over 20 years for road and public transit projects.
Opponents have said that Warner's plan to withhold rental car taxes is an example of what can happen to locally generated funds during a budget crunch.
"This is a preview of what you'll see if the tax referendum passes," said James T. Parmelee, president of the Northern Virginia Republican Political Action Committee and spokesman for groups opposing the sales tax increase. "As the governor's plan to take some of this rental car money shows, there are no dedicated funds anywhere."
State officials said the extra sales tax revenue would not be targeted by the state. That money would never reach Richmond, they said, and would instead go directly to the local agency responsible for allocating money to agreed-upon transportation projects in the region.
They also said that the Warner administration is well within its rights to garnish rental car tax revenue because the state collects the tax. Any revenue returned to local governments is just like any appropriation and therefore can be cut.
"There are certain appropriations that cannot be withheld but this is not one of them," said Ric Brown, director of planning and budget for the state. "Under state policy this is an appropriate withholding."
The state began collecting rental car taxes in 1981, when the General Assembly gave Richmond the right in an effort to make the collection more efficient.
Before that, local governments did their own rental car tax collection, and the money never left. Returning to the old system would require an act of the General Assembly.
"We believe that because the change was made statutorily, the only way to alter it is by the General Assembly," said Bill Lazaro, special assistant to Loudoun County Board of Supervisors Chairman Scott K. York (R), who is drafting a letter on behalf of county supervisors expressing concern about the cut. "We find the action inappropriate."