Monday, June 27, 2005

The financial crisis that prompted Virginia lawmakers to impose the largest tax increase in state history last year has turned into a $1 billion surplus — and a gubernatorial campaign issue.

Nominees Timothy M. Kaine, Jerry W. Kilgore and H. Russell Potts Jr. have addressed the surplus on the hustings recently.

In fact, Mr. Potts — a Republican state senator from Winchester who is running as an independent — has said that a shortfall in the state pension fund and a lack of funding for health care and education should dispel talk about a surplus.

“There is no surplus. Nothing could be further than the truth,” said Mr. Potts, a member of the Senate Finance Committee, which pushed for the tax increase in May last year. “Not only do we have bills in the drawer, we have massive bills in the drawer.”

Secretary of Finance John M. Bennett recently announced that state tax collections have increased by 15.2 percent this year, well ahead of the official forecast of 10.3 percent for the fiscal year that ends Thursday. He said the surplus — which mainly is attributed to the booming housing market — could exceed $1 billion this year.

Virginia ended 2004 with an estimated $1.2 billion surplus, as well. Most of the unexpected revenue was deposited into the state’s Rainy Day Fund, as required by the state constitution. The same will be true for this year’s surplus.

Discussions about surpluses are set against a backdrop of a $1.38 billion increase in the sales, cigarette and real-estate transaction taxes passed by the Republican-controlled legislature in May 2004.

Lawmakers also capped the amount the state reimburses localities for the car-tax relief program. Since 2002, the amount the state pays has been frozen at 70 percent, so car owners pay 30 percent.

Mr. Kaine, the lieutenant governor, and Mr. Potts supported the tax-increase package, which also cut some taxes; Mr. Kilgore opposed it.

Mr. Kaine thinks any surplus should go to transportation projects, his campaign spokeswoman, Delacey Skinner, said.

“Generally, those are the kinds [of investments] he feels make a lot of sense,” she said.

Miss Skinner also said Mr. Kaine, a Democrat, hails last year’s tax-reform package because of its “historic” investments in public education, health care and public safety. The $1.2 billion surplus last year allowed the state to make a down payment on improving its ailing roads, a move Mr. Kaine supported.

“It was a really good opportunity to make an investment in some transportation projects that needed the money,” Miss Skinner said. “That is one of the things you could expect a Governor Kaine would do with a surplus.”

However, Mr. Kilgore, the Republican gubernatorial nominee and former state attorney general, thinks the surplus proves that last year’s tax increases were not necessary, his campaign spokesman, Tim Murtaugh, said.

“The fact that the state’s revenues continue to climb with each passing day underscores what Jerry Kilgore was saying last year, which was that the economy was improving, and we should wait to see the numbers before raising taxes unnecessarily,” Mr. Murtaugh said.

“His firm belief is that keeping taxes low is the best way to foster economic growth, because people will be able to keep more of what they earn, and businesses will be encouraged to expand and create jobs and opportunity,” he said.

Mr. Potts said he is glad the state is in a good revenue position so it can deal with its commitments.

“Where would we be if we hadn’t have done what we had done in Governor [Mark] Warner’s investment plan?” he said. “But we still aren’t there, because all these dormant years of no investment at all.”

The winner of the governor’s race will succeed Mr. Warner, a Democrat, who cannot seek a second consecutive term under the state constitution.

• This article is based in part on wire service reports.

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