Gov. George Allen proposed $2.1 billion worth of tax cuts last week, but won't tell anyone exactly how he plans to pay for them until Dec. 19.
Just over half of the tax cut, or $1.3 billion, would result from tripling the personal income exemption from the current level of $800 to $2,400 by fiscal 1999. Allen is proposing that the tax cut take effect on Jan. 1.
The remaining $750 million worth of tax cuts would come from a five-year phaseout of the gross receipts tax imposed on business income by many local jurisdictions in the state. Although Allen said he would cover local governments' losses during the five-year period, some skeptics warned that cities, towns, and counties would eventually have to make up for losses by raising local property taxes.
State Democratic Party chairman Mark Warner was quoted after the plan was released as saying that Allen's move would be "the mother of all unfunded mandates."
Allen indicated during a press conference Thursday that the savings realized from downsizing state government would be one way to raise revenues to pay for the cuts. The Virginia legislature will have to approve any package the governor proposes.
The three major rating agencies all said it is too early to comment on the effects the proposal might have on the state's triple-A bond rating without seeing the whole package of tax cuts and the offsetting spending cuts.
"There's no way of analyzing the entire proposal because we only have the top half so to speak," said Hyman Grossman, managing director at Standard and Poor's Corp.
The state has a lot of expenses ahead of it, so it will be interesting to see how Allen plans to pay for the proposal, said Claire Cohen, executive vice president of Fitch Investors Service Inc.
Some of those upcoming expenses include paying for the state's recently passed comprehensive anti-crime bill, which calls for eliminating parole and building 27 new prisons. The commonwealth also must repay $340 million to federal retirees who were taxed illegally during the 1980s.
"Our focus will be how you pay for [the tax cuts] and if it's paid for in a reasonable way," said Rich Raphael, executive managing director of Fitch.
Virginia has a "good record of dealing honestly with budget issues and we would expect they would continue," said James Dearborn, vice president at Moody's Investor's Service.