How Virginia Won't Close Its Budget Gap, and How It Should

There's also the state's $1.2 billion "rainy day fund," intended for use in such events as recessions, natural disasters, or other unexpected adverse events.  Dipping into the "rainy day fund," however, is controversial.  In early October 2007, Speaker Bill Howell has essentially rejected the fund's use at a time when "[t]he Commonwealth is not in a recession and our economy continues to grow, albeit at a slower rate."

If the "rainy day" fund is off the table,  what can Virginia do to close its $1.2 billion, two-year projected budget gap (out of a $70 billion+ budget over that period).  Obviously, one option is spending cuts, some of which Gov. Kaine ordered back in August.  According to the governor's plan, "Statewide, the general fund reductions and revenue enhancements included in the Governor's plan equal $300.3 million, or just over 5 percent of the General Fund available for reduction."  (Note:  only about $6 billion out of the state's annual $35 billion budget -- including its $17 billion general fund -- is "available for reduction")  Cuts of $300 million per year appear to get us about halfway to the $1.2 billion deficit. 

That leaves another $600 million to deal with, and that's where the question of the "rainy day" fund -- $1.2 billion -- comes in.  Obviously, there's enough money in the fund to take care of the $600 million budget deficit, but as noted above, Speaker Howell is resisting the use of this fund.  In addition, Gov. Kaine has additional spending priorities, including his pre-kindergarten plan ($75 million additional annual spending?), plus a possible need to replace the $65-$120 million in annual revenues ($130-$240 million over the 2-year budget cycle) from the hated "abuser fees" when they are (most likely) repealed.  The combination of the new spending initiatives and the elimination of abuser fees could lead to a nearly $400 million budget gap that will need to be filled, in addition to the current deficit we're already facing.  That's the problem, and it's a significant one.  What's the solution?

One model that almost certainly will NOT be used here in Virginia is what Maryland just did -- raising $1.4 billion in new T-A-X-E-S, plus potentially hundreds of millions of dollars annually from slot machine gambling. According to today's Washington Post, this approach is flawed yet still a "considerable" achievement by Maryland Governor Martin O'Malley:

Politically, Mr. O'Malley will have more than higher taxes to show for his gamble. The new revenue will not only close the deficit, it will also help to clean up the Chesapeake Bay, extend health-care coverage to 100,000 lower-income Marylanders, build public schools, and add facilities for state colleges and universities. In addition, and critically, the governor secured about $420 million in fresh annual revenue for transportation, the biggest infusion of new money in 15 years. It will pay for the upkeep of the state's aging transportation infrastructure and for new roads and transit projects. Much of that funding will go to Montgomery County -- more than $250 million over the next three years for critical priorities including engineering for the Purple Line transit link between existing Metro lines in Bethesda, Silver Spring and New Carrollton; and for the Corridor Cities Transitway, connecting Shady Grove and Clarksburg. What's more, $50 million will be dedicated for annual funding of Metro, which could help unlock $1.5 billion in matching federal funds for the transit system over a decade.

Those are big achievements, any one of which might have been seen as an important accomplishment. They provide the governor a platform on which to run for reelection or higher office and an argument to support his claim to an expansive, generous vision of government's role. To have gotten them all after just 11 months on the job is a testament to Mr. O'Malley's tenacity, flexibility, political acumen and lobbying skills, as well as to a Democratic-dominated legislature that was eager to hand him a big success.

What are the chances for something like this being passed in Virginia?  Expressions like "hell freezes over" spring to mind, especially with anti-tax, flat-earth ideologues continuing to control the House of Delegates.  Personally, my preferred solution to Virginia's $1.2 billion budget gap would be a combination of whatever efficiencies can be wrung out of the budget, use of a portion of the "rainy day" fund, and an increase in taxes to pay for crucial programs like cleaning up the Chesapeake Bay, funding the pre-kindergarten program, instituting some sort of universal health care program in Virginia, slashing the state's greenhouse gas emissions, etc.  Since we need to get rid of the abuser fees, the obvious solution to Virginia's budget problems -- at least in a rational, non-ideological world -- would be to raise revenues (aka, "taxes") elsewhere. 

My personal preference is for a carbon tax of several hundred million dollars per year.  According to the U.S. Energy Information Administration, Virginia emits more than 120 million metric tons of carbon dioxide per year -- about 16 tons per person.  This means that each $1 per ton tax on carbon dioxide would generate around $120 million in revenues for Virginia.  A $5 per ton "carbon tax" would completely close the two-year, $1.2 billion budget deficit.  The $5 per ton "carbon tax" would cost each Virginian $90 per year.  To put this in perspective, according to the Energy Star program, "Retiring the old refrigerator in your garage or basement can save more than $100 per year."  An Energy Star heat pump can save you more than $100 per year.  It goes on and on like this.  The point is this:  "The average American family spends $1,900 a year on energy bills, much of which goes to heating and cooling our homes."  Cutting that bill by 10% saves $190 per year, 20% saves $380, etc.  And that's not even counting possible savings from trading in the gas guzzler car or SUV for a more fuel efficient model.  Energy efficiency savings can and WILL easily make up for the increased taxes paid on carbon emissions.  In short, a carbon tax is a win (for the state's budget)/win (for the citizen)/win (for the environment)/win (for new programs like pre-k and health care).

In sum, a carbon tax would solve several problems -- and create numerous opportunities -- at once:  1) balancing the budget; 2) avoiding tapping into the "rainy day" fund, which Bill Howell pretty much says is off limits; 3) allowing for the important programs (pre-k, etc.) listed above; and 4) reducing Virginia's greenhouse gas emissions, which is a crucial goal given the recent, dire report from the Intergovernmental Panel on Climate Change.  Virginia could then take part of the money raised from the carbon tax and give it back to homeowners and business in the form of tax credits or rebates for energy efficiency improvements.  A homeowner or business could thereby more than recoup (see above) the additional money they would spend on the carbon tax through energy cost savings.  And, of course, Virginia would be getting a major jump on federal greenhouse gas reduction requirements that are almost inevitable in coming years.

Of course, this is too logical for people like Bill Howell.  So is the Maryland model.  And so is dipping into the "rainy day" fund.  Which leaves just one option: spending cuts.  Remember, the Club for Growth Republicans' goal is to shrink government "down to the size where we can drown it in the bathtub."  This violent imagery aptly captures the extremely hostile attitude that Club for Growth Republicans hold towards government.  Unfortunately, while the recent General Assembly elections were helpful, they did not result in replacement of Club for Growth GOP control over the House of Delegates.  Which means, unfortunately, that we are likely headed for stalemate in 2008.  The question is, who will blink first, and who will be hurt the most.  Great way to close a budget gap, huh?

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