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10 Reasons to Oppose Virginia SalesTax Increases
by Chris Edwards and Peter Ferrara
Chris Edwards is director of fiscal policy studies at the Cato Institute; Peter Ferrara is president of the Virginia Club for Growth.
No. 75
Northern and southeastern Virginians willvote in referenda this November to approve orreject increases in the retail sales tax to fundtransportation projects. Northern Virginianswill decide whether to increase the sales tax from4.5 percent to 5.0 percent, an 11 percentincrease. Virginians in the Hampton Roads areawill decide whether to increase the sales tax from4.5 percent to 5.5 percent, a 22 percent increase.Proponents of tax increases point to unmettransportation needs to support their cause. Yetstate spending increased 13 percent in 1999, 7percent in 2000, and 9 percent in 2001. If keytransportation needs have not been met, theproblem is not a lack of funds but legislators whohave not properly prioritized the budget.If the sales tax referenda are passed, the stategovernment will have a strong incentive toreduce what it would otherwise spend on trans-portation in northern Virginia and HamptonRoads. By some measures, northern Virginiaalready gets the short end of the stick withregard to the state budget.Tax increases are not just bad budget policy;they are also bad economic policy. Since highertaxes reduce economic growth, an added cost of higher sales taxes would be lower incomes forVirginians. During the 1990s Virginia taxes grewfaster than incomes, and local property taxes havesoared recently.Even modest restraint in nontransportationspending could save enough money to fund pri-ority highway projects without tax increases.Further, the state could adopt a spendinggrowth cap that channels excess future tax rev-enues to transportation needs and tax cuts.
September 18, 2002
 
Introduction
Citizens of northern Virginia will vote thisNovember on a proposal to raise the generalsales tax rate in that region from 4.5 to 5.0 per-cent, an 11 percent increase.
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In southeasternVirginia, or Hampton Roads, citizens will voteon a similar proposal to raise the sales tax inthat region from 4.5 percent to 5.5 percent, a22 percent increase.
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The proceeds from thosetax increases and subsequent bond issues areto be used for transportation projects only inthose areas paying the higher taxes.The ballot questions are one-sided, as theyonly allow a tax increase option, not an optionto control state spending to free funds fortransportation. Ironically, the Virginia politicalestablishment has long been opposed to popu-lar referenda, but this year elected officials haveallowed citizens to vote only for an increase inthe size of the government. The last significantreferendum on taxes was a 1987 Fairfax Countyvote on increasing the restaurant meals tax tofund education. That referendum was defeated.In 2003 state transportation spending of $3.3 billion will be funded from a remarkablycomplex array of taxes and fees.
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(All budgetdata are for state fiscal years, which end on June30). Major funding sources include federalgrants, half of a percentage point of the state’sgeneral sales tax, a gasoline tax of 17.5 cents pergallon, a motor vehicle sales tax of 3 percent,motor vehicle license fees, and many other feesand taxes. The current Virginia general statesales tax is 3.5 percent, but localities add anadditional 1.0 percent for a total of 4.5 percent.The proposed sales tax increases have beenpushed by developers and other businessinterests in northern Virginia, led by theNorthern Virginia Roundtable. In a recentstatement, the Roundtable called for increasesin state individual and corporate incometaxes, gasoline taxes, and sales taxes.
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Clearly,developers directly benefit from expandedconstruction funding for highways and masstransit. Virginia’s governor Mark Warner, whohas long been supported by those groups,pushed the sales tax referenda through thelegislature and is now campaigning for pas-sage of the proposed tax increases.The sales tax referendum is a classic politicalcon game. Politicians insist that there is nomoney left in the budget for whatever the mostimportant issue happens to be for voters. If vot-ers’ top priority is highways, then politiciansinsist there is no money left for them and claimthat higher taxes are needed. If voters’ top priori-ty is education, then politicians insist there is nomoney for it without more tax increases. Thereality is that the support for sales tax increasesillustrates the failure of state politicians to livewithin their means after large tax revenue andspending increases during the 1990s.The sales tax proposals come at a particularlybad time, as the economic slowdown hasreduced the ability of families and businessesacross the state to pay more taxes. Indeed, sup-porters of the tax increase face strong grassrootsopposition in Virginia this year. Citizensopposed to higher taxes, and liberals and envi-ronmentalists who believe that more highwayconstruction will lead to more urban sprawl andpollution, are against the sales tax increases.If Virginians examine the state budget,they will find that they already pay more thanenough in taxes to finance all the basic ser-vices of state government, including roadsand highways. Slowing the growth rate inoverall state spending in future years wouldfree funds for transportation and allow a fullphase-in of the car tax repeal.This report discusses 10 reasons whyVirginia does not need a sales tax increase.Reasons 1 to 9 have to do with the current bud-get situation in Virginia. Reason 10 is that taxincreases have not only budget implications butalso important economic effects. Since taxincreases reduce economic growth, the sales taxreferenda are about more than funding high-ways. They are also about preserving Virginia’sstrong economy. Finally, we provide some poli-cy options that Virginia legislators should con-sider instead of tax increases. It turns out thatreasonable limitations on general fund spend-ing growth would leave more than enoughfunds for essential transportation projects andfurther tax cuts in the years ahead.
2
Support for salestax increasesillustrates thefailure of statepoliticians to livewithin their means.
 
10 Reasons to Oppose aSales Tax Increase
1. State Spending Has Grown Excessively
State spending in Virginia soared during the1990s as the economic boom flooded state cof-fers with tax revenue and prompted legislators toexpand programs beyond sustainable levels.During nine boom years from 1992 to 2001,state spending (general and nongeneral funds)rose an average of 6.8 percent per year.
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By con-trast, inflation grew at just 2.6 percent annuallyand Virginia’s population grew at 1.2 percentannually during that period. Figure 1 shows thatrecent spending increases have been particularlylarge, including increases of 13.3 percent in 1999,7.0 percent in 2000, and 9.1 percent in 2001.
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Although legislators were forced to slowspending growth to just 0.7 percent in 2002because of stagnant tax revenue, they haveenacted a 7 percent increase in spending for2003. Despite cries of large budget shortfalls,the May budget plan for the 2003–04 bienniumincluded more than $2 billion in “new spend-ing.”
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As soon as politicians anticipate moneycoming in the door, new spending projects arefound to expand state government.Virginia voters should ask why it is that,after the 1990s spending boom and plannedincreases next year, there is no money left tosolve transportation problems in northernVirginia and Hampton Roads. If transportationis a top spending priority, legislators and thegovernor should begin to reduce spending, orslow spending growth, in other budget areas inorder to reallocate funds to highway projects.
2. Tax Revenues Rose Quickly during the1990s
Virginia has a history of fiscal conser-vatism; its overall tax load has been somewhatbelow the average of the 50 states. But in thelate 1990s large tax revenue increases pushedVirginia closer to the midpoint.
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Unless bud-get restraints are imposed, Virginia may ulti-mately lose its low-tax advantage and becomeless economically competitive.
3
State spending inVirginia soaredduring the 1990sas the economicboom floodedstate coffers withtax revenue andprompted legisla-tors to expandprograms beyondsustainable levels.
8.3%8.0%5.2%2.9%7.0%9.1%6.6%4.0%2.7%13.3%4.0%6.6%1.9%5.4%2.8%0.7%4.1%2.2%5.1%3.7%5.6%4.0%3.4%4.4%3.8%3.3%
0%2%4%6%8%10%12%14%1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
State government spendingInflation plus population
Figure 1Growth in Virginia Spending vs. Growth in Inflation Plus Virginia Population
Source: Virginia Department of Planning and Budget, www.ddpb.state.va.us/budget/budget.htm.Notes: Spending is total fiscal year operating budget (general and nongeneral funds). Inflation and popluationgrowth are estimated for 2002 and 2003.
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