JOE MAHONEYGov. Ralph Northam briefs the legislative money committees on his proposed budget during a meeting at the Pocahontas Building on Tuesday.

Gov. Ralph Northam is proposing a two-year state budget with big tax increases on tobacco products and motor vehicle fuels, but he wants to use the money to lower health insurance premiums, end annual vehicle inspections and cut vehicle registration fees in half.

The governor proposes to increase the cigarette tax from 30 cents a pack to 60 cents a pack and boost the tax on smokeless and other tobacco products, excluding new electronic cigarettes that Altria Group Inc. wants to market as “reduced harm” products because they do not burn tobacco.

The proposed budget would bolster the state’s trust fund for roads, transit and other improvements by increasing the motor fuel tax by 4 cents per gallon for three consecutive years.

The two-year budget proposal, which Northam outlined on Tuesday in a joint meeting of the General Assembly’s money committees, also includes $100 million per year that a new, Democratic-controlled legislature could spend for “uncommitted contingencies” or unspecified goals of the new leadership.

“This is a time of change in the General Assembly,” the governor told members of the House Appropriations, Senate Finance and House Finance committees. “We will see new leadership, new priorities.”

Republican leaders had one overriding question — how will the state pay for everything Northam wants?

Senate Majority Leader Tommy Norment, R-James City, will become minority leader on Jan. 8 and will no longer be co-chairman of the Senate Finance Committee, but he promised to “dissect” the governor’s budget and its underlying revenue assumptions during the 60-day legislative session.

“We’ll say, ‘here’s what we can afford, here’s what we can do, here’s what our priorities are,’ “ he said after the speech.

Norment called the proposed $200 million in unspecified spending for the new legislature “a helpful start” for the assembly to decide how it wants to spend the money that it determines is available.

“The legislative branch is not going to totally abdicate its spending priorities to the executive branch,” he said.

The proposed $47.5 billion general fund budget, which funds services such as education, health care and public safety, is the core of a $135 billion two-year spending plan for all sources of revenue, including federal funds, tuition and transportation money.

It relies on an estimated $239.5 million more in state tax revenues than previously forecast this year, as well as a $212 million surplus in Virginia’s Medicaid program because of savings from expanding eligibility for health care coverage last Jan. 1 under the Affordable Care Act and a modest increase in program costs next year.

“We got a very big, pleasant surprise in the current fiscal year budget,” Secretary of Finance Aubrey Layne told the committees.

The governor’s budget would eliminate a new taxpayer relief fund created this year to hold additional state revenues resulting from provisions of the federal Tax Cuts and Jobs Act. The move would add $340 million in revenues over two years, allowing the state to keep enough cash in the bank to guard against an economic downturn and bolster its reserves in the second year.

Northam proposed to add $300 million to the state’s cash reserve fund, or more than Virginia had in its constitutionally mandated rainy day fund when he took office two years ago. The additional reserve funds, as well as $95 million in mandatory deposits to the rainy day fund, would boost combined state savings to $1.9 billion by mid-2022. That would achieve his goal of putting more than 8% of the state’s annual revenues in reserve by the time he leaves office in 2022.

“This is an important step to ensure that Virginia can weather whatever storms our volatile national and global economy throws our way,” he told the committees.

House Majority Leader Todd Gilbert, R-Shenandoah, who will lead the Republican minority next month, called proposed increases in tobacco and gas taxes “predictable” for a Democratic governor.

“But going further to repeal a fund specifically designed to bring tax relief to Virginians passed just last (session) is disappointing,” Gilbert said in a statement.

Tobacco taxes

The tobacco-related tax hikes would raise nearly $250 million over two years. Northam wants to use the funds to reduce health insurance premiums by 20%, addressing a public concern over health care costs that Republican opponents of the Affordable Care Act have tried to use against Democrats.

All of the money would remain in Virginia’s health care fund to offset the cost of smoking-related illnesses that Northam said cost the state Medicaid program almost $500 million a year.

The governor proposes to lower premiums by creating a state-based health insurance marketplace and a re-insurance program that would subsidize high-cost insurance claims. The re-insurance program would cost the state $73 million and require federal approval of a waiver to Virginia’s Medicaid program.

Motor fuels tax

The increases in the state’s motor fuel tax would raise it from 22 cents per gallon to 34 cents per gallon, still below the national average and the rate for neighboring states such as North Carolina, West Virginia and Maryland.

However, Northam also proposes to eliminate the annual vehicle inspection and fee, arguing that studies show no link between inspections and highway safety. He also proposes to cut the state’s vehicle registration fee in half. The current registration fee for most passenger cars is $40.75.

Those proposals would save Virginians about $280 million in transportation-related fees that only they pay and allow the state to reduce its general fund debt service for transportation by $61 million a year.

“This funding proposal is more sustainable, and it is more equitable,” Northam said. “Those who drive more should pay more.”

Republican leaders questioned why the governor did not include higher taxes on hybrid and electric vehicles in his remarks, but Secretary of Transportation Shannon Valentine assured legislators that a legislative proposal would include a tiered system that would reflect fuel efficiency so all drivers pay their fair share.

“It is a comprehensive proposal,” Valentine told House Appropriations Chairman Chris Jones, R-Suffolk.

Over the previous week, Northam already had rolled out many of his major spending initiatives, focusing on education, environmental protection and racial equity in state spending to address health, housing and other priorities of the Virginia Legislative Black Caucus.

The governor has been repairing his relationship with Democratic legislators, especially members of the black caucus, for almost a year after most of them called for his resignation over a racist photo on his medical school yearbook page in 1984. Northam initially apologized for appearing in the photo, then said he was not in the image.

Caucus Chairman Lamont Bagby, D-Henrico, called the budget “one of the strongest gubernatorial proposals in recent years.”

A caucus statement cited two dozen funding priorities, such as a $140.4 million boost in funding to school divisions with at-risk students, more money for Virginia State University and other historically black colleges and universities, money for affordable housing and prevention of eviction, and addressing disparate rates of maternal and infant mortality for African Americans.

The caucus praised Northam for funding initiatives to tell a truer account of Virginia’s history of slavery and racism, and the accomplishments of blacks, including $1 million for a “Slavery and Freedom Heritage” site in Richmond. “Black history is American history, but in the past there has been little state support for the institutions that preserve and teach that history,” the governor said in his speech. “We aim to rectify that.”

Sen. Jennifer McClellan, D-Richmond, vice chairwoman of the caucus, said, “We look to a final budget that further provides equity to communities of color, communities experiencing poverty, and all Virginians.”

However, Norment said the proposed budget focused disproportionately on minorities and low-income Virginians. “I didn’t hear a lot about the middle class of Virginia,” he said.

Gilbert called Northam’s focus on K-12 education “laudable.” The budget includes more than $1.2 billion for public education, including a 3% raise for teachers.

It also proposes money for other educational priorities that may have less Republican support, such as expanded early childhood programs and a new community college initiative for tuition-free education for low- and middle-income students who pursue high-demand jobs and pledge public service in return.

“As always, we will bring responsible and conservative ideas to the table,” Gilbert said, “and do everything possible to ensure that taxpayer funds are spent wisely.”

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