By Michael Sluss

Archives Reprint

RICHMOND -- The two houses of the General Assembly finally agreed on a sweeping package of tax code changes Tuesday, removing a major obstacle in negotiations toward a new state budget.

In a day of marathon sessions interrupted by frequent closed-door negotiations, the House of Delegates and the state Senate approved a package of tax increases and cuts that would generate $1.36 billion in new revenue over the next two years. The legislation's key component is a half-cent-a-dollar increase in the sales tax on goods, the first statewide sales tax increase since 1986.

Both houses also agreed to impose a $950 million annual cap on the car-tax reimbursements the state makes to cities, counties and towns. Supporters said the cap will save nearly $50 million in the second year of the upcoming budget cycle and control the escalating cost of the relief program in future years, freeing up funds for essential state services.

The long-awaited compromise by the two Republican-controlled houses paves the way for an agreement on a new state budget. A dispute over taxes prevented the House and Senate from passing a spending plan before its regular winter session expired March 16. Gov. Mark Warner, a Democrat, ordered lawmakers into a special session the following day and has prodded them for six weeks to hammer out a deal.

The compromise package contains many of the provisions Warner sought when he urged lawmakers to revamp the tax code and stabilize the state's fiscal structure. It also generates more revenue than Warner's proposal, which would have produced nearly $1.2 billion in the next two years.

Warner flashed a triumphant smile when he stepped out of his office and spoke to reporters shortly after the House adjourned Tuesday night.

"At the beginning of this process we laid out three goals," Warner said. "We wanted to make our tax code fairer, we wanted to make sure we could fund our core commitments, and we wanted to protect our fiscal integrity. Those goals have been met."

The Senate passed a revised version of a House bill (HB 5018) that emerged earlier this month with the support of 17 Republicans who broke from their largely tax-resistant caucus. The final version of the bill increases the sales tax on goods to 5 cents a dollar in August and the excise tax on cigarettes from 2.5 cents a pack to 30 cents a pack by July 2005. The measure also reduces the sales tax on groceries by a half-cent a dollar each year for the next three years.

The legislation reduces income taxes for most Virginians by raising standard deductions and personal exemptions. The measure will apply a means test to income deductions awarded to Virginians 62 and older, but will not affect those who have already reached that age unless their income exceeds $200,000.

The legislation also eliminates some sales tax exemptions for certain utilities and telecommunications companies and closes some loopholes that enable corporations to avoid paying taxes.

Of the $1.36 billion the package will generate over the next two years, $984 million will go to the state's general fund. The remaining $377 million - or half of the new sales tax revenue - will be distributed to localities to spend on public schools.

Sen. John Edwards, D-Roanoke, called the legislation's passage "extremely important."

"Now Virginia can begin to move forward," he said.

The Senate passed the House-sponsored tax bill by a vote of 31-8. Sen. Brandon Bell, R-Roanoke County, was away on business and missed the vote.

Before senators rewrote the legislation, the House package was projected to generate nearly $700 million in new revenue over the next two years. But the bitterly divided House approved the Senate's changes by a vote of 52-45, largely because most of the 17 Republicans who voted for the original bill held their ground Tuesday. Del. Jim Shuler, D-Blacksburg, missed the vote because he was traveling outside the country.

"If we fell apart at this point, we could really have been too far down the road to rescue the state," said Del. William Fralin, R-Roanoke, who voted for the bill. "It's not been easy. It's been difficult, but I believe we were sent here to make difficult decisions."

The House worked late into Tuesday night debating a separate bill (SB 5005) that caps the state's car-tax reimbursements to local governments. The popular relief program initiated by former Republican Gov. Jim Gilmore was designed to phase out the personal property tax localities levy on the first $20,000 of a vehicle's value.

The reimbursement rate has remained frozen at 70 percent since 2001 because of sluggish revenue growth. But the program's cost has continued to escalate as the number and value of the state's registered vehicles has increased.

The Senate passed the bill by a vote of 31-7 after leaders in both parties insisted on the freeze. The House passed it by a vote of 51-45 over the objections of some Republicans who accused their colleagues of breaking a promise to their constituents.

House Majority Leader Morgan Griffith, R-Salem, said he considered supporting the bill but voted against it after the Senate increased the value of the broader tax bill.

Though he consistently voted against tax increases, Griffith said he hopes Tuesday's votes spur House and Senate budget negotiators to a quick deal.

"Now that they have their set revenue, hopefully they can get this thing done," Griffith said.

Delegates from Southwest Virginia who voted to pass the tax increase measure are: Ward Armstrong, D-Henry County; William Fralin, R-Roanoke; Benny Keister, D-Pulaski County; Dave Nutter, R-Christiansburg; and Onzlee Ware, D-Roanoke.

Delegates from Southwest Virginia who voted against the measure are: Kathy Byron, R-Campbell County; Allen Dudley, R- Rocky Mount; Morgan Griffith, R-Salem ; and Lacey Putney, I-Bedford.

    Del. Jim Shuler, D-Blacksburg, did not vote.

    Senators from Southwest Virginia who voted to pass a measure to increase state taxes are: Creigh Deeds, D-Bath County; John Edwards, D-Roanoke; Emmett Hanger, R-Augusta County; Phillip Puckett, D-Russell County ; and Roscoe Reynolds, D-Henry County.

    Sen. Steve Newman, R-Lynchburg, voted against the measure.

    Sen. Brandon Bell, R-Roanoke County, did not vote.

Associated Press contributed to this report.

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