Virginia lawmakers today rallied around bills to repeal the estate tax, while killing off many proposals for tax increases to ease the state's fiscal crisis, including several plans that would have raised cigarette taxes.
The General Assembly also rejected proposals that would have scaled back car-tax relief, raised the sales tax to fund education and granted county governments greater taxing authority.
The only tax proposal advancing in a legislature that must correct a $1.2 billion imbalance in the state budget is the estate tax repeal.
"I think the prevailing attitude . . . is that the timing for putting new taxes on the backs of Virginians is not now, either in a recession or coming out of a recession," said Sen. Thomas K. Norment Jr. (R-James City), sponsor of the estate tax plan.
Legislators also are mindful that voters rejected two regional tax increases last November and that all 140 of their seats are up for election this November.
The tax decisions in Virginia come as many states, including Maryland, are debating tax increases as they struggle to close their worst budget shortfalls in at least a decade.
In Virginia, the state government has laid off 1,837 employees, and most state agencies have curtailed spending. Lawmakers have also acknowledged that the economic strain will likely continue into next year because they are proposing to use several one-time fixes to correct the current budget shortfall.
A spokesman for Gov. Mark R. Warner (D) criticized the moves in the Republican-controlled assembly. "I think the combined actions today of the tax cut on top of killing the revenue bills reflects short-term thinking, whether November is the term they're focusing on or not," Ellen Qualls said. "Any discussions of further reducing revenues during Virginia's largest budget shortfall ever are ill-timed."
Qualls said Warner is undecided about estate tax repeal but that he would have been receptive to a "reasonable cigarette tax increase" and a sales tax increase to support public education.
Robert D. Holsworth, director of the Center for Public Policy at Virginia Commonwealth University, said the tax actions are "a direct consequence of the [tax] referendum. No one wants to be on record raising taxes. The combination of reducing the estate tax in a very bad economic climate was unlikely to happen in a non-election year."
Opponents of the estate tax, which they term the "death tax," said people shouldn't be taxed again upon dying after a lifetime of paying taxes. They also expressed worries about wealthy citizens fleeing to states that have repealed the tax. Others said it forces families to lose small businesses and farms because they are forced to sell assets to pay the tax.
"For those of us concerned about maintaining family farms in Virginia, this bill is absolutely essential," said Sen. R. Edward Houck (D-Spotsylvania).
The estate tax repeal would bring Virginia in line with federal law passed in 2001, calling for the tax to be phased out by 2010. Thirty-four states match their estate tax codes with federal law, but a quirk in the Virginia statute required new wording to accomplish that.
Lawmakers in Maryland and the District chose to retain their estate taxes last year.
Virginia's estate tax generates about $130 million annually, and the repeal would take effect Jan. 1, 2004, to avoid reducing revenue this year. Legislators said most Virginians would see a reduction in estate taxes but that some wealthy citizens could end up paying more on inheritances in the interim.
Some legislators pointed to the $900 million in annual revenue that the car-tax repeal program has cost the state and warned against eliminating more funding sources. Under former governor James S. Gilmore (R), Virginia began to reduce the local tax on personal vehicles. The state government compensates localities for the lost revenue.
"I know that everyone here is going to be back wringing their hands saying, 'Oh, we just don't have any money,' " said Minority Leader Richard L. Saslaw (Fairfax). "We're giving tax relief to people who by and large don't need it."
Democrats tried to preserve a portion of the estate tax, but assembly members declined proposals to limit the repeal to small business owners and family farmers.
Democrats also were rebuffed in efforts to raise the state's 2.5 cent cigarette tax to the national average of 60 cents. They said that would generate about $350 million, while helping save millions in health care costs. Local governments, educators, business leaders and health groups have urged lawmakers to raise the tax to discourage smoking and to free up funds for struggling state services, such as mental health care.
Cities and towns in Virginia have the power to raise cigarette taxes, and many have done so this year. Others, including Manassas, Fairfax City and Falls Church, are considering increases.
Fairfax and Arlington are the only counties allowed to impose a cigarette tax. An effort to raise their levies from 2.5 cents to 40 cents will be killed, its sponsor said. A proposal to extend the taxing authority to all counties also has been defeated.
The District raised its cigarette tax from 65 cents to $1 per pack on Jan. 1, matching Maryland's rate.
Legislators also defeated a proposal by Sen. Janet D. Howell (D-Fairfax) to impose a tax of 4 cents per pack on all cigarettes manufactured in Virginia.
Several proposals to scale back car-tax relief were easily defeated in the Senate and House finance committees. Supporters said the hundreds of millions that would be generated could be used to fund schools and other needs, but legislators were unwilling to undo a tax relief program with broad support.