DIVISION OF LEGISLATIVE SERVICES
VIRGINIA LEGISLATIVE ISSUE BRIEF
Number 26                   December 2001

2002 SESSION: General Assembly Issues

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Finance/Taxation

Budget

The Appropriation Act adopted by the Virginia General Assembly is the single most important piece of legislation adopted each session, because it establishes Virginia's budget priorities for the coming budgetary period. Virginia and the United States have witnessed a record 10-year expansion of economic activity, generating Virginia's large increases in revenue, which have been used to provide billions of dollars of tax relief as well as funding for new and different spending priorities. In the last four years prior to the current biennium, the Commonwealth has averaged double-digit general fund revenue growth in each fiscal year.

The slowing of the economy has been evident for over a year and the Appropriation Act for the upcoming 2002 – 2004 biennium will need to fund priorities with very little revenue growth. However, a more critical test of the 2002 Session may be the enactment of a "caboose" budget bill for the current fiscal year, which ends June 30, 2002. With general fund revenue and net lottery profit growth of only 2.9 percent for the first year of the current biennium and with no amendments to the Appropriation Act adopted during the 2001 Session, the current Appropriation Act provides spending at a 7.5 percent increase for the current fiscal year.

The Governor has recently announced that he will reduce the official estimate for the general fund for the current fiscal year by $1 billion, which indicates the administration is predicting negative revenue growth rather than any type of increase. In addition, required spending increases will increase the budget gap for the current fiscal year to more than $1.3 billion. Thus, the $1.3 billion-plus gap may need to be made up in approximately six months rather than over the whole fiscal year. Of course, the final budget gap could be even larger if the economic downturn is more severe than currently forecast.

Clearly, Governor-elect Warner and the 2002 General Assembly will need to address these significant budgetary issues. Many difficult budget decisions will need to be made, and spending reductions, the amount of car tax relief, and the Rainy Day Fund will all be on the table to address and close the budget gap.

John A. Garka

Rainy Day Fund

For the first time since the creation in 1993 of the Commonwealth's Revenue Stabilization Fund, also known as the Rainy Day Fund, the constitutional conditions allowing its use might be met this year. According to the third paragraph of Article X, Section 8 of the Constitution of Virginia, "...no transfer shall be made unless the general fund revenues appropriated exceed such revised general fund revenue forecast by more than two percent of certified tax revenues collected in the most recently ended fiscal year." Said another way, the Rainy Day Fund may be accessed only if a revenue forecast overstates collections by more than two percent of the certified tax revenues for the prior fiscal year.

The Governor recently announced that the revenue forecast for fiscal year 2002 would be revised downward by $1 billion. If the official December revenue forecast is consistent with the Governor's most recent announcement, the constitutional condition for accessing the fund will be satisfied.

Once that condition is satisfied, constitutional limits exist on how much of the shortfall may be covered by the fund as well as how much of the fund may be transferred to the general fund in any given fiscal year. Again in Article X, Section 8, "The General Assembly may appropriate an amount for transfer from the Fund to compensate for no more than one-half of the difference between the total general fund revenues appropriated and a revised general fund revenue forecast.... Furthermore, no appropriation or transfer from such fund in any fiscal year shall exceed more than one-half of the balance of the Revenue Stabilization Fund."

In other words, the amount taken from the fund may only cover one-half of the projected shortfall and no more than one-half of the fund may be transferred to the general fund in any fiscal year. It will be up to the General Assembly to determine whether to access the fund and if so, in what amount.

Joan E. Putney

Car Tax

Phase-in Schedule

In 1998, the General Assembly enacted the Personal Property Tax Relief Act of 1998, which phases in the elimination of the tangible personal property tax on personal-use automobiles valued at $20,000 or less (Code of Virginia § 58.1-3523 et seq.). The act is geared to eliminating the local property tax on such personal-use automobiles, based on tax rates that were in existence in 1998. Code of Virginia § 58.1-3524 provides for the elimination of the tax to be phased in over five years, provided that certain negative economic events do not occur. The phase-in schedule (if the economic "circuit breakers" are not triggered) is as follows:

Economic "Circuit Breakers"

Code of Virginia § 58.1-3524 C identifies three negative economic conditions, any one of which will freeze the tax relief at the current level in effect. These "circuit breakers" are:

1. Less than 5 percent growth in general fund revenues over the preceding fiscal year, as indicated in the official December forecast of general fund revenues;

2. General fund revenues in any fiscal year that are less than appropriations, as indicated in the official December forecast of general fund revenues; and

3. Actual general fund revenues for a fiscal year that are less than the projected general fund revenues for such year by at least one half of one percent.

If one or more of the "circuit breakers" are triggered, § 58.1-3524 C provides that the tax relief will remain at the current level for the following calendar year—the phase-in to the next level will be suspended.

Tax Relief for 2002

The level of personal property tax relief for the current calendar year is 70 percent. If any of the three circuit breakers is triggered, personal property tax relief will not automatically advance to 100 percent beginning in calendar year 2002. Regarding the third circuit breaker, there are different views of whether or not actual general fund revenues for fiscal year 2001 were within one half of one percent of projected general fund revenues (i.e., whether or not this circuit breaker was triggered in the fall, thereby freezing the level of tax relief at 70 percent in calendar year 2002). These differences of opinion center around what was the actual projected revenue growth for fiscal year 2001.

Nonetheless, with the nation in the midst of a recession, it is highly probable that one or more of the other "circuit breakers" will be triggered. In such a case, § 58.1-3524 would freeze the level of tax relief at 70 percent for calendar year 2002. The level of personal property tax relief in calendar year 2003 would then depend upon revenue growth in fiscal year 2002 or some specific action of the 2002 Session of the General Assembly.

Mark Vucci

Regional Option to Increase Sales Taxes

The General Assembly almost certainly will be considering proposals to permit regional sales tax increases. Last session, the conference report for HB 2776, which would have authorized a referendum for a regional sales tax increase in Northern Virginia for transportation and education purposes, was narrowly defeated in the House in the waning hours of the session. The subject matter of this bill was a major issue in the gubernatorial race this fall. In addition, interest has been expressed in other regions of the state, most notably the Tidewater area, to pursue similar measures.

If the debates surrounding HB 2776 last year are any indication, some of the specific issues that may arise in the details of such legislation include: (i) the region to be affected, (ii) the type and amount of tax increase, (iii) the purpose(s) for which the new revenues will be used (including the nature and scope of specific transportation projects where transportation is one of the purposes), and (iv) the timing for the referendum and the imposition of the tax.

A more fundamental issue that arose last session was whether such legislation constitutes special legislation under Article VII of the Virginia Constitution and therefore requires a two-thirds majority vote for passage. According to prior cases decided by the Supreme Court of Virginia, the answer to this question should depend on whether the geographic region covered by the bill is reasonably related to the purpose of the bill. If so, according to the Court, it is general legislation, and if not, it is special legislation.

David Rosenberg

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