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Kaine: End car tax, raise state income tax

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RICHMOND — If Gov. Timothy M. Kaine has his way, Virginia's widely despised car tax will vanish in the rear view mirror. Ending the state car tax subsidy and replacing the lost local revenue with another levy is a key piece of Kaine's final budget before leaving office.

The governor wants to give localities a share of a new income tax the state would collect and distribute in exchange for abolishing the car tax.

Kaine said the swap would be a net gain for localities. Over time, it would produce $1.9 billion annually — more than the current $950 million car-tax subsidy from the state.

That proposal is perhaps the boldest in the 2010-2012 budget that Kaine presented to a joint meeting of the General Assembly's money committees on Dec. 18. It is not the only contentious item in his plan to plug a $4.2 billion state revenue gap.

He proposes $2.3 billion in spending reductions, including more cuts to public and higher education, health care services and public safety.

After Kaine's morning speech, House Republicans said they plan to immediately put the brakes on the car and income tax combo, which they dismissed as a bad idea that has no chance.

"It's unrealistic to even propose it," said House Speaker Bill Howell (R-Stafford). "It's got no chance of passing."

He said adding a 1 percent surcharge to the current maximum income tax rate of 5.75 percent would be unaffordable to many Virginians.

In the current tax scale, a worker with $40,000 in annual taxable income pays about $2,042.

As Kaine's plan is currently crafted, a separate 1 percent surcharge would be imposed on total adjusted gross income, meaning the same wage earner would pay roughly $2,442.

Kaine, a Democrat, defended the idea during his speech, noting that legislators never asked him to continue the car tax relief first promised more than a decade ago by then-Gov. Jim Gilmore, a Republican.

"This line item has stayed in the budget without any legislative champion for one reason — political expedience," he said.

Car tax relief on the first $20,000 of a vehicle's value was enacted in 1998 on Gilmore's watch, though it was never fully phased in and the current $950 million cap was later imposed.

In a written statement issued Friday, Gov.-elect Bob McDonnell called it "bad economic policy to increase taxes on Virginians."

Another tax change Kaine proposed is eliminating the so-called "dealer discount" program that allows merchants to keep a small portion of the sales tax they collect.

Adding a 2 percent liquor tax, increasing the Emergency 911 fees on phone bills and housing out-of-state inmates at Virginia prisons are other revenue-generating ideas Kaine proposed.

In education, his budget includes funding caps for school administrative and support staff positions such as secretaries and other non-instructional personnel, and more reductions in higher-education funding.

Proposed cuts for public safety include about $120 million for sheriff's departments around the state, a move that could lead to layoffs in the wake of previous cuts to law enforcement.

Local commonwealth's attorneys and circuit court clerks would also feel pinches under Kaine's budget.

Reductions totaling $419 million are proposed for health care services — those cuts would impact Medicaid reimbursements to providers and curtail programs such as physical, occupational and speech therapy in 2012.

State workers would also feel pain.

Kaine's plan calls for another 664 layoffs and the elimination of nearly 1,900 unfilled jobs, and it would require state employees to cover a portion of the contributions toward their retirement benefits to save the state money.

If Kaine's tax proposals are defeated, several legislators said, Virginians should brace for deeper cuts when the General Assembly convenes this winter.

Without a new revenue source, Sen. Janet Howell (D-Fairfax), said McDonnell will have to chop another $2 billion in spending.

"It's just tragic because of how it impacts people's lives," she said. "It's not just numbers on a page. Every one of these cuts impact citizens."

Major provisions of Gov. Kaine's two-year budget proposal:

REVENUE:

• Eliminates the car tax in favor of phased-in 1 percent income tax increase.

• Increases the cost of liquor by 2 percent.

• Eliminates the dealer discount, a share of  the state's sales tax merchants were allowed to keep for collecting and remitting the tax to the state once a month.

PUBLIC SAFETY:

• Cuts $270.5 million to constitutional officers such as sheriffs and commonwealth's attorneys.

• Cuts $73.4 million from local police departments.

• Leases 1,000 prison beds to out-of-state inmates to raise $19.8 million.

• Increases what the state pays to local jails to house state inmates from $8 to $12 per day.

• Changes the deputy-population ration from 1 to 1,500 to 1 to 2,000 to save about $25 million.

• Delays the opening of a new prison in Grayson County and pushes back construction of another.

HEALTH & HUMAN RESOURCES:

• Cuts $12.2 million from community service boards that provide treatment and crisis services to the mentally ill.

• Closes Commonwealth Center for Children and Adolescents, the geriatric unit at Southwestern Virginia Mental Health

Institute and the Southwestern Virginia Mental Health Institute adolescent unit.

• Cuts nearly $419 million from Medicaid budget by adjusting payments to providers, and makes administration,

eligibility and benefit changes.

• Continues $7 million annual cut in indigent care funding for teaching hospitals.

EDUCATION:

• Transfers $18.8 million in fees collected by colleges and universities to the general fund.

• Recaptures $134 million in unused health insurance premiums paid for teachers.

STATE EMPLOYEES:

• Freezes salary increases for two years.

• Cuts another 664 positions.

• Requires state workers to start contributing toward their pensions.

• Increases the retirement age for new hires from 50 to 55.