Legislative Newsletter — November 26, 2003

Tax Structure and Reform

Governor Mark Warner released details of his "budget and tax restructuring plan" on Monday. The proposal would provide more than $1.1 billion in new state revenue for the 2004-2006 biennium. The governor said that his plan would "make Virginia financially stable and reduce pressure on local governments to raise property taxes." The plan reduces the sales tax on food and eliminates the car tax while increasing the state sales and use tax and cigarette tax.

The plan increases the state cigarette tax by 22.5 cents per pack, generating $145 million annually to be dedicated to health care. All localities would be allowed to impose local cigarette taxes (currently, only cities, towns and two counties have such authority) up to 50 cents per pack. Counties would be allowed to impose a cigarette tax of up to 20 cents per pack, beginning in 2004, 35 cents per pack in 2005, and 50 cents per pack in 2006.

The state portion of the sales tax on food would be eliminated; a one-half cent reduction has already been enacted. It is proposed that a 1 cent reduction take effect next July, to be followed by another ½ cent reduction in July, 2005. The local option 1% sales tax, the 1% state sales tax returned to localities based on school-aged population, and the one-half percent sales tax dedicated to the Transportation Trust Fund would be retained. Also under the plan, car tax reimbursement to localities would be increased to 100% by 2008.

The Governor's plan also proposes to streamline state sales tax collections, close corporate income tax loopholes and restructure income tax brackets (to include providing a larger personal exemption and standard deduction for individuals, lowering income taxes for all filers on the first $20,000 of income, and creating a 6.25% tax bracket for those with taxable income above $100,000). The plan also proposes to partially eliminate the estate tax and revise the age deduction for senior citizens. According to the governor, the plan reduces the tax burden for 65% of Virginians.

The Tax Code Study Commission met on Tuesday, the day after the Governor's announcement. Secretary of Finance John Bennett presented details of the plan. Commission Co-Chairman Emmett Hanger noted that revisions to the tax code would have to be a joint effort between the governor and the legislature. Legislators on the panel were quick to note how the Warner plan would be intertwined with the budget he proposes next month, and agreed to hold off meeting again until after the early January budget public hearings (see next section for details). Senator Walter Stosch stated that legislators need to hear from constituents at those hearings about the budget and tax plan, so that lawmakers can focus on what they are trying to accomplish, what the needs are and what resources are available to meet those needs. In addition to the governor's plan, there also are expected to be tax reform proposals from Senator Hanger, Senate Finance Committee Chairman John Chichester and Delegate Allen Louderback, who is proposing to change the income tax brackets while applying the sales tax to services (and reducing the rate from 4.5% to 4%).

Meanwhile, the joint subcommittee examining telecommunications taxes has concurred with an agreement reached by VML/VACo and the telecommunications industry to proceed with a bill of intent in the next General Assembly session. This bill would set forth the issues that the legislature and stakeholders must try to resolve between the 2004 and 2005 sessions, with those specific reforms to be considered in the 2005 General Assembly. The draft bill excludes discussion of and reference to cable and satellite and also directs the Auditor of Public Accounts to determine revenues generated by the current taxes that would be repealed: consumer utility tax, gross receipts tax, state and local E911 taxes and fees and the Virginia Relay Center Assessment. If this review reveals that the replacement revenue to be generated by a 4.5% tax on all retail telecommunications services and a uniform statewide E911 tax does not fully replace all revenues resulting from the taxes intended to be repealed, then no legislation would be introduced in 2005.

State Budget/Revenues

Members of the House and Senate money committees have gotten a first official peak at budget issues they will have to tackle during the upcoming session. The House Appropriations and Senate Finance Committees held separate retreats last week to receive the news from their respective staffs. State revenue for the remainder of FY04 is projected to exceed estimates by about $187 million. In addition, $400 million in previously announced federal funding for budget relief and Medicaid will be available to cover additional spending in the current fiscal year. Part of this money likely will be used to deposit $128 million into the "rainy day" fund.

One staff report estimates general fund revenue growth of 5.3% in FY05 and 5.8% in FY06 (each one percent of revenue growth produces about $363 million). Dollars carried forward and those from additional revenue growth should yield close to $1.5 billion over the next biennium. However, mandatory spending requirements will easily consume this amount and more, since as much as $2.6 billion will be needed to meet those requirements during the same period. The biggest reasons for this are costs for "rebenchmarking" state education costs, as well as additional categorical program and teacher retirement costs, and Medicaid, driven by growth rates of 8% per year for managed care, nursing homes and inpatient hospital services. The reports also indicate that state Comprehensive Services Act costs could increase by $47 million, HB 599 funding needs a $24 million hike, and jail per diem costs are expected to rise $30 million or more. Continuing the Personal Property Tax Relief Act at the 70% reimbursement rate will cost the state an additional $103 million in the next biennium.

It is expected that fewer "one-time" fixes, which were readily used by the legislature the past two years, will be available this coming year to address the budget situation, thus making it more likely that the legislature may have to consider reductions to programs that largely have been exempted from cuts in the past.

Governor Warner is slated to submit his budget proposal to the General Assembly in three weeks. Public hearings on that proposed spending plan once again will be held by the House Appropriations and Senate Finance Committees. The closest one to our area will be held on Tuesday, January 6, 2004, at the August County Government Center in Verona beginning at 12 noon. The Richmond area hearing will be held on Monday, January 19 at 1 p.m. in the General Assembly Building. During the legislative session that begins January 14, legislators will shape amendments to the current fiscal year budget and craft a spending plan for the next biennium. Your locality is encouraged to testify at a public hearing about how the governor's proposed budget and tax code initiatives impact your local budget!

Adequate Public Facilities Ordinances (APFO)

A subcommittee of the Commission on Growth and Economic Development that has been discussing adequate public facilities for the past six months will not propose enabling legislation in the next General Assembly, but hopes to continue its discussion of the issue with local government, builder and realtor groups in the coming year. After months of brainstorming and review of draft legislation, the panel could not reach consensus on a bill, though it recognized that various measures likely would be proposed in January. Several panel members continued to cite inadequate resources as the crux of the infrastructure challenges faced by growing localities.

Meanwhile, subcommittee co-chair Senator John Watkins has requested two attorney general opinions, one on the legal authority of local governments to contractually obligate for the provision of APF, and the second inquiring whether statutory authority is necessary for a local governing body to deny a rezoning request on the basis of inadequate public facilities. The subcommittee will recommend to the full Commission that it propose a study resolution to continue to the legislator/stakeholder subcommittee for another year.

Photo Red Legislation Submitted

Legislation narrowly defeated last year that would have allowed all localities to establish and operation traffic signal monitoring systems has been resubmitted for the 2004 General Assembly. HB 19, patroned by Delegate McQuigg of Prince William, already has been prefiled and could be considered early in the legislative session. The bill is very similar to bills submitted the past several years by Del. McQuigg. In addition to allowing all localities to use "photo red," the bill requires an engineering safety analysis of intersections that would be enforced and annual evaluation of the program. It also eliminates the law's 2005 sunset date.

Water Supply Planning

Various stakeholders who met with Department of Environmental Quality (DEQ) officials this summer and fall have agreed to a framework of the components of a state water resources plan, but have not been able to reach consensus on local water supply regulations. As a result, a report next month to the General Assembly will include these criteria and guidelines, but will not include draft regulations governing local and regional water supply plans. The report is a requirement of SB 1221, which required establishment of a comprehensive state water planning process. DEQ plans to move forward with the criteria and guidelines to govern the process for developing a comprehensive statewide water supply program. Local government representatives had expressed concern that the proposed draft regulations did not include funding for the plans, imposed conservation mandates and did not specify if the state would streamline the permitting process. The group likely will convene again next year.

**Remember that the deadline for legislators to request drafts of legislation to be pre-filed is Monday, December 8. If you have legislation that you want your delegate or senator to introduce at your request, you should discuss it with them prior to this date.

**Have a safe and happy Thanksgiving!