Legislative Newsletter No. 16— September 24, 2004

State Budget Issues

The end of the first quarter of FY05 is nearly upon us, and state revenue projections for the first two months of this quarter are ahead more than nine percent over last year. However, September's revenue report, available the middle of next month, will provide a better picture of revenue collection trends for this fiscal year. That report will reflect figures from the first month of sales tax collections under provisions (effective September 1) that increased the sales tax one-half cent on non-food items and that hiked cigarette taxes to 20 cents/pack (still, sales tax collections in July and August were running nearly 7.5% above last year).

Also next month, the Governor's Advisory Board of Economists will be meeting to examine the outlook for Virginia's economy over the next several years. Its forecast will serve as the basis for the revised revenue forecast Governor Warner will present to legislators in mid-December when he unveils proposed amendments to the current two-year state budget.

The chairman of the Senate Finance Committee is asking his colleagues to carefully consider the unfinished business from this past year's contentious budget battle. At a meeting this week, Senator John Chichester cited the sales tax on food, the Literary Fund (used for local school construction loans), higher education and of course, transportation, as areas the legislature should think about in the upcoming budgeting process. He also warned against authorizing more state debt; some Northern Virginia legislators are proposing to use expected state revenue surpluses to leverage additional transportation dollars. Chichester's comments preceded a presentation to the committee about the economic outlook for the state. Economist Chris Chmura said Virginia is well positioned to grow in the post-recession expansion, but not as it did during the late 1990's. She said such growth would be spearheaded by increased defense and security spending, and growth in professional business services. Her report also noted that the Charlottesville MSA ranked seventh in the country in employment growth during the July 2003-June 2004 period.

Discussions Being Held on Car Tax "Glitch"

VACo and VML representatives are working with Administration officials in an attempt to resolve negative impacts on local governments due to changes made by the General Assembly this year to the car tax reimbursement program. Provisions approved by the legislature during its special session this spring cap the amount of state reimbursement to localities for the program at $950 million beginning in tax year 2006. However, to save more than a quarter billion dollars for the state, the legislature axed all state reimbursements in the final quarter of FY06 by budgeting only $680 million for reimbursements in FY06, instead of the necessary $950 million. This shortfall in FY06 is expected to create a cash flow problem for localities that bill for the tax in the spring (which in our region, includes Albemarle, Charlottesville, Fluvanna, Greene and Nelson). The plan does not provide for the repayment of the outstanding $270 million from FY06. The new provisions also require localities to apply at least two car tax rates, one to values below and one to values above $20,000.

A published report this week stated that at least one member of the Senate Finance Committee has requested that Governor Warner include the money needed to fix the glitch in the budget he submits to the General Assembly in December. In the meantime, additional meetings between the local government groups and the Administration will be held to try to solve the local cash flow problems.

Tax Revenue Study

The Joint Legislative Audit and Review Commission (JLARC) has released its study results on replacing income tax revenues with sales tax revenues. It concluded that to do this and maintain current revenue would require a state sales tax rate over seven percent, which currently is the highest of any state, and that doing so would result in the tax burden not being distributed as evenly across income groups as at present. The report also noted that states without income tax have had difficulty expanding the tax base and that those with high sales taxes are vulnerable to revenue loss from Internet and out-of-state sales. Increasing the state sales tax rate by one percent would generate just over $900 million. Presently, Virginia ranks 43rd among the states in the burden of state and local taxes as a percentage of personal income.

Housing Panel Continues Work

A workgroup of the Virginia Housing Commission looking at blight issues wants to examine ways to spur more cooperation between urban centers and surrounding suburban counties as part of its review of housing stock and regulatory and state law changes that can make housing more affordable. At a meeting this week, the First Cities Coalition told the workgroup about the various challenges older cities face related to affordable housing, income and employment, and dealing with aging infrastructure, while surrounding suburban areas are fairing much better. .

The panel also heard from a local government attorney about various ways that localities deal with blighted properties. He also suggested the General Assembly could assist localities by providing more authority to deal with "eyesore" properties that are unsafe, dangerous or unsanitary, and revising Code sections on inoperable motor vehicles to address junk cars. The workgroup plans to meet again in late October, at which time it also will hear about zoning and brownfields issues.

This workgroup on local revitalization and blight removal is one of three subcommittees of the Housing Commission, which has been charged with examining various housing issues and developing a statewide housing policy by the end of next year. Workgroups examining regulatory and financial obstacles to affordable housing, as well as eminent domain issues, also are meeting this fall.