Virginia tax hike could lead to higher taxes elsewhere

Virginia shed its reputation as a tax-wary state this week and endorsed a hefty $1.36 billion tax increase, an example that might embolden other cash-strapped states to reluctantly accept tax increases to balance their books.

Anti-tax groups fear the first major tax hike in decades in the Old Dominion may have a ripple effect in other states. The anti-tax movement is particularly watching Kansas and Texas for fear Republican lawmakers might abandon anti-tax stances there as they did in Virginia and allow higher taxes, said Paul Prososki of the Americans for Tax Reform, a group headed by national anti-tax reformer Grover Norquist.

In Kansas, anti-tax groups worry that moderate Republicans in rural areas might join forces with Democratic Gov. Kathleen Sebelius to raise taxes to bolster funds for schools. In Texas, Republican Speaker of the House Tom Craddick pitched a $1 billion tax increase as lawmakers there work with Gov. Rick Perry (R) to overhaul the way the state funds public education.

Virginia’s Republican-controlled General Assembly wound up approving more tax increases than the $1 billion proposed by Democratic Gov. Mark Warner, but it didn’t accede to all the tax reform changes he outlined. The final plan now awaiting Warner’s signature increases Virginia’s sales tax by half a penny; raises the cigarette tax to 30 cents a pack from 2.5 cents, previously the lowest in the country; reduces the state sales tax on food by one cent; and freezes a rollback of a car tax.

The General Assembly rejected Warner’s tax reform plan to boost tax rates for those earning more than $100,000, up to 6.25 percent from the current 5.75 percent. Warner said higher taxes were needed to maintain his state’s renowned education system and shore up its economy.

The action in Virginia, which severely split GOP lawmakers, breaks a string of crushing defeats of major tax increases. Within the past year, voters in Alabama and Oregon rejected voter initiatives to increase taxes.

The fact that tax-averse Republicans in both chambers of the General Assembly in a conservative Southern state such as Virginia joined with Democrats to raise taxes “shows the gravity of the situation: that states continue to face very serious fiscal problems,” said Sujit M. CanagaRetna, a tax and budget expert at the Council of State Governments. While the budget picture is brightening after three years of steep deficits, 33 states project budget gaps for fiscal 2005, which starts on July 1 in all but four states.

Ironically the Warner plan “was given aid and comfort by Republicans who fell into line,” said Scott A. Hodge, president of the Tax Foundation, a research organization in Washington, D.C., that recently issued a special report on the Warner plan. While House Republicans were the last holdouts against a tax hike, Warner’s tax proposal was given momentum when a top Republican in the Virginia Senate proposed a tax increase package nearly twice the size of Warner’s. Sen. John Chichester, a Republican who chairs the Senate Finance Committee, unveiled a tax package that would cost some $2.5 billion. The Republican-run Senate ultimately passed a budget plan with even higher taxes, nearly $4 billion.

One anti-tax group says the Virginia action sends a political message to other state capitals. “It sends the signal to politicians that it’s OK to [raise taxes], that they are not going to pay the price for reneging on campaign promises to hold the line on spending,” complained Jeff Dirckson, a policy analyst for the National Taxpayers Union, a group that wants lower taxes and more government accountability.

Warner, who ran in 2001 on a platform not to raise taxes, argued that without the tax package, Virginia risked losing its top AAA bond rating. This rating can save the state money when it borrows and also signals to investors and businesses that the state is financially sound.

“If Virginia holds its favorable borrowing rate … other states will be more willing to wade out” and pass a tax hike, said Robert “Jerry” Lawson an associate professor at the University of Richmond who worked more than 30 years in Virginia state government.

To be sure, not all statehouse watchers agree that Virginia’s vote is a bellwether of tax increases to come in more states. Chris Kinnan, a spokesman for Citizens for a Sound Economy, a Washington, D.C., group that has launched a national anti-tax campaign, said his organization intends to make the tax vote a major issue in the next elections. He said his organization plans a “voter education” campaign to make sure Virginia voters know how their representatives voted in the tax debate, particularly those who ran on a no-new-tax pledge.

The 17 Republican House lawmakers in Virginia who put their jobs on the line when they joined forces with the Democratic governor to raise taxes may face retribution, but not until November 2005. Virginia is one of six states that will not hold legislative elections this November.

The Virginia tax package is likely to be “an example of a compromise that people can live with, but not everyone will be terribly happy about it,” concluded Scott Pattison, a former Virginia budget director and now executive director of the National Association of State Budget Officers, a trade group of state finance officers.

While conservatives are unhappy that Virginia has set a precedent for higher taxes, some liberal and moderate groups are disappointed that the package fell short of sweeping reforms. Warner’s plan, for example, did not include expanding the state sales tax to services, a move some groups such as the Center on Budget and Policy Priorities say is vital for states to have steady, reliable revenue.

See related stories:

State budget picture shows modest improvement

Tax restructuring plan tops Virginia gov’s agenda

Govs reflect on Alabama tax plan’s rejection

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