Tuesday, April 27, 2004

RICHMOND — The Republican-controlled General Assembly yesterday passed the largest state tax increase in decades and voted to freeze the state’s popular car-tax-relief program.

The revenue plan would boost the 4.5 percent sales tax to 5 percent, the same rate as in Maryland. The plan also would raise the cigarette tax from 2.5 cents per pack to 20 cents per pack this year and to 30 cents per pack next year. That means a pack-a-day smoker would pay $63.88 more for cigarettes this year and $100.38 more next year.

Drivers likely will continue to pay 30 percent of the car tax for at least two more years. Under the plan, the state next year would cap its payouts to localities at $950 million a year for revenue lost under the car-tax cut.

Local governments could make up for the loss by raising other taxes, as the value of cars continues to rise.

The passage of the two measures paves the way for lawmakers to craft a new budget for the two years beginning July 1.

Gov. Mark Warner, a Democrat, is expected to sign both plans. Last night, he praised the legislature for putting aside party politics to pass the tax plans.

“Today bipartisan majorities in both bodies decided to fix Virginia’s finances,” he said, grinning widely. “Today, they put Virginia first. I hope the conferees will work with due speed to try to get this done so they can go home for good.”

House Majority Leader H. Morgan Griffith said he hopes a new budget will be ready on Friday. Nine House and Senate budget negotiators, who are expected to meet today, will use the tax plan to craft a budget for 2005-06.

The House voted 52-45 in favor of the tax plan that would generate $1.38 billion in net new revenue and also will cut the food and income taxes. The plan would bring in only $984 million to state coffers. The difference goes to a special fund that local governments can dip into to for public-education funding or for local tax relief.

The plan’s passage was achieved by the support of 17 Republicans — most of whom broke from their party’s antitax leadership two weeks ago and voted for a plan that included the same sales and cigarette tax increases.

Two of those 17 House Republicans voted against the tax plan yesterday, but two other Republicans — Delegates Joe T. May of Leesburg and Robert D. Orrock Sr. of Thornburg — voted for the tax increases. The two lawmakers who switched their vote against the tax increases were Delegates Gary Alan Reese and Vincent F. Callahan Jr., both of Fairfax County.

The Senate passed the tax plan 31-8 and the car-tax cap 31-7. The cap would freeze the annual state reimbursements to counties and cities at $950 million.

The House Appropriations Committee approved the plan 13-12. After much debate last night, the House voted 51-45 to pass the car-tax cap.

Sen. Jay O’Brien, Fairfax County Republican, said he felt the car-tax freeze would have a negative impact on Northern Virginia. “This is the one area that gets a huge benefit” from the car-tax reimbursement, he said.

Delegate William Janis said lawmakers were fooling themselves if they consider car-tax relief a burden on the budget.

“Don’t kid yourself — this is a tax increase,” the Goochland Republican told fellow delegates during a debate. “It’s a tax increase because the owner of every single car will inevitably pay more after 2006.”

Mr. Callahan, chairman of the House Appropriations Committee, tried to amend the bill to allow the legislature to establish the cap each year in the budget. He said it was bad precedent to put a dollar figure in the state code.

“The dollar amounts change every day in Virginia,” he said.

The committee, however, rejected the amendment 15-10. A similar amendment later failed in the House.

The House had little debate on the tax plan.

Democratic House Caucus Chairman Brian J. Moran of Alexandria called it a “tremendous victory.”

“This produces over $1 billion of education money,” he said. “Whether you’re from Southwest or Northern Virginia, you have to recognize that children from all over the Commonwealth will benefit. This is as good a bill as we were going to get.”

The plan also increases the tax on real-estate transactions from 15 cents per $100 of value to 25 cents and puts a 10 percent excise tax on other tobacco products. The raised tobacco taxes will go toward funding Medicaid. The tax increase on cigarettes will begin Aug. 1. Next year’s increase will begin March 1.

It also includes many tax cuts, including eliminating the marriage penalty, cutting the food tax by 1.5 cents on the dollar by July 2007 and changing the income-tax filing threshold so thousands of the state’s poorest residents no longer have to pay taxes. It also eliminates corporate loopholes and removes the sales tax on public-service corporations.

Localities now get one penny on the dollar for the sales tax — the bill passed yesterday bumps that up by one-quarter penny.

Former Gov. James S. Gilmore III was elected to office in 1997 on the pledge to fully eliminate 100 percent of the car tax by 2002. However, the popular car-tax- relief program was frozen at 70 percent in 2001, when the program turned out to be too costly. Under the measure passed yesterday, the program would remain frozen at 70 percent indefinitely.

The car tax is now one of the largest expenses in the state budget, at a total of about $860 million a year. Because more people are buying more expensive cars, that figure is expected to grow to about $950 million in 2005 and continue to increase by $150 million each year.

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