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Jewish World Review March 2, 2004 / 9 Adar, 5764

John H. Fund

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Consumer Reports

As Virginia mulls a tax hike, all Americans should guard their wallets | ALEXANDRIA, Va.— Gov. Mark Warner has already pulled off the impressive feat of being elected as a Democrat in a state that has voted Republican for president in every election since 1964. Now he is trying to convince this conservative state to raise $1 billion in taxes to plug a budget deficit. If he succeeds in breaking the lock Republicans have created against higher taxes, expect him to leap to the front ranks of those John Kerry is considering as his running mate.

Right now, Republicans in the state Senate are serving as enablers for a Democratic governor's tax increase. John Chichester, chairman of the Senate Finance Committee, is using the excuse of an $800 million budget shortfall to propose a tax increase that dwarfs even the governor's. He has assembled a bare majority of the Senate's 24 GOP members behind a package that would raise $4 billion in revenue over the next two years by raising sales, income, gas and tobacco taxes.

The state House of Delegates, headed by GOP Speaker William Howell, says calls for tax increases on the general public are an attempt by a coalition of liberal spenders and big business interests to expand the size of government while preserving tax benefits enjoyed by large corporations. The House has passed a modest $520 million tax increase package that ends 13 business tax preferences that no longer make much economic sense.

The two houses passed their respective versions of a tax plan last week and are in gridlock, with the Legislature due to adjourn in two weeks. "The anti-tax crowd in the House is very ideological, heavily committed. They won't move," says Mark Rozell, a professor at Catholic University in Washington. "And there's no incentive on the Senate side for anyone to cave [in]. They've already put all their credibility and stature on the line."

Each side is raising the rhetorical stakes. Sen. Walter Stosch, a Republican who supports tax hikes, says new infrastructure and Medicaid demands require tax increases: "The price for the state is the sales tax, which hasn't been raised since 1986, and the income tax, which hasn't been raised since 1972."

Mike Thompson, director of the free-market Thomas Jefferson Institute, responds that if the need is so great, the Legislature should pass a bare-bones budget that raises taxes slightly to pay for Medicaid costs and then let the people decide the issue this fall in an advisory referendum: "I'm amused by legislators who say the people want this tax increase for needed investments, but then won't let them be consulted on it." He says the state could close much of its current budget shortfall if it hired a private collection agency to go after debts smaller than $15,000 and opened up some state services to competitive bidding.

Tax opponents are also circulating a statement from Marty Connors, chairman of the Alabama Republican Party, who said warnings of doom and gloom stampeded his state's Legislature into passing a massive tax increase last year with the support of Gov. Bob Riley, a Republican. But the tax increase went to a vote of the people, who rejected it by a 2-to-1 margin. "Alabama government is having to tighten its belt, but none of the disasters that were predicted have come to pass," says Mr. Connors. The state Republican Party's official rejection of the tax increase helped persuade voters the GOP was still the antitax party. "If we lose that branding, we start losing elections," he warns his Virginia counterparts.

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Aides to Sen. Chichester and Gov. Warner respond that that failure to pass a major tax increase will jeopardize the state's triple-A bond rating from Moody's. Delegate Harry Parrish, a Republican, says that a lower bond rating would force Virginia to pay $1 billion more in debt service next year. In effect, Virginians are being told they will have to pony up a billion dollars either to bondholders or to the state's tax collectors.

But Paul Goldman, a former chairman of the state Democratic Party, says this line of thinking is a scare tactic. He phoned Moody's and learned that it has never said a tax increase would prevent a downgrade of the state's bond rating. But it did say it had agreed with Gov. Warner to wait until the legislative session ends before deciding whether to downgrade the rating. "Moody's for the first time, has allowed its decision-making to be held hostage to political considerations," Mr. Goldman says. "If my research is correct, the bond analysts would have made their decision by now and then revisited the ranking" after the Legislature adjourned. Mr. Goldman says that even though he is a Democrat he opposes Mr. Warner's tax increase because "when you add up all the parts, it will make the fiscal mess even worse in a few years."

By then Gov. Warner and Sen. Chichester will be long gone from Richmond. Mr. Chichester is serving his last term and has refused to rule out rumors that he may take a job in the Warner administration. Mr. Warner is legally limited to one term, ending in January 2006.

Mr. Warner may hope to leave for greener pastures before then. The former cellular-phone tycoon is busy selling himself as a moderate Southern Democrat who sold business interests and a Republican-controlled legislature on higher taxes. A President Kerry, like Gov. Warner, would almost certainly face a Republican legislature. That's why conservatives and antitax groups are fighting Virginia's proposed tax increase so hard. The stakes are much bigger than its effect on Virginia's budget or economy. If a major tax increase is approved in a state that is the heart of Bush Country, it could serve as a model for those who want all Americans to pay higher taxes.

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©2001, John H. Fund