- The Washington Times - Tuesday, August 31, 2004

The sales tax in Virginia will increase by a half-cent on the dollar, and the levy on a pack of cigarettes will increase by 17.5 cents beginning today as part of the largest tax increase in state history.

Under the tax-reform plan approved by the legislature, the sales tax will increase to a nickel on the dollar, which means a $35 shirt from the Gap that today costs $36.58 with tax, will cost $36.75 today.

The Republican-controlled General Assembly in May approved a tax-reform plan that raises $1.38 billion to fund a balanced two-year budget that allots more money for education, health care and public safety. Virginia’s sales tax will be the same as Maryland’s. The general consumer sales tax in the District is 5.75 percent.

Under the plan, a family that spends $20,000 on items a year will pay $100 more per year in sales taxes. A family that spends $25,000 will pay $125 more in taxes, and a family that spends $30,000 will pay $150 more.

Under the same plan, the cigarette tax increases from 2.5 cents to 20 cents per pack — the first increase in the 44-year history of the state’s cigarette tax — and the tax on real-estate transactions increases from 15 cents per $100 of value to 25 cents.

The cigarette tax will increase to 30 cents per pack by July 1.

A pack-a-day smoker would pay $63.88 more for cigarettes this year and $100.38 more next year. The plan also puts a 10 percent excise tax on other tobacco products such as chewing tobacco, starting March 1.

The state’s current cigarette tax is the nation’s lowest and still will be one of the lowest in the country despite the latest increase.

Delegate L. Preston Bryant, Lynchburg Republican and a leader of the tax-reform plan, said residents won’t be much affected by the increases.

“Before the tax-reform package, Virginia had the second-lowest sales tax in the nation, and after it, we still have the second-lowest,” Mr. Bryant said. “And the part of the tax-reform story that is not properly focused on is that there are a lot of tax cuts.”

Overall, he said, the plan ends up cutting taxes by a small amount for most Virginians, increasing taxes on those earning more than $140,000 because they spend more of their disposable income on luxuries and keeping taxes the same for the rest of the state’s residents.

However, House Speaker William J. Howell said the economy will suffer from the tax increases.

“A tax increase of this magnitude is going to have a detrimental effect on the economy,” the Stafford County Republican said. “I would rather see the citizens have the money than the state.”

The tax-reform plan also capped the state’s popular car-tax relief program, freezing the amount the state reimburses localities at $950 million a year for revenue lost under the car-tax phaseout.

Under the cap, car owners will continue to pay 30 percent of their tax bills for at least two years. Those bills are likely to rise as residents buy more expensive cars and localities continue to get the same amount of money from the state.

This year’s car-tax bills, which are in the mail, are due Oct. 5.

The plan also cuts taxes — including the elimination of the marriage penalty and an increase in the income-tax-filing threshold so the poorest Virginians will no longer have to file state taxes. Those changes will take effect on Jan. 1.

The food tax will be cut in half-cent increments — from 4 cents to 2.5 cents on the dollar — starting July 1 through July 1, 2007. Virginians will see a 1.5-cent reduction in the food tax in 2007, which means a $200 grocery trip will cost $3 less then than it does now.

Also taking effect today are the elimination of corporate loopholes and the removal of the sales-tax exemptions for public-service corporations, a measure which amounts to a tax increase for some companies, including Dominion Virginia Power. Those companies might decide to pass that increase along to their customers.

Dominion Virginia Power, the state’s largest utility, will take the next year to decide when to recover the additional costs from its ratepayers, spokesman David B. Botkins said.

The tax increases come nearly two months after the state ended its fiscal year with a $323.8 million surplus. News of the surplus came a few days after the legislature passed the tax-increase plan and the state’s two-year-budget in May.

Last week, Gov. Mark Warner said the state will use a portion of that surplus to accelerate a scheduled $100 increase on the personal exemption for Virginia tax returns to take effect on Jan. 1, instead of Jan. 1, 2006.

Under the cut, a family of four would get $400 of income free from state income tax. The tax cut will cost the state $28.3 million.

Tax Commissioner Kenneth Thorson said the Virginia Department of Taxation’s biggest challenge has been implementing the tobacco-tax increase because it affects both wholesalers, who purchase and affix tax stamps to each pack of cigarettes, and retailers.

One of the goals was to provide merchants with enough cigarettes at the lower tax rate to meet demand through last month, but not enough to allow them a windfall at state expense after the new rate takes effect.

“On September 1, the price will go up 17 cents per pack whether they have the old stamp or the new stamp,” Mr. Thorson said.

“There could be profiteering by retailers at the expense of the commonwealth and consumers.”

To prevent retailers from stockpiling cigarettes at the lower rate, the tax department imposed a tax-stamp quota on wholesalers. The quotas were based on monthly sales figures, with some growth to accommodate increased consumer demand.

Wholesalers were allowed a 2 percent increase in 2.5-cent stamps in May, 5 percent in June, and 10 percent in July and last month.

This article is based in part on wire service reports.

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