With many legislators facing primary elections in new districts this spring, the House of Delegates and Senate are not likely to waste much time in looming negotiations on how to bridge a $1 billion divide between tax cuts and new spending in the state budget.
House Republicans already have embraced a $1 billion package of tax cuts that Gov. Glenn Youngkin proposed in the $177.4 billion, two-year budget that he introduced on Dec. 15, but they face a tough sell to Senate Democrats who widened their narrow edge in the chamber to 22-18 with a special election victory last month in Virginia Beach. The package, if fully enacted, would lower the income tax rate that corporations pay below the top rate that 84% of Virginians pay, regardless of how much they earn.
“I don’t know how much they’re going to be willing to give, but I don’t think it will be that much at the top,” Richmond political analyst Bob Holsworth said Friday.
Holsworth suggested that Democrats could be willing to deal on tax cuts that help low- and middle-income Virginians, such as increasing the standard deduction on income, making more of the earned income tax credit refundable for working families and creating a refundable child tax credit.
On the other hand, Holsworth added, “Youngkin has one great advantage in that he’s inherited a lot of money,” in state revenues.
A year ago, in his first assembly session as governor, Youngkin secured $4 billion in tax cuts, aided by record revenues from Virginia’s rapid economic rebound from the COVID-19 pandemic and unprecedented federal spending to help state and local governments in the emergency. This year, he predicts an additional $3.6 billion in revenues, including a $1.9 billion surplus in the last fiscal year, and proposes to spend $2.6 billion on state services, especially in education and behavioral health.
The House has adopted all of Youngkin’s proposals for an additional $1 billion in tax cuts, but the Senate has rejected them as budget negotiations loom.
The governor and his Republican allies have proposed to lower the corporate income tax rate from 6% to 5%, while reducing the top rate for individual income tax from 5.75% to 5.5%. He wants to increase the standard deduction to twice what it was when he took office, remove the age limit for veterans to exempt up to $40,000 of military retirement income from taxation, create a new tax credit for small businesses, and expand existing business tax breaks.
In a recent appearance at the Weinstein JCC, Youngkin said Virginians are overtaxed.
“We have ample resources in order to cut taxes and invest in our top priorities and we need to get this done for Virginians,” he said.
However, Senate Finance Co-Chair Janet Howell, D-Fairfax, said Friday, “At this point, I don’t see him getting any of the tax cuts. We’re pretty determined that he won’t.”
House Appropriations Chair Barry Knight, R-Virginia Beach, said some tax cuts benefit poorer Virginians more than rich ones. “Raising the standard deduction helps poor people more than anything else,” he said Friday.
Republicans and Democrats share priorities for boosting spending on public education, health and human services. In the Senate, Democrats are interested in turning the governor’s proposal of almost $200 million in bonuses for teachers and state employees into additional pay raises or a combination of the two.
“I think you’ll see more money for those salaries,” said Sen. Chap Petersen, D-Fairfax City, chair of the finance subcommittee on general government, who is concerned about a 21% vacancy rate in state jobs and lower labor participation across the state after the pandemic.
Knight said House Republicans also are interested in different ways to hire and retain state employees and teachers. “We all agree we need to add money to our employees. It’s just the mechanics of how we get it done.”
Youngkin has said tackling the state’s mental health crisis is a major priority, and his budget includes a $230 million boost to state spending on Virginia’s long underfunded public behavioral system.
Democrats say Youngkin’s increase, while welcome, does not go far enough.
State Sen. Creigh Deeds, D-Bath, chair of the General Assembly’s Behavioral Health Commission, has an amendment calling for an additional $162 million to try to fill the nearly 2,800 vacant posts at the state’s community services boards, or CSBs, the local or regional agencies that manage treatment and programs for people with mental illness as well as intellectual and developmental disabilities. The money is to fund bonuses to help retain and recruit CSB staff.
Deeds also proposes $38.7 million in additional state funds to raise provider rates for a wide range of services for people with mental health problems through Medicaid, the state-federal program for the elderly, disabled and poor. The federal government would match those funds with $76.7 million to pay for those services.
Other Democratic senators have proposed $127 million in additional state funding to boost rates for Medicaid services to people with developmental disabilities and serve 2,350 people on the state waiting list for nonmedical services to people with those disabilities. The federal government would provide $132 million to match the new state funds for those services and Medicaid waiver slots.
Democrats hope for help from Republicans to push back on the governor’s attempts to intrude on assembly authority — from control over use of transportation funds to support improvements for economic development projects, to ensuring that critical legislative agencies have space in the newly renovated Old City Hill next to Capitol Square.
“The legislature has its prerogatives and we hold them dear,” said Howell, who expects the Senate budget to ensure space for the divisions of Capitol Police and Legislative Automated Systems in the national historic landmark, eyed by the Youngkin administration for executive agencies instead.
Knight said House Republicans generally support Youngkin and his initiatives, but he added, “We are the legislative branch. We will continue to control the checks and balances on the money ... no matter what the governor’s party.”
The governor’s budget would divert $300 million in state transportation money — including funds that pay for highway construction and maintenance, rail and public transit — to the Transportation Partnership Opportunity Fund. The proposal aims for quicker decisions on transportation upgrades to attract major economic development projects, including a new FBI headquarters sought in Springfield, but it still makes legislators from traffic-clogged Northern Virginia uneasy about the diversion of money from other state-ranked priorities.
“I don’t want to have the governor moving around hundreds of millions of dollars in needed transportation funds,” said Sen. Adam Ebbin, D-Alexandria. He cast the sole “no” vote in Senate Finance on Senate Bill 1106, proposed by Sen. Steve Newman, R-Lynchburg, one of two submitted on behalf of the Youngkin administration for the transportation initiative.
Both the House and Senate have amended the administration bills to eliminate requirements for a specified amount of funding to be shifted into the fund, while restoring requirements that the governor report to the money committees on any grants he makes. However, Newman, one of the governor’s strongest legislative allies, has balked at a House proposal to require advance approval by the assembly’s economic project review commission of any grant of more than $35 million.
On higher education, Knight predicted that the House will push to use state aid to persuade colleges and universities to moderate tuition increases.
At the K-12 level, both sides want to add money, but Youngkin will start about $200 million in the hole after the Department of Education acknowledged that it had overstated the amount of basic aid that each local school division could expect in the state budget adopted in June. The error, first reported by the Richmond Times-Dispatch, was not part of the budget itself, but many localities relied on the inaccurate estimates in preparing their budgets for the current fiscal year and the one that will begin July 1. The lower estimates pose a particular challenge for small and rural school divisions that rely more on state aid for education.
“It doesn’t change the budget, but it puts pressure on Republicans,” Holsworth said. “These are jurisdictions they represent.”
Youngkin has urged the assembly to cover the gap with additional sales tax revenues and money he included in the proposed budget.
“Rest assured, the error from the Department of Education will not result in any budgetary cuts to our school divisions,” House Majority Leader Terry Kilgore, R-Scott, said Thursday.
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