Earlier this year, Democratic Governor Mark R. Warner of Virginia proposed the largest overhaul of the state’s tax code in nearly four decades. It became law in large part because state Senate Finance Chairman John H. Chichester steered it through the Republican-controlled legislature.
Both men shared the conviction that the state had no other choice. Even if Virginia’s economy were to grow by larger than historic margins during the rest of the decade, the state would remain in the red because of demographic pressures on schools and other programs, as well as the impact of tax breaks passed during the go-go 1990s. “We had to raise revenue and recapitalize this corporation that we call Virginia,” Chichester says.
Chichester had been crafting his own bill for months before Warner publicly unveiled his. Chichester’s package, in fact, was much more ambitious than Warner’s, seeking $3.8 billion in new revenues over two years (as opposed to the governor’s $1.1 billion). Chichester believed that since Virginians tend to approve tax increases only once in a generation, he should try to address as many problems as possible, including transportation infrastructure.
The governor’s plan was much more modest. It would not have created a single new program — Warner simply wanted to ensure that the state could pay for anticipated growth in programs such as education and public safety. His proposal, in fact, offered a net tax cut to most citizens while restructuring the state’s tax code in the hopes of capturing revenue from the post-manufacturing economy of today.
Says Chichester, “We were paddling different canoes in the same direction in the same body of water.”
Virginia had room to tax a bit more while still staying competitive with rates in other states. There had been relatively small tax increases in 1971 and 1987, but Virginia’s last major increase occurred way back in 1966, to pay for the creation of the state’s community college system.
But taxes are perhaps even more unpopular in Virginia than most places. Voters not only defeated two regional sales tax referenda for roads in 2002, they also tossed out the House transportation chairman in 2003 for referring the measure. While Republicans control both legislative chambers, the House caucus is younger and more ideologically conservative than Chichester and his fellow senators.
Chichester, who is 67, comes from a long line of public officials. His grandfather sat on the state Supreme Court and, between them, his father and brother have held the position of commonwealth attorney in his home county for much of his lifetime. After serving 26 years in the state Senate, Chichester stood for an old-fashioned conservatism, which held that the state was obliged above all else to pay its bills. “He is a fiscal disciplinarian of the highest order,” says Hugh Keogh, president of the state Chamber of Commerce.
To the extent that Chichester was able to convince his colleagues that a tax increase was necessary — and keep a majority of Republican senators together behind his package — the groundwork had been laid by Warner, who was elected in 2001 on a no-tax pledge.
Shortly after taking office, however, Warner found himself faced with a $3 billion budget shortfall (much larger than his predecessor had suggested it would be). He spent the first two years in office cutting spending, ultimately reducing state expenditures by a total of $6 billion and eliminating 3,000 positions for good.
Warner, 49, took advantage of the tough budgetary climate to improve Virginia’s operating structure. Before entering politics, he had become a multimillionaire as an entrepreneur in the technology sector, and he couldn’t believe an enterprise as big as Virginia couldn’t see past the limits of its own normal two-year budget cycle. “To make lemonade out of lemons,” he surmised, “this may be the time when you can really make some really significant changes in government operations to bring about a more business-like approach.”
He eliminated 50 state boards and commissions and cut spending in every agency aside from K-12 education. But he realized he couldn’t keep hacking away without endangering core services. Any government program can stand improvement, but to really save money, Warner decided what he needed to do was consolidate cross-agency functions, such as procurement.
His biggest moves have been in the area of technology, where he’s trying to collapse 94 agency chief information officers under the penumbra of one technology czar. The state has folded three agencies into its new Virginia Information Technology, has already integrated IT services for all its small and medium-sized agencies and now is starting to tackle the largest ones.
It’s a work in progress, but the strides Virginia has taken have not only saved money but increased collaboration across agencies. Noting the state’s single-term limit on governors, Sandra Bowen, Virginia’s secretary of administration, says, “It’s impossible to make the kind of wholesale changes we’re about in any four-year term. What we’re trying to do is get these reengineered changes in place so the next governor will have to pick them up and sustain them.”
Having cut spending and streamlined government operations, Warner was then in a position to make the case that the state simply had to raise more money if it wanted to remain solvent. “If you’re going to go out and ask people for more revenues, you have to have rock-solid credentials,” he says. “You’ve got to show the taxpayer that you’re going to squeeze every dollar and efficiency before you ask for more.”
His plan earned support from some surprising quarters, including the Virginia Chamber and AARP, despite the proposal’s direct aim at a big income tax break for senior citizens. But his most important ally was Chichester.
Several years ago, Chichester had tried to slow the implementation of a popular car tax cut in order to avoid spending cuts and accounting tricks he thought irresponsible. “Should we ask our children and grandchildren to pay an extra $210 million by 2020 so that we can each enjoy an average tax cut of $55 per car this year?” he asked at the time.
As the 2004 session got underway, Chichester decided Virginia needed to get its fiscal house in order and should take its best shot before the economy turned downwards again. His ability to convince and maintain a large majority in the Senate offered a political counterweight to the naysayers in the House. “He was rock solid throughout this,” Warner says. “He rallied the majority of the Republican senators to his cause, as well as all the Democrats.”
Given the anti-tax mood in the state — and in the state House — a package of the scope he sought never had a chance. But politically, it set the bar so high that Warner’s request suddenly looked like a compromise proposal. “It did put the governor’s plan in the middle, image-wise, and that made it more acceptable to the mainstream centrists,” says Keogh.
While Chichester negotiated with legislators, Warner took the argument public, stumping the state and telling dozens of civic groups and town hall meetings that, as uncomfortable as a tax increase would be, the lack of one would leave the state in much worse shape. He also played a central role in the legislative process, helping to persuade a rump group of Republican House members to break ranks with their leadership and pass a compromise bill.
The final product was a lot smaller than what Chichester had wanted — he surrendered the transportation money in negotiations with the House. And it didn’t do as much to reform the tax code as Warner might have hoped. But it did provide about $700 million more than the governor had asked for.
Compromises aside, the new budget went a lot further than most observers had originally thought possible toward meeting the overriding goal of getting Virginia back on a healthy financial footing for the foreseeable future. “It was a remarkable example of people stepping up and doing the right thing,” Warner says.
— Alan Greenblatt
Photos by Drake Sorey