Kaine proposes replacing car tax with income one

RICHMOND | Virginia’s hated local car tax would be replaced with a $2-billion-a-year income tax increase under the new budget Gov. Tim 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. Robert F. McDonnell, who has pledged to reject any general tax increase, and with an anti-tax GOP House majority strengthened by last month’s elections.

A defiant Mr. 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, Stafford Republican, sat mute amid the General Assembly’s budget writing panels, staring wide-eyed as Mr. Kaine advocated dismantling the 12-year-old GOP measure.

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

Friday’s cuts were the fifth that Mr. Kaine has proposed since July 2008. And Mr. 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, Mr. 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 would generate 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.

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.

Mr. 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.

Mr. 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. Mr. Kaine had already been forced to cut $7 billion from the budget the past 18 months.

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