Politics & Policy

McDonnell Risks Tarnishing His Legacy

His opposition to Medicaid expansion is threatened by a tax fiasco.

Some Republican governors — all of them elected with strong tea-party support — have moved left since the November election by agreeing to participate in Obamacare’s expansion of Medicaid. The lure of “free money” from Washington has proven too much for governors Jan Brewer of Arizona, Rick Scott of Florida, and John Kasich of Ohio to resist. Obamacare promises to pay 100 percent of the cost of new Medicaid patients, lowering that to 90 percent in later years. Never mind that Uncle Sugar has a notorious reputation for reneging on promises and that history shows that expanding Medicaid only increases insurance premiums, because absurdly low Medicaid payments force hospitals to cost-shift and raise rates on the privately insured.

One GOP governor who has held firm against Medicaid expansion is Virginia’s Bob McDonnell. Less than an hour after Governor Scott’s cave-in was announced on Wednesday, McDonnell tweeted to make clear he opposed any expansion absent sweeping structural reform of Medicaid. “Reform is far more than simply receiving a waiver from the federal government,” he wrote state legislators after the state senate passed a budget that enables the Medicaid expansion to move forward. Sadly, last month, 16 of the 20 Republicans in the Virginia state senate voted for the budget.

#ad#The legislators may be capitulating on Medicaid in order to marshal their resources for the real budget fight, which is over a massive state tax increase to pay for expanding transportation budgets.

McDonnell, who is limited by state law to one term in office, wants to build a legacy in his remaining year as governor. In that light, he last month proposed a $2.4 billion tax increase over five years that would end the state’s 17.5-cents-per-gallon gas tax and replace it with a sales-tax increase and a tax on gasoline at the wholesale level.

Virginia does have some of the nation’s most congested highways, and its gas tax — which isn’t indexed for inflation — hasn’t been raised since 1986. Because of increased fuel efficiency and the growth of hybrid and alternative-fuel vehicles, the gas tax has become a “stagnant revenue source,” McDonnell says. His solution is to shift much of the costs of transportation infrastructure from drivers to shoppers.

Spenders from both parties, however, exploit any proposed tax increase as an opportunity to grow government. McDonnell’s original proposal has become a garish Christmas tree of legislative add-ons. The tax increase has grown by 250 percent, becoming a $6.1 billion behemoth. The gas tax won’t really go away, but will be replaced with a 3.5 percent wholesale tax. If Congress doesn’t approve a law allowing states to collect sales tax from out-of-state Internet retailers, the tax will rise to 5.1 percent in 2015. If the price of gasoline doesn’t rise a penny, the new tax will bring in the same amount of revenue. Meanwhile, sales taxes will jump to 5.3 percent, up from 5 percent, and new regional taxing authorities in Hampton Roads and Northern Virginia could see sales taxes in those regions increase to 6 percent. A host of other tax hikes have been grafted onto the bill. The tax on motor-vehicle sales will go up by a third, a new tax on home sales will be imposed, and there will be a $100 annual fee for drivers of alternative-fuel cars.

#page#“It’s a feeding frenzy, with every legislator sticking on their pet tax before the bill leaves the legislature,” says Jim Parmalee of Republicans United for Tax Relief. “Legislators who opposed the tax hikes weren’t allowed on the conference committee that is designing the final bill.”

So far Governor McDonnell has given no sign that he is willing to veto the bill, despite its kudzu-like growth beyond his original plan. Attorney General Ken Cuccinelli, the almost-certain GOP nominee for governor to succeed McDonnell, has finally come out in firm opposition. He says, “In these tough economic times, I do not believe Virginia’s middle class can afford massive tax increases, and I cannot support legislation that would ask the taxpayers to shoulder an even heavier burden.”

#ad#Grover Norquist, the president of Americans for Tax Reform, says the Virginia tax binge is even more disappointing in light of what other states are doing. “North Carolina, Louisiana, Kansas, and Nebraska are trying to eliminate their state income taxes,” he notes. “Ohio, Oklahoma, Indiana, and Wisconsin are cutting their income taxes. Florida and Texas are cutting their sales taxes because they have no income tax. All of these states have roads, and elected officials that stand with taxpayers rather than against them.”

Indeed, there are many creative ways that Virginia could restructure its budget to ensure there is enough money for transportation. The state has run a $1.2 billion surplus over the last three years, but the surplus was not returned to taxpayers; it went into a rainy-day fund. The legislature saw fit to spend less than 7 percent of that rainy-day fund on transportation. Gabriel Roth, who worked on transportation economics for 20 years at the World Bank, told National Journal that the governor’s plan “places highway financing in the hands of Virginia’s politicians, whose recent experience in financing transport infrastructure has been unfortunate.” If you can’t prioritize roads when you have unexpected revenue surpluses because the economy grew faster than you were planning, when can you prioritize roads? Previous tax increases in Virginia were sold on the premise that they would be dedicated to either roads or education, but lawmakers did not follow through on those promises.

What Virginia needs is a sweeping tax reform, one that recognizes that the state has a 21st-century economy burdened by an archaic corporate- and personal-tax system that badly needs streamlining. As part of that, the state could create a dedicated road fund that would be paid for by the people who use the roads. Adding tax increases to the existing system will only slow down the economy and reduce the chance that the money will go where it’s most needed.

The danger now is that Democrats in the state legislature have been so emboldened by the expansion of the tax increase in the budget that some of them are now demanding that Governor McDonnell agree to the Medicaid expansion as the price for ensuring the Democratic votes necessary to pass the budget. Whatever McDonnell does, he shouldn’t compound the tax fiasco he is overseeing with a cave-in on Medicaid that would eventually leave the state budget in worse shape than he found it in four years ago.

— John Fund is a national-affairs columnist for NRO.

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