2001 General Assembly
A Perfect Storm
Legislators face dilemma of what kind of tax reform will best assuage Virginia's growing pains

by Page Boinest Melton

If Virginia legislators want a story to characterize the 2001 General Assembly session, they might do well with "The Perfect Storm," the true-life tale of how lives were upended when a cold front collided violently with a brewing hurricane. Legislators are sailing into a similar tempest: a projected budget shortfall buffeted by spending demands from businesses and localities, shrouded in election year politicking and a looming redistricting battle.

But the year 2001 will be a turning point. "There’s an air of reality that the state is confronting about fiscal issues and part of the discussion has to be about how you allocate revenue and responsibility," says Thomas R. Morris. He has a unique perspective: Morris is a political scientist, president of Emory and Henry College and chair of a citizen’s commission studying the possible reform of the state’s tax structure.

The Morris commission found a peculiar tax dilemma. While localities are being squeezed to pay for more services, they are forced to rely upon a relatively static source of revenue. All the while, the state faces escalating expenses related to its rapid growth. The fix? Give localities a share of the state’s income tax, broaden the state’s sales tax and reconsider how local and state governments share responsibility for services.

The debate may be coming at just the right time, Morris believes. Revenue growth is slowing down, creating a "bit more realistic budget picture for state and local governments." Legislators and Gov. Jim Gilmore already are engaged in tough consideration over how to honor priorities established last year in the state’s two-year budget, including the governor’s signature campaign promise to reduce the reviled tax on cars and trucks.

As usual, politics will be the wild card. This spring, legislators tackle redistricting, redrawing the state’s legislative districts based on population changes. The watch word for many in the 2001 session: self-preservation. All 100 seats in the House of Delegates and the jobs of governor, lieutenant governor and attorney general are on the line this fall. Increasingly, stands on economic matters, rather than gut issues such as gun control or abortion, matter more in state campaigns. Gilmore, for instance, swept into office on his "no car tax" pledge. His successor will be pressed to explain how the state continues paying for it and holding the line on other taxes while pressure builds to pay for a menu of spending on roads, mass transit, public schools, colleges and universities. Candidates in Virginia ignore voter aversion to tax increases at their peril: Already the anti-tax rhetoric is flying in the governor’s race.

Pressure on legislators and statewide candidates will be strongest from Northern Virginia where business leaders say they are fed up with their region’s increasingly nightmarish traffic problems. "We’re going to raise some hell," said David M. Guernsey, who owns an office supply company and chairs the Fairfax County Chamber of Commerce.

Already, Northern Virginia business groups have banded together to support a transportation compact that proposes creating a regional authority with revenue-generating capabilities, plus special taxing districts for transportation. Eighteen business groups — representing the interests of 15,000 businesses and about 1 million Northern Virginia households — want to increase the state’s role in transportation funding and allow the region to issue bonds, assign tolls and user fees, and even sell naming rights for roads and rail stations. Guernsey believes those kinds of numbers pack the punch to make legislators sit up and listen. He and other business leaders are willing to mobilize employees and withhold campaign contributions from candidates who don’t see it their way. "We’ve come to the conclusion that writing a check to a legislator isn’t getting the job done."

But how far can the legislature go? The 2000 General Assembly enacted a local income tax option for Northern Virginia, but Gilmore vetoed it, opting instead for a new transportation fund financed by the state tax on insurance premiums. Business leaders want a longer-range solution. Given the limitations on this legislative session, and an anti-tax governor, the best they may be able to do is hold on to gains made last session.

That’s the fear of Delegate John A. Rollison III, the House of Delegates’ point man on transportation, who worries transportation funds make a tempting target for raising immediate cash to balance the budget. "We’re going to have our hands full just maintaining the progress we made last year. You’ve got a lot of competing interests, a serious budget shortfall and a high level of expectation on top of that. I don’t see any chance at all of shifting any major source of funds to local control."

Indeed, Virginia’s tax structure is being increasingly viewed as outdated. Northern Virginia is taking the initiative, with business executives citing figures that show drivers in the Washington area lose more per capita — $1,260 in lost income and wasted fuel — than any area in the country. Hampton Roads companies struggling with their own growing pains are cheering on the Northern Virginia efforts, with Roanoke area business leaders not far behind.

Meanwhile, local governments across the state are hamstrung in raising revenue. They have long depended on property taxes and the personal property tax for revenue, a throwback to an agrarian economy. With real estate tax collections relatively stagnant, new companies less capital intensive, and car tax collections less certain, local governments hope to snare a portion of the state’s income tax, the real engine of the technology, service- and finance-oriented economy. Six percent of the state’s income tax revenue would mean $500 million a year for localities. "It would be a different revenue stream, unconnected to the car tax, that would allow us to share in the new economy," said Michael Amyx, executive director of the Virginia Municipal League. He hopes that the statewide candidates will be drawn into the debate this year and that a new legislature and governor in 2002 will take up their cause. "We know that big ideas take a while in the political process."

His counterpart at the Virginia Association of Counties, James D. Campbell, agrees. Both groups are endorsing the income tax proposal and pressing for a substantive debate. "We want a piece of the future. Local governments have the best sense of what their communities need."

Virginia’s ability to build roads and outfit schools, plus the health of local governments, remains a huge concern to the business community and economic development leaders. "We’re really churning pretty hard about budget issues," says John Sternlicht, community relations director for the Virginia Economic Development Partnership. "Transportation and education will be two of the biggest issues — they are economic development issues — and that might have some impact on how localities operate."

Other key business issues this year will be the first phase of health care deregulation, a workmen’s compensation review, and a study of the state’s unemployment insurance fund. Lawmakers will consider tweaking legislation passed last year to regulate wetlands and will weigh refinements to the Uniform Computer Information Transaction Act that has been championed by the technology community to govern Internet trade.

As for "The Perfect Storm" analogy, the business community might see some of its priorities sink under their own weight. The projected budget shortfall means that money for initiatives like work force training will be harder to come by. Ron Williams, who lobbies for the Hampton Roads Chamber, says his companies would like help training employees at existing businesses — not just for those that expand, but those that need to retrain their current work forces. "We need more funding." Likewise, says Joyce Waugh at the Roanoke Regional Chamber: "We have very low unemployment in our immediate area and in the broader regions, we have pockets of unemployment. We have to make sure there’s money for training."

Budget and revenue discussions, destined for further study, debate and advocacy, may make the state more nimble in responding to both the predictable and unforeseen. Doug Koelemay, who lobbies for the Northern Virginia Technology Council, says state government should model itself on businesses that can turn on a dime. And that’s not just a Northern Virginia issue. Business leaders were bewildered last year when the state could not provide meaningful assistance to Martinsville area residents, hit by massive textile industry layoffs, or to an area like Loudoun County, scrambling to build the roads, schools and other infrastructure it needs for exploding communities. "You had a flat-footed state government that couldn’t help people either way," Koelemay says.