The House leadership has gotten the GOP a deal no thinking member of the party can complain about -- especially when they get to blame us Democrats for breaking our promise not to raise taxes.

 

The chess players know they have to give "My Cousin Vinny" his due: While every other House budget negotiator was believing their own rhetoric, only Vincent F. Callahan, Jr., R-Fairfax, the House Appropriations chairman, paid attention to the budget details of the Maverick GOP tax plan. Without Callahan's private support -- and now public backing -- the Maverick GOP "compromise" plan would not have the votes to pass this Tuesday.

 

Vinny sponsored a 1/2 cent sales tax hike a few years ago. So, having done the research, I knew, as did Speaker William J. Howell, R-Fredericksburg, that his stance these past months against the one-cent hike proposed by Gov. Mark R. Warner and the Virginia Senate was only half-hearted.

 

Admittedly, Chairman Callahan had spent months promoting a No Tax increase budget. He'd even called the proposed House budget "one of the finest" ever proposed.

 

As I wrote at the time, Del. Hamilton's major league chess play of using the ploy of closing all those business loopholes allowed Callahan to open negotiations with a No Tax budget, not just a No General Tax increase budget.

 

From the beginning, "My Cousin Vinny" had one overriding goal: stopping an increase in the income tax rate on the GOP's core constituency, the top wage warners and business owners, those with taxable incomes of $100,000 or more.

 

Warner had proposed a $300 million tax hike on these GOP voters. Callahan, and Speaker Howell, were becoming increasingly worried about losing this battle for one self-evident reason: They knew the Hamilton loophole bill was a ploy, leaving the House budget with a $200 million dollar hole.

 

Moreover, since they knew any budget compromise would likely require them to increase the spending in the House budget by another $100 million or so, this left them with $300 million in new revenue to generate.

 

Detail, detail, details. As I have been writing, first you fight the PR battle, then you get down to the details. I have been critical of Chairman Callahan and Speaker Howell for focusing too much on the details and not enough on the PR.

 

But now that details are king again, one has to praise Callahan and Howell for their attention to the budget math. As a Democrat, I have to say they do know how to add. 

 

They had a $300 million dollar hole to fix.

 

Here's their problem: The Warner tax hike on their core constituency raised $300 million. The governor knew it, and the senate knew it, as their proposals, too, had targeted this very group.

 

A half-cent sales tax hike raises more than double, almost triple, the new revenue, depending on when it starts.

 

True, the sentiment in the House GOP Caucus was against any income tax increase. But Callahan and Howell knew their folks were getting shaky at the edges. They could see some of their members saying: Why tax 100 percent of the people when you can tax 8 percent, mainly in Northern Virginia? Even Virgil Goode, the anti-tax Democrat turned Republican, voted to increase taxes on this 8 percent when he was in the state Senate.

 

Remember, Democratic Senate Minority Leader Richard L. Saslaw, D-Springfield, said he was speaking for the governor and senate when he said this new high-end income tax bracket was "non-negotiable, and that Democrats would never back a sales tax increase, which is regressive and hits the little guy without a compensating increase in the income tax rate paid those at the top. 

 

As the Speaker and Chairman have said in private for months, and in public for weeks if you read their words carefully, their plan was to go from a No-Tax budget to a No-General-Tax increase budget by agreeing to a modest hike in the tobacco tax and another user fee or two.

 

This would have raised the $300 million.

 

Thus, to Callahan and Howell, the budget math seemed to point to the easy play for the House GOP: play out the No Tax increase string -- they didn't consider closing an unfair corporate loophole a tax increase --  and then make the dramatic "Okay, you win, we will raise the cigarette tax" announcement, sure to get front-page headlines across the Commonwealth.

 

This would be their No General Tax increase budget.

 

But Callahan and Howell realized this: The anti-tax contras in the GOP were going to bash them for backing a cigarette tax, and not give them any praise for avoiding a general tax increase. In other words, they were laboring hard to please a group that had no appreciation for their efforts.

 

The anti-taxers were never going to vote for a cigarette tax, and probably not for the original House budget when it came to final passage!

 

The Chairman and the Speaker came to this conclusion: They had to save the House GOP, indeed the State GOP, from itself.

 

To repeat: A cigarette tax was a sure thing. It was going to happen. But if the contras refused even to back this user-fee levy, then they would provoke a backlash that would result in passage of the $300 million dollar tax hike on the GOP's core constituency. Moreover, if a budget impasse persisted, these very same savvy GOP voters would blame the House GOP for the mess.

 

Either way, the high income earners would take out their wrath on the GOP, not Warner, who has only the power to propose legislation not to vote on it. True, the Democrats would be providing the most votes for a higher income tax rate, but the GOP would be perceived as provide the key votes for passage.

 

So, behind the scenes, Vinny switched to a pro-sales tax position despite months of publicly saying he was against any general tax increase. He helped the GOP mavericks craft their budget. Then Speaker Howell made sure the Maverick GOP tax plan was the one that would end the budget impasse.

 

Why that plan?

 

"My Cousin Vinny" never lost sight of the budget math.

 

When it comes to details, Vinny and his ace budget guy, Robert Vaughn, know how to count.

 

They know something the anti-tax GOP chorus has not understood: The so-called Maverick budget "compromise" is as favorable to the core GOP constituency of high-income Republican wage earners and business owners as any they could hope to get.

 

Do the math. This key GOP constituency saves $100 million a year from the complete repeal of the estate tax, something the governor and Democrats called unconscionable a year ago. This is a huge score for Vinny, especially if you understand what happens when the new Bush estate tax law reverts back to the old federal law in 2001. It will be worth $400 million per budget cycle and progressively more to this key GOP constituency.

 

Most importantly, that "non-negotiable" stance on a mandatory raise in the income tax on high income earners is likewise "repealed" if you will, and is not going to be enacted. This saves the key GOP core constituency $200 million a year.

 

"Not too shabby," thought Vinny, who had become worried about losing control of his own Republicans: "I get to save the key GOP constituency $300 million a year" now, much more in the years to come.

 

Okay, I'm making up those quotes. But the budget math doesn't lie.

 

Previously, I have said that Del. Bob Tata, R-Virginia Beach, the godfather of the estate tax legislation, was the $100 million man. He got $100 million a year -- his bill -- for voting YES on the Maverick bill this Tuesday.

 

So, I don't want to double count: Call Vinny then the $200 million a year man, having gotten double for his vote. Moreover, Vinny would say this to the anti-taxers in the GOP: Do the math, and tell me this is not as good a deal as we could have gotten.

 

Here would be his logic.

 

First, the press and their mainstream pundits have basically never understood the tax debate.

 

It has never been between Tax Raisers and No Tax Raisers. The cigarette tax was always going up, even the press said that.

 

The real debate was always this one: If the No General Tax increase line was breached, what would be the shape of the tax increase?

 

There were four options

 

 One, a statewide referendum.

 

Two, the approach of Bobby Orrock, R-Thornburg, which said raise the state sales tax by 1/2 cent but give all the proceeds back to the localities by the existing formula.

 

Three, a local option sales tax increase, with or without a referendum

 

Four, a "Raise some, lower some" tax hike anchored by a 1/2 cent state sales tax increase.

 

The most education money could be raised by a statewide education referendum for 1 percent. The polls said the people would back the right one overwhelmingly. But the Democrats didn't want to go that route.

 

The next most new education money could be raised by option two, the Bobby Orrock approach. It could have been passed by the House Finance Committee. But pro-education groups didn't want to go this route.

 

The next most education money could have been raised by the Phil Hamilton compromise of allowing local option referendums. But this too got no support.

 

Howell and Callahan backed the fourth option, the Maverick GOP plan.

 

Why?

 

Do the math. The 1/2 cent sales tax increase in the Maverick GOP budget raises $688 million for the biennium budget. It is being sold as raising $688 million new dollars for education.

 

But of course, that conveniently obscures the price paid in budget dollars to get support for that 688 million. Callahan and others extracted a price for their support. To get the 1/2 cent sales tax hike, the final "compromise" includes other things which use some of the $688 to plug new holes created in the house budget.

 

For example, the Tata estate tax bill reduces state revenue by $100 million. Thus, the Maverick compromise had to find $100 million in new sales tax revenue to cover this new budget hole.

 

Get it?

 

Thus, the food tax cut in the Maverick GOP plan costs, in budget lingo, $130 million in revenue, the one-time sales break for big business $181 million, the marriage penalty elimination another $31 million, and the increase in the personal deduction reduces income tax revenue by $86 million.

 

Add it up: 100 + 130 + 181 + 31 + 86 = 529.

 

The special income tax break for 140,000 poor families reduces revenue by only $7 million in the budget -- about $35 a family per tax year.

 

Thus, to get "$688 million" in new revenue, the Maverick GOP plan spends 80 percent of that "new" money to get the votes to pass it on the floor.

 

Thus, the actual net new tax money is: $152 million..

 

Net, net: The 1/2 cent sales tax raises only $150 million or so for education above what the House was already willing to put into the education pot.

 

If you add up the sales tax and cigarette tax increases, many low income families are very likely to pay more in taxes, not less, under this Maverick compromise. 

 

Callahan's wisdom then: When you take out the cigarette tax ,which is really being turned into a user fee to pay for smoking-related health care costs, the actual tax increase in the Maverick GOP plan is very modest by any analytical basis.

 

Yes, it does raise the level of sales taxation. But this hits Democratic groups harder than Republican groups. As for all the new tax breaks and other thing that are in the budget or kept out of the budget, they benefit Republican groups far, far more than Democratic ones.

 

As Callahan sees it, the basic tax trade-off is super favorable to the GOP, indeed incredibly so.

 

Callahan would concede there are only two parts of the "compromise" bill that the GOP should have any trouble supporting at this point in the budget game.

 

One is raising the cigarette tax by five extra cents on July 1, 2005. This puts the increase right in the middle of the 2005 GUV race and General Assembly elections. This is not something Kilgore wants, for his party will be in charge and the smokers -- 25 percent of the electorate -- will not be happy about being picked upon. Moreover, tobacco taxes don't play well in Kilgore's rural base.

 

So, Callahan, if he were plotting the anti-taxer's strategy, could see a move on Tuesday to change this part of the bill. The revenue impact is small, surely not big enough to overstate the politics. Moreover, Lt. Governor Tim Kaine doesn't want to have to defend yet another tax in the middle of GUV race, it doesn't help him.

 

Secondly, the "compromise" bill contains a senior tax hike, the one related to the phase-out of the income tax deduction for seniors, that doubles the tax increase over the raise proposed by Warner.

 

I personally cannot believe the Mavericks truly understood this difference. I wonder whether Callahan ever saw the actual language of the bill before it was submitted to Legislative Services for drafting. In terms of politics, this is the most risky aspect of the Maverick tax plan.

 

Surely, Callahan would not be surprised if someone challenges the House to vote separately on a proposal to cut this tax hike out completely or to at least cut it in half. I would not be surprised if Callahan himself voted to support some modification here.

 

There is yet a third possibility based on Callahan's past history: Lowering the size of the General Fund taxes, but raising some new non-general fund taxes - a higher titling tax for example - to beef up the special transportation fund. This would keep the net, net of the whole deal roughly the same on the total new tax revenue. It is no coincidence that Vinny also sponsored a gas tax increase this year and it is backed big-time by key GOP business leaders. Again, it would hit lower income Virginians hardest under current law. My Cousin Vinny can play the game, can't he?

Bottom line: Callahan believes the governor has bent over backwards like a Romanian gymnast to get GOP support for a tax plan. Once you take the cigarette tax increase out of the equation -- since this was a done deal in any budget -- then the appropriations chairman sees a general tax increase of $150 million or so, or basically much ado about nothing in aggregate terms.

 

In terms of hardball, he believes the House's hard-line stance over these months has gotten more out of the final budget deal for his core GOP constituency than anyone would have bet given how badly the House has been burnt on the PR aspect of the battle.

 

Callahan knows this fact: The Maverick GOP plan makes the tax code more regressive, not less regressive, with the biggest breaks to those at the top of the food chain.

 

His job was too protect the high income earners and business owners.

 

They didn't have their income tax rates raised; in fact, they had them lowered, plus got the estate tax repealed.

 

The basic corporate rate was not raised even though it has been the biggest net winner over the years if you do the aggregate math.

 

The poor look to General Assembly Democrats to protect them: sadly, many will pay more in taxes now, not less.

 

There is never a perfect solution to any budget stalemate. But on balance, Vinny Callahan is right to feel that he did yeoman work for the GOP. And they don't seem to appreciate it at all.

 

Or do they? We shall see on Tuesday how the anti-taxers contras play the end game in this budget

chess match.

 

As Vinny Callahan knows, if they have any strategy brains at all, they can probably reduce the overall sales tax increase on a net basis to under $100 million if not to near zero. This would leave, in true budget negotiation terms, mostly a cigarette tax increase, the original House GOP plan as envisioned by the Chairman and the Speaker.