Where did the money go?
Source: Joint Legislative Audit and Review Commission briefing on "Review of State Spending: December 2003 Update"
Taxes. And in 2002, it became clear that not enough taxes were coming into the state's pocketbook to pay for a long term (6 year) road program with a $10 billion price tag ($1.67 billion per year for 6 years, in a state budget that totals about $25 billion per year), as proposed by the Commonwealth Transportation Board.
Of course, no one likes to pay taxes. Governor Gilmore was elected in 1997 based on a simple slogan - No Car Tax. Eliminating that tax was popular... but it did not directly reduce the state funding for highway construction. The state did not receive revenues from the car tax (it was a personal property tax coillected by local city and county governments rather than the state). Gilmore's simple slogan was surprisingly hard to implement.
After the General Assembly passed Governor Gilmore's legislation to cut the car tax and the state officials developed a complicated mechanism to reimburse the county treasurers for the loss of the car tax revenue, the dot.com bubble collapsed. In 2002, it became painfully obvious that the state's tax revenues would not be sufficient to pay the local governments for the "missing" car tax revenues and to finance the plans of the Commonwealth Transportation Board to spend $10 billion over the next 6 years on transportation projects.
In the November, 2002 election for governor, the political balance shifted. Mark Early (the Republican candidate who had been on Gilmore's ticket and elected Attorney General in 1997) would not indicate any dissatisfaction with repeal of the car tax. Mark Warner expressed carefully supported local referenda in Tidewater and Northern Virginia to raise regional sales taxes to pay for regional transportation projects.
After Warner was elected, the General Assembly accepted that further rollback of the car tax would have to be suspended. Administratively, Warner focused attention on the Virginia Department of Transportations failure to match planned expenditures with expected revenues. He appointed a new VDOT commissioner, and on June 20, 2002, the Commonwealth Transportation Board (CBT) approved a revised Six Year Program. The 2003 long-term spending plan was $2.8 billion less than the program approved the previous year. After the 28% reduction, the cost of the 2003 plan totalled $7.3 billion rather than $10.1 billion over the next six fiscal years.
Until 1999, Virginia funded highway construction primarily via:
This was a legacy of the "pay as you go" attitude from the days of Harry Byrd. Harry Byrd got his start in Virginia politics by opposing bonds for road construction. He understood the importance of building roads in the 1920's, when the slogan for many political campaigns were "Get the farmer out of the mud." Byrd's alternative to state bonds or appropriations from the general revenues was to finance road construction with taxes on the users. Taxes on gas and licenses would burden the same people who used the new roads, which many people would describe as a fair way to balance costs and benefits.
Highway interests were guaranteed a steady source of revenue from vehicle-related licenses and taxes, but the amount raised annually waxed and waned with the state's economy. After adopting the "pay as you go" approach," the state avoided bond issues that would commit future funds. Roads were constructed as revenues were available - no faster, no slower.
The state did not fund roads via property taxes, of course - property taxes are almost exclusively a local tax. In some areas, the demand for highway construction exceeded the state's ability - or willingness - to finance projects. Some local communities, most notably Fairfax and Prince William counties, passed bond issues to accelerate road building in advance of revenue collection. A 20-year loan would burden future residents; county tax revenues (including property taxes) were committed to pay for the bonds. Since the roads were expected to be used for 20 years, the local perspective was That's fair. We'll let everyone who lives here pay for the roads they use. Otherwise, everyone who lives here now has to pay all the costs, and future residents would get a "free ride" - literally.
In 1992, Governor Wilder opposed a proposal in the General Assembly to propose a bond issue for transportation improvements. Until the Virginia Transportation Act of 2000, the state avoided committing General Fund revenues to road construction. With the passage of that law, however, the state increased the transportation budget by $546 million ($473 million for highways). The Priority Transportation Fund was established within the Transportation Trust Fund, and one-third of the estimated revenue to be collected from the existing Insurance Premium Tax was permanently assigned to the Priority Transportation Fund. Virginia also borrowed from anticipated future Federal funding. 10-year bonds, Federal Highway Revenue Anticipation Notes (FRAN's, also known as GARVEE's) will be guaranteed by federal dollars that will be allocated in future years for state transportation projects.
Jim Gilmore was elected governor in 1997 by running on a election slogan - "No Car Tax." He tapped into the citizen resentment of the property tax on cars and trucks, and then overcame resistance of the Democrats in the General Assembly to get legislation passed to phase out the car tax over 5 years.
But in the first year of implementation of the tax cut, the administrative complexity was so great that there were news stories suggesting the tax cut was ineffective. Some of the complaints were just political cheap shots and carping from the losing side, but even supporters of the governor expressed frustration at the difficulty of implementing a three-word slogan. If "No Car Tax" could fit on a bumper sticker, why was it so hard to reduce the actual tax?
The car tax is a property tax, based on the value of the personal property. The 1998 tax on a 10-yrear old Ford Tempo was far less than the tax on a 1997 Honda Civic. Byrd's political decision 70 years earlier to structure the taxes to protect the rural communities complicated Gilmore's efforts to eliminate the car tax. When the state government cut the car tax... it was cutting a tax it did not collect.
Instead, each county and city had its own personal property tax rate for cars. In the first year of the tax cut, the counties/cities had already started to collect their normal property taxes. The state agreed to reimburse the individuals with refunds, but this required the state to calculate the car tax paid on every vehicle and mail a reimbursement check to every taxpayer. Only in the second year of the tax cut (1999) were the counties/cities able to reduce their personal property tax bills in advance. The state government reimbursed the cities and counties, which required far less paperwork than retroactively mailing a refund to a large number of individual citizens.
Of course, local governments could have raised their taxes, so taxpayers would have written the same size of a check in 1999 as they did in 1998. After all, many communities needed a tax increase.
In the economic boom of the 1990's, the federal and state revenues (based heavily on income taxes) climbed as incomes rose. In contrast, real estate values in suburbanizing counties in Tidewater and Northern Virginia, or near Richmond and Charlottesville and Roanoke, have not risen as fast as the need for services from new residents. In some rural counties, as population shrinks and real estate values decline, the local officials have been faced with the need to increase property tax rates to maintain existing service levels - schools, libraries, police, fire... the basics.
No elected official wants to raise local taxes, especially as the news stories report a surplus at the federal and state level and unsophisticated voters assume all taxation authories are able to afford tax cuts. If Virginia's voters had been less attentive to Gilmore's campaign, some communities might have tried to "keep taxes level" rather than actually reduce them. The governor demonstrated throughout his term that he was serious about actually cutting taxes, however, and there was no window of opportunity for local officials to use sleight-of-hand accounting techniques to tap into the revenue that the governor was giving back the taxpayers.