In 2002, the Commonwealth Transportation Board (which determines which projects will be constructed by the Virginia Department of Transportation) included $10 billion of projects in the state's Six Year Plan. A $10 billion plan required $1.67 billion per year for 6 years, in a state budget that totaled about $25 billion per year.
Funding for those projects was expected to come from a variety of taxes and fees, but in 2002 it became clear that not enough taxes were coming into the state's pocketbook to pay for the long term road construction program.
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 collected by local city and county governments rather than the state. To implement Gilmore's simple slogan, the General Assembly could simply force cities/counties/towns to reduce their budgets, but that would generated a political uproar. Instead, state officials developed a complicated mechanism to reimburse localities for loss of their local property tax revenue.
After the General Assembly passed Governor Gilmore's legislation to cut the car tax, the dot.com bubble collapsed and state tax collections dropped substantially. 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 six years on transportation projects.
In the November, 2001 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) failed to articulate his opinion on whether the car tax should be reduced only 50% (as proposed by the Republican-controlled State Senate) or 70% (as proposed by Governor Gilmore). Democratic candidate for governor Mark Warner emphasized his support for 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 simple "No Car Tax" election slogan. He tapped into citizen resentment of the property tax on cars and trucks to win the election, and then overcame resistance of the Democrats in the General Assembly to get legislation passed to phase out the car tax over 5 years.
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?
Harry 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 cut a tax it did not collect.
Instead, each county/city/town had its own personal property tax rate for cars. The state planned to reimburse the local jurisdictions, phasing out the car tax until it could provide 100% reimbursement for the lost revenues after five years. By the time the General Assembly approved the tax cut in 1998, however, many local jurisdictions had already started to collect their normal property taxes. Individuals had already sent a check to their local government to cover the personal property tax on their cars.
For 1998, the state agreed to reimburse those individuals, but this required the state to calculate the car tax paid on those vehicles and mail a reimbursement check. In the second year of the tax cut, the state government reimbursed the cities and counties; that required far less paperwork than retroactively mailing a refund to a large number of individual citizens.
Counties/cities/towns were able to calculate the state's reimbursement before mailing the 1999 personal property tax bills. Citizens saw a reduction in their car-related property taxes - but did not necessarily write a smaller check to their local government. Local officials could have raised other taxes as car taxes were reduced, or real estate values might have increased (and thus increased the amount of local real estate taxes, even if the tax rate on real property had not changed).