In the introduction to his budget statement released yesterday, Governor Ralph Northam described his proposed 2020-22 budget as “the most progressive in Virginia’s history. If by “progressive” he means “leftist,” with a strong propensity for taxing, spending and wealth redistribution, it’s hard to argue with him. That’s exactly what it is.
In previous posts on my blog Bacon’s Rebellion, I’ve critiqued the governor’s major spending initiatives, totaling about $2.5 billion in ongoing and one-time spending proposals, so I will not repeat myself here. Instead, I focus on the revenue side of proposed budget. I’ll address the negatives first, then touch upon a couple of silver linings.
Northam proposes to raise taxes even while the economy is growing and tax revenues are increasing. According to the Economic Outlook and Revenue Forecast for the 2020-2020 Budget, General Fund revenues are predicted to grow 4.5% in FY 2021 and another 3.7% in FY 2022. That represents a healthy increase over inflation, which is running around 2%. If Virginia needs to raise taxes when revenues are growing, what will happen when a recession makes them shrink?
The governor is obscuring how much the tax hikes add up to. Bits and pieces have been made public, but the big picture is elusive. Northam proposes to gain $340 million over two years from killing last year’s tax relief fund; $230 million in taxes on cigarettes and other tobacco products; $125 million on so-called “games of skill” that compete with the Virginia lottery; and a 12-cent increase in the gasoline tax over three years, partially offset by killing annual auto inspections and cutting the state vehicle registration fee in half.
Of all the tax increases, the gasoline tax will be the most politically problematic. Little wonder, then, that the Governor’s Office did not put a dollar value on the tax hike. Calculations are difficult because “the gas tax” consists of a mix of wholesale taxes, at-the-pump retail taxes, and special taxes on diesel and gasohol. According to the Virginia Department of Transportation budget, the “sales tax on motor fuels” yielded about $850 million in revenue in FY 2019. If we guesstimate that boosting Virginia’s 16-cent-per-gallon excise tax by another 12 cents yields a 60% revenue increase when all sources are considered, we’re talking about $500 million a year in extra revenue. That will be offset by about $130 million in savings from the automobile license fees, plus $20 per automobile for eliminating the mandated annual inspection — a big loser for taxpayers. Hopefully, the General Assembly will insist upon seeing hard forecasts for those numbers.
Add up all the tax increases, and net damage to taxpayers will run in the neighborhood of $500 million a year when the full gasoline tax increase goes into effect. Such a number, or anything close to it, would make for terrible headlines, so the Governor’s Office declined to release it.
The governor has packaged his tax increases shrewdly. One of the governor’s gambits is to say that the revenue generated by the increase in tobacco taxes will be used to help reduce health insurance premiums 20% by setting up a state reinsurance plan to stabilize premiums for the 400,000 Virginians who purchase private insurance. What better source of revenue for such a program than tobacco, considering that smoking costs Virginia taxpayers nearly a half billion dollars a year in Medicaid?
Similarly, Northam proposes a tax on unlicensed, untaxed electronic “games of skill” that are cutting into Virginia lottery revenues and to funnel those revenues to K-12 schools. This tax supposedly would substitute for lost lottery revenues that would have gone into K-12 schools.
In a shred of good news, Northam proposes adding $300 million to the state’s cash reserve. Between the cash reserve and the rainy day fund, the state would have a $1.9 billion cushion by mid-2020, about 8% of the General Fund budget, to buffer a loss of revenue in an economic downturn. One could argue that $300 million is small potatoes given the gusher in revenue the state will likely enjoy if the economy grows as predicted and Northam’s tax hikes are adopted. But at least it’s a gesture toward fiscal responsibility.
Although Northam wants to hike transportation taxes, at least he’s inching back to a user-pays funding system. I’m not convinced that the tax increase is necessary, but if you’re going to increase transportation taxes, make motorists pay in proportion to which they use the transportation system. Under a gasoline tax, the more people drive (and put a strain on the transportation system), the more they pay. By contrast, the vehicle registration fee is a flat tax that applies equally whether you’re a little old lady who drives about 2,000 miles a year or a road warrior who drives 20,000 miles a year. We still need a mechanism to get people who drive hybrids or electric vehicles to pay their fair share, but it’s a small step in the right direction.