HJR 532

Commission on State and Local Government
Responsibility and Taxing Authority

June 23, 1997, Richmond

At the commission's first 1997 meeting, staff presented a brief history of the commission, which began its work in 1995 as a result of HJR 487 and was continued in 1996 by HJR 108. Its original charge was to examine the services provided by state and local governments as well as the taxes and fees required to generate the revenues necessary to provide those services.

During the 1996 General Assembly Session, legislation establishing a model business, professional and occupational license (BPOL) ordinance for use by local governments was proposed by the commission and passed by the legislature. The purpose of the ordinance was to provide more uniformity in the application and administration of the BPOL tax.

Personal Property Tax

SJR 385 (1997) requests the commission to study the advisability of reducing or eliminating the tangible personal property tax and authorizing alternative methods of generating revenue. A bill (SB 750) was also introduced during the 1997 session, which would have increased the state portion of the sales and use tax from 3.5 percent to 5 percent with the revenue generated by the increase being distributed back to the localities in order for them to reduce their reliance on the tangible personal property tax. Each locality would be required to lower the amount of tangible personal property tax revenue it could collect by the amount of its share of the increased sales tax revenues. The bill failed to come out of the Senate Finance Committee.

Gilmore Proposal

Delegate Thelma Drake presented former Attorney General Jim Gilmore's personal property tax proposal to exempt the first $20,000 of assessed value of all personally owned vehicles from the tax. Local governments would continue to assess all vehicles and would bill the Commonwealth for the portion exempt from the tax. The state would then reimburse, from revenue growth, the local government, dollar-for-dollar, for the foregone amount. In the event the state could not meet its funding obligations, the localities could collect the tax themselves. Local government would continue to levy the tax on business property and non-vehicles, as well as on assessed values above the exempt amount. The plan would be phased in over a five-year period with the exemption amount starting at $1,500, going to $3,000 in year two, $5,000 in year three, $12,000 in year four, and $20,000 in year five.

Localities' Reaction

Representatives of the Virginia Municipal League (VML) and the Virginia Association of Counties (VACo) discussed the importance of the personal property tax to localities' budgets. The tax has served as a healthy revenue source, which has often offset sluggish growth in the real estate tax or sales tax. The average annual growth in personal property tax revenue during the last ten years has been 9 percent. In addition, about 75 percent of the personal property tax revenue is attributable to vehicles, with the remainder coming from business personal property, boats, airplanes, etc. Of that amount, 85 percent of the vehicles are personally owned and would benefit from the exemption. According to VML and VACo, the estimated annual cost to the state of a $20,000 exemption on personal vehicles would be more than $1.3 billion in 2003, when the plan is fully implemented. The total in state payments to localities for the first five years is estimated to be $2.9 billion. Both VML and VACo expressed concerns about the state's being able to fund such amounts consistently.

General Fund Budget

Finally, the commission was briefed on the major general fund budget pressures for the 1998-2000 biennium. Local aid and aid to individuals make up about two-thirds of the general fund budget. Ninety percent of the general fund is spent for public education, sheriffs and jails, police departments and mental health/mental retardation community services boards. In the category of aid to individuals, Medicaid is by far the main recipient by accounting for over three-fourths of all such aid. The major areas that will require additional funding are public education, public safety, Medicaid, debt, and state employees' salaries and fringe benefits. The estimated increase in necessary funds for these areas is between $1,009.7 million and $1,044.7 million for the 1998-2000 biennium.

Next Meeting

During the next meeting, the commission hopes to hear from a panel of economists concerning their revenue projections and expectations for the Commonwealth's economy during the next five years as well as information concerning what effect state actions regarding revenues could have on local governments' bond ratings.