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No one likes to raise taxes. Business leaders in particular are reliable supporters of a low-tax, limited-government philosophy. But in recent years, Virginia lawmakers
have failed to address pressing priorities and unmet funding needs in areas of core government responsibility such as education, transportation, healthcare and public safety. Failure to act led to repeated budget shortfalls and neglected priorities. The mantra of “no new taxes” created an environment in which no policy maker would vote to raise revenues at the state level by conventional methods. Instead, lawmakers resorted to a series of maneuvers to accomplish the same goals by indirect means.
The legislature raised “fees” by $300 million. Tuition climbed by double digits annually at state institutions of higher learning. State government forced cuts on local governments who substantially increased property taxes to fund services. Myriad one-time budget fixes were used to make the numbers balance. Squeezing Medicaid reimbursements and covering the losses with higher health insurance premiums shifted healthcare costs and created a hidden tax. Anti-growth initiatives harmful to the state’s economy were advanced as quick-fix solutions to pressing long-term infrastructure needs. The state’s superior bond rating was threatened.
Business and political leaders concluded that a credible state budget would require additional revenue. And this year, lawmakers responded.
The Virginia General Assembly took extraordinary steps in difficult circumstances this year to meet necessary government funding responsibilities and address chronic budget deficits. The unprecedented 115-day budget stalemate was broken in May with passage of HB 5018, a compromise omnibus tax package constructed by a fragile, bi-partisan coalition. The resulting biennial budget, as with any hard-fought compromise, offers much to be applauded but leaves much to be desired.
Increased education funding receives a standing ovation. Business leaders in Virginia have long held education as a number-one priority for continued progress and prosperity in the Commonwealth, and the new budget agreement is an impressive step toward meeting the state’s funding obligations. With $759 million in new money for K-12 public education over the next two years, state government will have the means to largely fund the Standards of Quality – a responsibility that for too long has fallen to localities. The budget allocates $175 million in new money for state colleges and universities. This begins to bridge the large gap in state funding for higher education, estimated by the General Assembly at $300 million a year.
Further applause goes to a concerted, successful effort to maintain Virginia’s best-in-the-nation AAA bond rating. The extended-overtime agreement in Richmond this year will generate $1.4 billion in new revenue from tax increases for the state’s $27 billion two-year general fund budget. This new money, combined with economic growth and the freezing of car-tax reimbursements at $950 million annually, should yield some $3.5 billion over two years. The state’s rainy-day fund, depleted by $700 million in recent attempts to cover $6 billion in budget shortfalls, will be replenished by at least $450 million, probably more. The package will stem Virginia’s chronic budget deficits, shore up cash reserves and send a strong message to Wall Street that state finances are stabilized.
Virginia is now poised to address deficiencies in public safety, public employee pay, Medicaid and mental health services, all worthy objectives neglected in recent rounds of budget belt-tightening.
Conspicuously missing from the budget accord is any attempt to offer long-range solutions to the state’s pressing transportation needs. Business location, expansion and retention depend heavily on our transportation systems. Companies need fluid highways, railroads, seaports and airports to conduct business efficiently, to grow, prosper and create jobs. Transportation is and always has been a core governmental function and Virginia faces fast-growing unmet transportation needs. The Virginia Department of Transportation is $1.3 billion short of the funding required to meet commitments in the current six-year construction plan. Virginia’s elected leaders must offer adequate long- range solutions to Virginia’s 21st-century transportation demands.
Also absent from this year’s “tax reform” is much in the way of true reform. The result of the protracted budget battle is a mixture of substantial tax increases and a sprinkling of tax reductions, but little has been done to make the system demonstrably more modern, equitable or broad-based. Pronounced shortcomings include:
1) failure to eliminate the estate tax,
2) retention of accelerated sales tax payments, a gimmick that requires major retailers to remit July tax payments in June,
3) continued de-conformity with federal tax law, thus denying increased business deductions for capital expenses, and
4) no mechanism to constrain future spending growth. We have little to show for all the rhetoric about modernizing the tax code, broadening the tax base, and making the system fairer to all who pay.
Development of a long-term strategic vision remains unfulfilled. Virginia FREE renews its challenge to the governor and legislative leaders to articulate a clear direction for the state’s future. This must include an emphasis on efficiency, effectiveness and a streamlining of government as proposed in numerous studies to allow still greater focus on the core functions of government.
Virginia is a wonderful place to do business and it remains a well-governed, low-tax state. We boast a diverse wealth of natural beauty and resources, a strategic geographic location, top-notch public education, well-developed transportation systems, and a business-friendly environment. The quality of government administration is high, and lawmakers typically reject bills harmful to free enterprise, business growth and economic development. Tax hikes enacted this year, the first general tax increase since 1986, will enhance Virginia’s attractiveness to business by stabilizing the state’s finances and securing revenue for essential services and infrastructure that help make our state the best in the nation.
Weighed against the alternative of continued budget deficits and stalemates, the budget accord of 2004 must be viewed as substantial progress. It will be truly a success if it serves to focus our energies on the great challenges and vast opportunities ahead.
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June 7, 2004
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