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Va. budget deal includes $4 billion in tax cuts, 10% raises for state workers

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Sen. Janet Howell (left), D-Fairfax, chair of the Senate Finance and Appropriations Committee, and Del. Barry Knight, R-Virginia Beach, chair of the House Appropriations Committee, led the budget negotiations.

A proposed budget deal General Assembly negotiators reached this week would cut taxes by $4 billion over three years, increase state employee and teacher pay by 10% over two years and contribute up to $470 million in state funds to widen a 29-mile stretch of Interstate 64 between Richmond and Williamsburg.

The tax cuts include one-time rebates of $250 for individual taxpayers and $500 for families this year, a 78% boost in the standard deduction on state income taxes, a larger deduction for military retirement income, and a refundable tax credit for low-income working families.

But it does not include the repeal of the 1% local option sales tax on groceries — only the 1.5% state portion of the tax. It also does not include a three-month suspension of the state tax on gasoline that Gov. Glenn Youngkin had wanted as part of a larger $5.5 billion tax relief package in his first year in office.

The compromise agreement between negotiators for the House of Delegates and Senate came nearly three months after the legislature ended its 60-day session on March 12 without a revised budget for this year or a new two-year budget that will take effect on July 1.

“We wanted to convey a message here that we’ve taken our time getting it right and we think we’ve gotten it right,” House Appropriations Chairman Barry Knight, R-Virginia Beach, said in a joint budget briefing with Senate Finance Chair Janet Howell, D-Fairfax, on Thursday afternoon.

It’s the fifth budget agreement lawmakers have reached since Howell became committee leader more than two years ago, before the COVID-19 pandemic turned Virginia’s economy upside down and then a series of massive federal emergency aid packages helped turn the bust to boom with record amounts of state revenue.

“We had really major differences and we’re in uncertain times,” she said. “The threat of inflation looms and a possible recession looms, so we’re very cautious in how we spend the money.”

The details of the proposed agreement will become public by Sunday night, before the assembly meets in special session on Wednesday.

The two budgets — one for the fiscal year that ends June 30 and another for the two fiscal years that begin July 1 — then will go to Youngkin. He will have seven days to propose amendments or veto provisions.

Knight, who led negotiations for the Republican-controlled House, said Youngkin “knows most of this,” but said his first priority was briefing the other five House members of the budget conference committee and the House leadership — Speaker Todd Gilbert, R-Shenandoah, and Majority Leader Terry Kilgore, R-Scott.

“There’s a pecking order around here,” he said. “There’s the legislative branch and then it’s the executive branch.”

Youngkin spokeswoman Macaulay Porter said, “The governor was briefed and looks forward to seeing the final language, but I’ll decline to comment further.”

Tax deal

The first-year governor will see some things he likes in the agreement, beginning with the increase of the standard deduction from $4,500 to $8,000 for individual taxpayers and from $9,000 to $16,000 for families. The change will reduce state income tax revenues by an estimated $1.6 billion over two years, or about $500 million less than Youngkin had sought.

“That was a major concession for us,” Howell said.

In return, Senate Democrats achieved a long-denied goal by making up to 15% of the earned income tax credit refundable for low-income families who don’t pay enough taxes to offset the entire credit.

“It was one we did not like,” Knight said.

The House and Senate will form a joint subcommittee to study state tax policy later this year, including the scheduled rollback of the higher standard deduction levels in 2026 if Congress does not extend the federal tax cuts enacted in late 2017 under then-President Donald Trump.

The House prevailed in raising the exemption on military retirement income to $40,000, phased over four years, instead of the $20,000 maximum that the Senate had proposed.

But the final deal also holds the one-time tax rebates at the same level then-Gov. Ralph Northam proposed in his parting budget — $250 for individuals and $500 for families, rather than the $300/$600 Youngkin proposed and the House endorsed.

It also doesn’t include a gas tax holiday that the governor had proposed for three months — May through July, phased back in over the following two months, with a 2% cap on future annual increases for inflation. The proposal would have cost the state about $437 million in transportation revenues, not including reductions from the inflation cap.

The agreement also doesn’t include the full repeal of the sales tax on groceries, which both parties have favored but Youngkin made a priority. Both chambers voted to eliminate the state portion of the tax, using state revenues to offset losses to local school systems, but the Senate balked at repealing the 1% local option that goes directly to local governments to pay for their public services.

Raises and bonuses

On the spending side, the agreement includes about $1.8 billion over two years for across-the-board raises, one-time bonuses and targeted salary relief for state employees, teachers, and state-supported local employees, including sheriff’s deputies.

The deal preserves a 5% raise each year for those employees, as well as a $1,000 bonus that the Senate had proposed in its budget. The House had proposed a 4% raise and a 1% bonus each year.

The compensation package also includes targeted pay increases for state and local law enforcement, direct-care staff at state behavioral health facilities and correctional officers. Knight said local sheriff’s deputies and correctional officers would see a 22% increase between targeted relief and across-the-board raises.

VRS

The proposed agreement also would save state and local governments $1.85 billion over 20 years in pension costs for public employees by depositing $750 million this year in the Virginia Retirement System and an additional $250 million in the next budget to pay down unfunded liabilities. The contributions would increase the funded status of the state employee and teacher pension plans by 1%.

The additional money for teacher retirement also would relieve pressure on the Literary Fund, which is part of a three-way compromise to provide $1.25 billion in loans and grants to local school divisions to replace or repair outdated public school buildings. The compromise includes the creation of a new school modernization fund and a loan-rebate program that the House had proposed.

“That’s pretty significant,” Knight said. “We haven’t done something like that before.”

Interstate 64

One of the big surprises is a proposed commitment of up to $470 million in state funds — $320 million this year and $150 million contingent on future revenues — to close “the gap” on I-64 by widening the interstate to three lanes each way between Bottoms Bridge in New Kent County to Lightfoot in James City County.

The Senate had proposed $190 million and the House had included $50 million for the project, which is a top transportation priority for the Youngkin administration.

Knight said the $750 million project also would require up to $125 million from the Central Virginia Transportation Authority, which has been divided over spending regional money on it, as well as regional funds from Hampton Roads and federal grants from the Infrastructure Investment and Jobs Act.

“We hope we can get enough money from all sources to fully fund it,” he said.

Housing

The agreement would break new ground in state support for affordable housing. It would add $40 million to the Virginia Housing Trust Fund, for a total of $150 million in the next two years, and add $240 million to a new Virginia Housing Opportunity Tax Credit program over the next 10 years.

Howell said the investments represent “sort of a breakthrough” on state support for affordable housing in the face of rapidly rising house prices and rents.

“It’s a crisis,” she said.

Medicaid

Another point of pride for the negotiators was an additional $1.4 billion for health and human resources. That includes almost $700 million to increase Medicaid reimbursement rates for providers of dental care, services for people with developmental disabilities, personal care and nursing facilities.

It also includes money for an additional 600 Medicaid waiver slots for people with developmental disabilities and $217 million in state and federal funds to expand community-based mental health services, such as permanent supportive housing, and boost pay for direct-care staff at state mental hospitals.

Knight and Howell also outlined other proposed investments, including:

  • $1.6 billion in deposits to state reserves, boosting them above $3.8 billion by mid-2024;
  • up to $159 million over two years to the Virginia Business Ready Sites program to make the state more competitive for economic development projects, such as the $5.5 billion electric vehicle plant that Hyundai just announced would be built near Savannah, Ga., instead of a proposed site in Danville;
  • $568 million for water quality improvements, including $100 million to help Richmond complete the long-term project to eliminate polluted overflows into the James River during heavy rains;
  • $3.3 billion for capital projects, with two-thirds of it paid by cash instead of tax-supported debt; and
  • $340 million in financial and other aid to colleges and universities, including $43.3 million for both public and private historically Black institutions, and $202 million in state aid to encourage colleges and universities to moderate annual increases in tuition, a long-standing House priority.

“I personally would like to see it at 3% or less,” Knight said. “We’re worried about the debt these kids come out with.”

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