Let's start the discussion by asking: How many readers have heard of the Code of Virginia 58.1-3536(A)? Only a handful, basically those who work for state government. The law was inserted into Gov. Jim Gilmore's car tax program at the insistence of Democrats, Republican Senator John Chichester and John Bennett, the Secretary of Finance who then was working for the Senate Finance Committee.

 

All responsible finance experts knew that Gilmore had misled Virginians - whether purposeful or innocently is a matter of debate -- on the true car tax budget expenditure projections, understating the amount of the line item by a factor two or more.

 

The handful of legislators still trying to pretend they were fiscally responsible in 1998 insisted that "Deficit" Jim Gilmore accept 58.1-3536 (A) which

reads in pertinent part: 

The Governor shall not submit any budget bill ... or any amendments ... that propose the appropriation of an amount that exceeds a total of eight and one-half percent of the amount of total general fund revenues available for appropriation for payments in any fiscal year to treasurers pursuant to 58.1-3526. (Emphasis added).

This clause, in plain English, put brakes on what legislators knew would be the runaway budget buster it has become by 2003. As predicted, the line item has constantly grown and grown by hundreds of millions of dollars over original projections. Thanks to this law, the car tax expenditure can never exceed 8.5 percent of general fund revenues. But if Mark Warner has his way, it will eventually mushroom an additional $800 million more and counting for a full budget cycle.

 

Think of it: The Dems bashed "Deficit" Jim Gilmore for being reckless with his car tax promises, for taking money from education and other priorities, etc. But now, for reasons discussed below, Gov. Warner has decided to do the Full Gilmore Monte on the car tax; with a special twist as I will show.

 

What The Guv Wants

 

Warner wants to move from the current 70 percent phase-out to the full 100 phase-out, fulfilling his campaign promise to finish the job that Gilmore started. There's just one stumbling block. At the expected growth in state revenues of five percent to seven percent annually, even phasing out the car tax slowly over four years at the rate of 7.5 percent annually, the reimbursement bumps into the 8.5-percent budget cap. Indeed, as long as the cap stays in place, based on his economic assumptions, Warner won't be able to phase out any more than 80 percent of the car tax.

 

That's right, hidden in Warner's plan, not disclosed to Democrats or anyone, is his decision to eliminate the 8.5-percent cap, a key part of his tax plan that was described this way in yesterday's Washington Post:

 

Tax Plan Won't Help Va.'s Poor, Elderly

By Michael D. Shear
Washington Post Staff Writer

RICHMOND -- More than a half-million poor and elderly Virginians would receive no benefit from Gov. Mark R. Warner's proposed changes to the state's income tax, leaving them especially vulnerable to the governor's one-cent increase in the state's sales tax.

Why does the governor, a sensible guy, expect Democrats to swallow this plan in silence? I guess because General Assembly Dems have been signing on, as they are afraid of being called "disloyal," even when they are backing a plan that they would strongly oppose had it been submitted by a Republican.

 

Why is it that we commentators have had to raise these issues, comparing the governor's promises to the ugly reality? Why not the Democratic legislators elected to protect the poor, the elderly, the most vulnerable and least powerful in our society?

 

I ask you: What has happened to the soul of the Virginia Democratic Party in the past few years?

 

I want to thank Jim Bacon, editor of this website, for getting Warner's chief Three Card Monte dealer on the record about their intentions regarding the 8.5-percent cap. In preparation of his own column, Jim took the initiative to put the tough questions directly to Secretary of Finance Bennett on Friday. He shared some of the answers with me yesterday when editing this column.

 

The Political Calculus

 

Here's how I reconstruct the thinking inside the Warner camp: The governor told his kitchen cabinet and government aides to come up with a plan to allow him to claim that 65 percent of Virginians would pay less taxes. This 65-percent claim is his self-styled "wow" factor. But after his political guys took a look at the numbers, it appears they could not give the governor the thing he wanted -- the 65 percent sound bite which his polling said was powerful -- unless he could figure out how to take credit for enacting the last 30 percent of Gilmore's car tax phase-out, irrespective of the cost.

 

Without the car tax phase-out, Warner's plan would raise the state taxes of a majority of Virginia taxpayers. So they came up with this plan: If they eliminated the 8.5 percent budget cap on car-tax expenditures, put into place by Dems and others in the General Assembly out of fear that it would consume the budget, then Warner can lay claim to credit for getting the phase-out to 100 percent. 

 

Net, net: GUV Warner, under pressure from his aides, Sabato, et. al, and the editorial boards to raise taxes and get a "legacy" -- what a silly debate this has been on the "legacy" thing, so amateurish -- thus has become obsessed with the 65 percent number.

 

The governor is approaching the tax issue as a sound- bite, poll-driven political strategy. Otherwise, he could never justify his Car Tax Cap Buster, something no Democrat has ever proposed. Unfortunately, the political game the governor is playing is fiscally dangerous -- and every honest Dem leader, every editorial board, every objective individual who follows state finances knows it.

 

If you study Warner's own numbers, you will find that the massive increase in car tax expenditures, fueled by his proposal to drop the Cap, forces him to raise taxes elsewhere.

 

(1) But for the car tax proposal, the governor could have raised the money he wants for the budget he will submit Wednesday with a 1/2-percent sales tax increase.

 

(2) But for his need to raise the sales tax by a record 1 percent, Warner would not have had to promise powerful special interests to eliminate the Estate Tax on all but a handful of families, giving a few hundred of the wealthiest Virginians windfalls of $100,000 to $1 million while giving no net tax relief to many of the state's poorest 600,000 families.

 

(3) But for the car tax, he would not have to ask for such a big increase in the state tobacco tax -- a cost borne disproportionately by the poor and inner-city residents.

  

(4) But for the car tax, Warner would not have needed to eliminate an important tax deduction that goes to low- and middle-income seniors between 62-64.

 

(5) Due to his need to keep the 65-pecent figure, Warner now will have to veto any gas tax increase even though he said transportation needs were key to jobs in 2002.

 

(6) But for his fiscally reckless car tax promise, the governor could have come up with a plan to give real relief to the poor and elderly.

 

Truth is, this is a Nixon Goes To China thing. Warner figures the editorial boards, key Dems, education groups and the big-business community are so desperate for a tax increase that they would buy a tax plan that they would have opposed if Gilmore's name had been on it -- even if it does punish the poor.

 

Governor Warner's plan violates the central principles of Virginia Democrats: It guarantees a bigger structural deficit crisis during the next downturn -- Warner's six year plan conveniently assumes no economic downturns all the way through -- and it is based not on sound fiscal principles, but polling data and sound-bite politics.

 

Warner won the job, so he can do what he wants. But any honest observer has to state that the governor is now doing precisely what he campaigned against: He is emulating Gilmorenomics, putting the state's fiscal situation at unnecessary risk and failing to meet the standards of fairness and candor that he criticizes Republicans and others for not practicing.

 

If you go to the out years of his proposal, you see that he has front-loaded the taxes and back-loaded the expenditures -- allowing him to extract maximum political benefit and saddling his successor with big problems.

 

Moreover, if you move the chess board around a few pieces, you can see that Warner has given away so much that he has almost no room to maneuver.

 

Political Reality Bites

 

Let's analyze what will happen to the governor's plan after it gets run through the sausage grinder in the General Assembly.

 

First of all, logic suggests the General Assembly will give no more than half -- if that much -- of his proposed state tobacco tax increase. I may be wrong but logic tells me that in the end, he will have to back out $70 million revenue out of his plan. Second, he will need to change his plan to give tax relief to the 60,000 poor and elderly families discussed in the Washington Post story. At a minimum of $50 dollars a family average -- hardly a lot -- this would require backing out another $30 million.

 

House Speaker William Howell says a one-percent increase in the sales tax is too much. Let's say they compromise and Warner gets 3/4 of a percent. That reduces his plan's net revenue by another $200 million.

 

Then there's the gas tax. Some Republicans have been talking up the gas tax as a way to raise money for transportation. Plus, the GOP might push this to offset the new upper-income tax bracket, a major downer for the party base. A two-cent increase on the gas tax would raise $100 million. Trouble is, if Warner accepts a gas tax -- which hits all tax brackets -- he'll never achieve his 65-percent figure.

 

Finally, consider that the Warner plan underestimates the huge cost of his estate tax windfalls. Once you get to 2011, when the federal law reverts to the way it was, repeal of Virginia's estate tax will cost the state many hundreds of millions of dollars.

 

Bottom line: Mark Warner is a smart guy. But spooked by "legacy" foolishness, he drafted a plan in secret, wanting to show that he was in full control. Those who had access to the drafting clearly didn't represent the poor, or even the Democratic party.

He can still come out a big winner next year. But for this to happen, he is going to have admit serious flaws in his plan, speak candidly to Virginians, and perhaps even take the risk of asking the General Assembly to put his tax ideas to a vote of the people.

 

True, on Tuesday, he will present his budget, and as I wrote in Goshfather 1, he feels his spending plan -- an unprecedented use of nonexistent funds from his proposed taxes -- will change the nature of the debate.

 

But all these things can not change what reporters and analysts are finding: Warner has taken a Nixon Goes To China approach, which seems to fly in the face of his image.

 

-- December 15, 2003