End to car tax relief on table to plug budget hole

RICHMOND

One of the sacred cows in Virginia's budget, car tax relief for residents, is among the spending items outgoing Gov. Timothy M. Kaine and his team are analyzing as they look to plug a state revenue hole estimated to be anywhere from $2.7 billion to $3.5 billion.

Particulars of the discussions are hazy as budget talks occur among a select group of high-ranking state officials. A request for documents about the proposal made through the state open records law was denied.

Kaine and several members of his administration concede that when he has said "everything is on the table," the governor's words apply to the $950 million Virginia divides among localities to cover car tax rebates - in addition to other state taxes and spending.

"The car tax is significant," Kaine said last week. "But it's not the only thing we're looking at."

An outright repeal of the car tax subsidy could save the state $1.9 billion over the upcoming two-year budget cycle and fill a large chunk of the projected revenue hole. But it would also place localities that rely on those funds in a tough spot and likely mean higher tax bills for vehicle owners.

Car tax relief was a signature accomplishment of former Gov. Jim Gilmore, who signed it into law in 1998.

The program provides state money to localities to cover a portion of the car tax many motorists pay. It was to be fully phased in over five years.

Instead, lawmakers capped it at about 70 percent several years ago.

The corresponding amount, $950 million, was divided among all Virginia localities based on how much each collected in car tax payments during 2004.

And while the amount of relief is fixed, it isn't static for individual motorists. As more vehicles are registered in the state, the rebate dollars are spread among a larger fleet.

In an interview Friday, Gilmore said any proposal that reduces the rebate "is the wrong approach" and amounts to a tax increase "in a time of economic distress."

House Majority Leader Morgan Griffith, R-Salem, said any reduction to the car tax refund amounts to "a huge tax increase" that "hits the families of Virginia right in the eye."

Anything the state withholds, localities would be "entitled to bill" to their residents, he added.

While there has been speculation in state political circles that the car tax concept

is a trial balloon, or a political maneuver to force Gov.-elect Bob McDonnell to reject it and find other unpopular alternatives to reduce state spending, Kaine spokeswoman Lynda Tran insists neither is the case.

Kaine's "policy proposals will be decisions that he thinks are the right things to do for Virginia and nothing political in nature at all," she said.

The governor is to announce his budget proposal Dec. 18.

So far, the only known quantity in Kaine's budget proposal is that it will likely eliminate the so-called dealer discount, a program that allows merchants to keep a small portion of the state sales tax they collect. Last year, the dealer discount cost the state roughly $61 million. Business groups successfully opposed an effort to discontinue the program early this year.

Another tax proposal Kaine floated last year - a doubling of the cigarette tax to help close a budget hole - also was rejected.

McDonnell spokesman Tucker Martin said the governor-elect isn't willing to speculate on what will be in Kaine's budget plan, but he remains opposed to tax increases and attempts to scale back existing tax credit programs.

Not everyone is sour on taking a hard look at tax credits embedded in the state budget.

Michael Cassidy, executive director of the Commonwealth Institute for Fiscal Analysis, suggested that tactic in a recent study released by his group.

"A look at trimming that back in some way is basically a recognition that... we may not be able to afford that current level of personal property tax relief," he said.

Without reducing tax credit programs, Cassidy added, officials may have to make deeper funding cuts to education, public safety and health care services.

Whatever he does, the decisions Kaine makes in his final spending plan before leaving office may leave many unhappy.

"When I present a budget... everybody's going to see stuff in there they don't like," Kaine said Friday.

The incoming governor, he added, will "find that all the options at this point are very, very tough."

Julian Walker, (804) 697-1564, julian.walker@pilotonline.com