Virginia governor proposes replacing car tax with 1 percent phased-in income tax increase

Va. gov: End car tax, raise income tax 1 percent

RICHMOND, Va. — Virginia’s hated local car tax would be replaced with a $2 billion-a-year income tax increase under the new budget Gov. Timothy M. Kaine presented Friday.

The tax proposal from the Democratic governor who leaves office next month accompanied a budget that prescribes about $1.2 billion in spending cuts in a bid to reconcile a $3.6 billion state revenue shortfall for 2010 through 2012.

The plan was on an immediate collision course with incoming Republican Gov. Bob McDonnell, who has pledged to reject any general tax increase, and an anti-tax GOP House majority strengthened by last month’s elections.

A defiant Kaine derided the 12-year-old Republican-born car tax relief system as “a $950 million folly,” and accused GOP lawmakers of protecting it only for the sake of political expedience.

“While some of you might disagree with this proposal in your public statements, your actions have told the public you do not place a high priority on car tax relief,” he said.

House Speaker William J. Howell, R-Stafford, sat mute amid the General Assembly’s budget writing panels, staring wide-eyed as Kaine advocated dismantling the 12-year-old GOP car tax cut.

“I think it’s unrealistic to even propose it. It’s got no chance of passing,” Howell said afterward.

Friday’s cuts were the fifth that Kaine has proposed since July 2008. And Kaine estimates that the total budget gap will reach $4.2 billion by 2012 if the expected growth in Medicaid costs and the end of federal stimulus funding beyond 2011 are factored in.

Besides a budget bill that deeply cuts funding for state-supported colleges, mental health services and public safety, Kaine is preparing a separate bill that would phase in a 1 percent income tax increase over two years. It would be the first income tax increase since 1972.

The massive income tax increase generates about $400 million a year more than the $1.6 billion the car tax now raises for localities. Local governments would also receive additional revenue from the income tax.

The car tax was so broadly loathed in Virginia that Republican Jim Gilmore’s promise to phase it out got him elected governor in 1997.

The tax, applied to the value of personal cars and pickup trucks, could run into hundreds of dollars annually in some jurisdictions. The General Assembly exempted up to $20,000 of a vehicle’s value from taxation and agreed to reimburse cities and counties dollar-for-dollar for revenues lost as the tax was gradually rolled back.

But as annual reimbursement costs spiraled toward $1 billion, the legislature voted in 2004 to cap total state reimbursements to local governments at $950 million a year.

Kaine belittled the complicated scheme that has bedeviled legislators for years.

“Three-fourths of the members of (the General Assembly) know that ‘No Car Tax’ is ridiculous. Why not call it what it is and put it out there,” Kaine told reporters later.

Kaine’s budget eliminates reimbursements and any obligation to pay taxes on cars, no matter their value. Income tax legislation would provide local governments all of that money, perhaps more.

McDonnell questioned the tax increase.

“It is bad economic policy to increase taxes on Virginians, especially as they continue to struggle with the worst economy in generations,” he said.

The cuts reduce the biennial general fund budget to about $30 billion, about the size of the budget six years earlier. Kaine had already been forced to cut $7 billion from the budget the past 18 months.

Funding for state-supported institutions of higher education would be cut by 26 percent over the next few years, a move certain to provoke sharp increases in tuition.

Public school districts would see deeper cuts in state support for positions such as secretaries and teachers’ aides.

Kitty Boitnott, president of the 60,000-member Virginia Education Association, gasped as Kaine announced the public school cuts. Capping support for non-teaching personnel would mean job losses, she said.

The state would cut about $12 million for mental health crisis services, just two years after mental health budgets had been increased by $42 million in response to the April 2007 shooting deaths of 32 people at Virginia Tech by a disturbed student.

Sheriffs and other local constitutional officers would lose about $270.5 million over the two years, and local police department funding would be cut by about $73 million.

John Jones of the Virginia Sheriff’s Association said sheriffs are reeling from cuts Kaine made in September. Some can’t provide 24-hour patrols, he said.

“This assaults that core service; we can’t do it with these cuts,” Jones said.

State employees would forgo pay raises for two years and be required to make payments toward their own pensions for the first time since 1983. The retirement age for new hires would jump from age 50 to 55, and the state would eliminate 664 jobs.

“The governor’s proposals today are a gut shot to state employees where death is long, lingering and excruciatingly painful,” said Ron Jordan of the Virginia Governmental Employees Association.

The tax increase is not the only effort to increase revenue. Kaine proposed ending the dealer discount, a sliver of the state sales tax retailers keep for collecting and remitting the tax, adding $60 million to $70 million annually.

He proposed leasing 1,000 state prison beds to house out-of-state inmates to raise $19.8 million.

And, if approved, the price of a bottle of liquor will increase by 2 percent at Virginia’s state-owned liquor stores.