RICHMOND — A dispute over tax cuts proposed by Gov. Glenn Youngkin (R) derailed budget talks Tuesday among key House and Senate lawmakers, jeopardizing his administration’s goals for some $3.6 billion in excess state funds.
Virginia
Virginia budget negotiations collapse, leaving $3.6 billion in limbo
Republican leaders said Tuesday that Youngkin could call a special legislative session to try to force lawmakers to return to Richmond and hammer out a deal, but the governor seemed noncommittal when asked about the possibility by reporters at an unrelated public appearance.
“I am so disappointed that I do not have a budget on my desk and I candidly believe that this is a massive failing from the leadership in the Democrat party in the Senate,” Youngkin said, according to a transcript provided by his office.
A spokeswoman added later that “the governor is currently evaluating next steps.”
Democrats, in turn, blamed Youngkin for his insistence on cutting taxes at a time of economic uncertainty.
Senate Democrats “want to invest $2 billion in K-12 & mental health while House GOP wants to cut taxes on corporations so they pay a lower tax rate than individiuals & help the Gov’s presidential campaign,” state Sen. Scott A. Surovell (D-Fairfax) tweeted. “Sounds like the voters will get to decide this one.”
House budget negotiators had already backed down on Youngkin’s call for a corporate tax cut, participants said, but the impasse came over other proposed tax cuts that would reduce state revenue on a recurring basis. Senate negotiators preferred one-time tax rebates.
The lack of a deal creates uncertainty, particularly for school divisions that have not known what sort of increases or pay raises to expect for next year. But schools and state agencies will continue to operate as usual under the two-year budget passed in 2022. It’s the $3.6 billion in surplus funds that remains in limbo.
Youngkin had proposed using $1 billion for new tax cuts, on top of the $4 billion in tax cuts the General Assembly approved last year. The Republican-controlled House of Delegates approved budget amendments in line with Youngkin’s agenda, but the Democratic-controlled Senate approved amendments that instead used all the excess funding for priorities such as raises for teachers and state employees and increases in K-12 education spending.
Senate Democrats — and at least one Republican — balked at the idea of passing recurring tax cuts that would reduce state revenue heading into a possible economic downturn.
Top House budget negotiator Del. Barry D. Knight (R-Virginia Beach), chairman of the House Appropriations Committee, said the outlines of a compromise deal had been in place since February but had been on hold pending the June 20 primary elections.
Knight said he had agreed to scrap Youngkin’s proposal for a corporate tax cut, which Democrats in the Senate made clear they would never support; increase the standard income tax deduction to $9,000 from $8,000 for individual filers, and double that amount for married couples filing jointly; and rather than lower just the top income tax bracket, as Youngkin proposed, to instead slightly adjust all tax brackets to provide more benefit to low-income filers.
In addition to a handful of more minor recurring tax cuts for businesses and military veterans, Knight said he had proposed one-time rebates of $100 for individual taxpayers and $200 for married couples filing jointly. The rebates and tax cuts would have totaled roughly $900 million in each of the next two years, Knight said, with a decrease in revenue continuing into the future.
He said he told his Senate counterparts — Senate Finance and Appropriations co-chairs Janet D. Howell (D-Fairfax) and George L. Barker (D-Fairfax) — that if they went along with those tax cuts, the Senate could have a similar amount for its priorities, such as colleges, schools and mental health services.
“That would still leave $1.5 billion in the middle,” Knight said, for yet more big-ticket items such as teacher and state employee pay raises. “We would put in everything we both want.”
According to Knight, he had an informal agreement with both Howell and Barker on that deal. They didn’t make it public or take it to fellow budget conferees for a vote, Knight said, because Barker faced a heated primary election and was politically vulnerable.
“His opponent would have used it against him,” Knight said. “I wanted him to have a fair fight in his primary race, and I was hoping George would prevail.”
Barker acknowledged sharing concerns with Knight that striking a deal before the June 20 Democratic primary could hurt him in his race with Stella Pekarsky, who had painted him as too willing to compromise with Republicans.
But Barker said he’d never agreed to any deal with Knight.
“Barry put together a proposal back in February and he presented it,” Barker said. “I listened to what he had to say, I understood what he was saying but after he finished, I did not say anything. I did that very intentionally because I did not want anyone to misremember what I was saying. Not only was there never any agreement voiced, I didn’t say anything. I just kept my mouth shut on that. Janet was maybe a little more open to it than I was. I don’t know if she would say she agreed to it or not.”
After Barker lost the nomination to Pekarsky, Knight said he called Howell and Barker to arrange a meeting in Richmond to finalize the budget deal. Howell — who is not running for reelection — was traveling outside the country, so Barker planned to handle the negotiations on her behalf.
At a lunch meeting in Richmond on Monday, Knight said, Barker told him he would not support the compromise.
Barker said in an interview with The Washington Post that he worried the House plan for permanent tax cuts would put the state on uncertain financial footing and jeopardize its coveted AAA bond rating, which makes it cheaper to borrow money. He also said he felt the Republicans’ plan to adjust the income tax brackets would offer “a huge windfall” to the wealthiest Virginians.
He said he stayed mum about those concerns in earlier meetings with Knight because he was still mulling things over.
“I wanted time to think through things and make sure I was making the right decision. I wanted to make sure we weren’t doing something that has at least the potential for jeopardizing things long term,” Barker said.
Barker and Knight met again Tuesday and Barker offered an alternative deal: no ongoing tax cuts, but a doubling of the one-time rebates.
That would cost a similar amount — roughly $900 million — but only for one year.
“At that point, he was clearly not in the mood to negotiate with us,” Barker said of his House counterpart. “We agreed to part ways and go figure out where to go from there.”
“I’m very frustrated,” Knight said later Tuesday. “I had the rug pulled out from under me.”
He sent a letter to Barker on Tuesday afternoon, offering to meet again.
One Republican negotiator for the Senate, Emmett W. Hanger Jr. (R-Augusta), said he shared Barker’s concern about what permanent tax cuts could do to the state’s financial position.
“We can afford it right now. We know that,” Hanger said. “But we have to temper the fact that we’re experiencing good times now with the fact that a lot of the revenue occurred because of the generosity of the federal government during covid.”
Hanger said the two sides are not all that far apart and was optimistic that they can overcome their differences. “There’s really nothing that can’t be worked out,” he said.