- The Washington Times - Sunday, May 30, 2004

A top bond-rating agency has applauded the Virginia legislature’s cap of the car-tax-relief program, but some lawmakers are vowing to reverse it next year.

Moody’s Investors Service removed Virginia from its credit watch list on Thursday and affirmed the state’s AAA bond rating, which ensures the government pays the lowest interest rate on its loans.

The New York-based firm attributed Virginia’s perfect rating to the rebounding economy, the legislature’s tax increase and the cap on the car-tax-relief program.

“We owe it to the people of Virginia to get rid of the car tax,” said House Appropriations Committee Chairman Vincent F. Callahan Jr., a Fairfax County Republican who fought the cap.

The Republican-controlled legislature last month approved indefinitely capping the amount the state reimburses localities at $950 million a year for revenue lost under the car-tax phaseout. As a result, Virginia vehicle owners are likely to pay higher car-tax bills beginning in 2006.

The Washington Times first reported May 21 that Mr. Callahan and others want the cap reversed, and ultimately want vehicle owners to pay no car tax.

Former Gov. James S. Gilmore III this week said the legislature should use a projected budget surplus and any additional money generated by the rebounding economy to phase out the car tax.

“We should eliminate the car tax next year with all these giant revenues,” said Mr. Gilmore, a Republican who was elected in 1997 on a pledge to end the car tax. “None of the three bond rating agencies said anything to me when we were instituting the car-tax cut.”

Mr. Gilmore initially said the full phaseout of the car tax would cost the state about $660 million. That figure has grown to nearly $1 billion, and the state is reimbursing only 70 percent of the tax.

Mr. Gilmore said he used the $660 million figure when campaigning because that was the information he was given. He said that after the election, his administration revised the figure to about $900 million.

When Moody’s put Virginia on its credit watch in September, it criticized the growing car-tax reimbursement.

Caroline Cruise, a Moody’s assistant vice president, said yesterday the cap was “definitely a factor” in the agency’s decision to affirm Virginia’s AAA status.

“The car tax was a possible drain on the budget in years to come,” Miss Cruise said. “The cap limited the risk of future drain.”

Miss Cruise would not speculate on what would happen if lawmakers reverse the cap or continue to phase out the car tax. She said Moody’s constantly monitors the finances of all its rated states. “We will pay attention,” she said.

Mr. Callahan said reversing the cap won’t hurt the AAA rating now that the state is off the watch list.

Some lawmakers who campaigned for office on eliminating the car tax say the bond rating is less important than pledges to voters.

“That’s a broken promise effectively,” said Sen. Kenneth T. Cuccinelli Jr., Fairfax County Republican. “We need to get rid of it, take it off the table and eliminate it forever.”

To do this, the state must aid localities, which would lose millions of dollars by eliminating car-tax bills. No plans are on the table as to where to obtain that money.

Sen. Richard L. Saslaw, Fairfax County Democrat, said he has not heard any complaints from constituents about the car-tax cap.

Mr. Saslaw predicted Mr. Callahan would pass a car-tax-cap reversal in the House, but “he ain’t going to get one vote through the Senate Finance Committee.”

Mr. Saslaw said any change in the car-tax cap or its full phaseout must be funded with tax increases. “Tell him to put a big whopper of a tax increase in to replace the $950 million,” he said.

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.

Senate Finance Committee Chairman John H. Chichester, Stafford County Republican, and Gov. Mark Warner each initially proposed to phase out the car tax. However, their plans rested on increasing the income tax, a measure the full legislature did not support. Mr. Chichester’s plan would have phased out the car tax by 2005, and Mr. Warner’s plan would have eliminated it by 2008.

Warner spokeswoman Ellen Qualls said the governor’s plan included a way to pay for the phaseout and noted that the legislature rejected the plan earlier this year.

“If lawmakers try to reverse the cap … there would need to be a tax increase probably attached to it to responsibly phase it out,” Miss Qualls said.

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