What caused Virginia’s budget breakdown? Accounts differ.

Virginia’s budget negotiators don’t agree on whether they did or didn’t agree to a preliminary deal months ago.

House Appropriations Chairman Barry Knight, R-Virginia Beach, and Sen. George Barker, D-Fairfax, emerged this week from their budget talks — which the General Assembly conducts mostly in private until a deal is reached — with two starkly different accounts of how negotiations progressed this year before falling apart on Tuesday.

Knight has sketched out the details of a proposed compromise that makes several concessions to Democrats, such as dropping Gov. Glenn Youngkin’s plan to lower the corporate tax rate and adjusting the state’s income tax brackets, which haven’t changed since 1990, in a way that benefits lower-income filers instead of the highest earners.

In Knight’s telling, Senate negotiators had already agreed to those terms but wanted to delay moving forward on the deal until after last week’s primaries.

“They said they were fine with it,” Knight said.

When meetings in Richmond restarted this week, Knight said, Barker — who lost his primary last Tuesday — insisted there was no deal and would not let Knight explain his proposal to other senators working on the budget.

Senate negotiators in turn have said there was never a firm deal struck in February, and it’s Knight and the House that tanked an evolving deal by insisting any agreement had to involve longer-term tax cuts rather than accepting an offer of nearly $900 million in one-time rebates.

“We were in the middle of negotiations and they actually walked away from the table,” said Sen. Mamie Locke, D-Hampton.

Sen. Creigh Deeds, D-Charlottesville, characterized the breakdown in talks as stemming from “a basic disagreement about a conversation that occurred between the chairs.”

“Barry Knight has one version of what happened in that conversation. George Barker has another,” he said.

Because Virginia operates on a two-year budget cycle, the state can continue operating past the June 30 end of the current fiscal year without disruption. But the lack of the new budget bill has caused uncertainty for other public bodies that make decisions based on how much money they can expect from the state. The extended budgetary limbo also means roughly $3.6 billion in surplus funds still cannot be allocated to bipartisan priorities like teacher pay raises and more funding for the struggling mental health system.

Tax policy has been the main area of friction between Democrats and Republicans. The Democratic-controlled Senate has balked at many of Youngkin’s proposed tax cuts, characterizing them as overly generous to the wealthy and corporations and potentially hazardous to the state’s long-term fiscal health. Republicans have argued state revenues are strong enough the government can afford to give all taxpayers a break while spending significantly more in key areas.

The impasse is a long-running one, but it broke into the public this week in dramatic fashion when Knight announced Democrats had “decided to abandon” a deal he said the parties had reached in February but put off announcing due to a stiff primary challenge Barker was facing. On Tuesday, according to The Washington Post, Youngkin said he believed the stalemate was “a massive failing from the leadership in the Democrat party in the Senate.”

Republicans say uncertainty over who’s in charge of the Senate Democratic Caucus has contributed to the budget confusion, with both Senate Majority Leader Dick Saslaw, D-Fairfax and Sen. Janet Howell, D-Fairfax, who co-chairs the chamber’s budget committee, heading into retirement. Sen. Louise Lucas, D-Portsmouth, just campaigned heavily on the idea that she’s next in line to run the budget committee, and the odds moved in her favor last week when she won her primary and Barker lost.

Knight said he feels more progress could be made if other Senate Democrats could be involved, since Barker is now a “lame duck.”

“The only thing that’s changed is Janet was not there Monday because she’s in Japan on a trip she’s had planned for a year,” Knight said. “And George lost his election.”

Knight suggested Howell could verify there was an initial agreement. In remarks reported by the Washington Post, Barker indicated Howell was “a little more open” to the GOP’s offer than he was. Howell’s office did not respond to a request for comment Wednesday.

It’s unclear how many other Democrats are fully in the loop on what Knight was offering. Deeds said other Senate negotiators didn’t see the tax bracket proposal until Tuesday.

“Barry Knight says he told George and Janet about it in February, but it was not communicated to us,” he said.

In an interview, Barker said the Senate conferees are “operating as a team” just like their House counterparts.

“I don’t think it’s necessarily appropriate to have him come in and try to say things that are not necessarily completely true,” Barker said in response to Knight’s attempt to present his plan to more senators.

Sen. Scott Surovell, D-Fairfax, said the caucus as a whole has not been briefed on any proposed deal.

“I think tax cuts would be a hard sell to my caucus,” Surovell said. “It sounds like George has made that clear in multiple rounds. But the Republicans have continued to cater to the governor’s demand for tax cuts.”

A closed-door process

The varied accounts highlight the opaqueness of Virginia’s budget process, much of which is conducted behind closed doors by an inner circle of negotiators.

“They don’t brief members outside of the Appropriations Committee about this at all,” said Del. Danica Roem, D-Manassas. “We find out about stuff like this through news reports.”

Many lawmakers in Richmond say the complexity of budget negotiations and the requirement that the state balance its books make it necessary for smaller groups of legislators to hammer out the final details of an agreement.

“It’s logically infeasible to imagine all 140 members casting line item votes on every budget item,” said Del. Sally Hudson, D-Charlottesville, who recently lost a tight primary against Sen. Creigh Deeds, D-Charlottesville, one of the Senate’s budget conferees. “At some point you do need a set of people to sit down and close the gap between the House and the Senate versions.”

In Virginia’s system — which Roem says was “originally designed to be done in a smoke-filled back room” — those negotiations unfold almost entirely in private. Once the chambers choose the conferees who will participate in talks, no formal public meetings are typically held until the chief negotiators announce a deal and the House and Senate vote on the completed version.

That can lead to conflicts like the one that has emerged in Richmond this week, where there’s little ability to verify what was agreed to and when.

The House proposal

The three major components of the roughly $900 million tax relief plan sketched out by Knight are another increase to the state’s standard deduction for income taxes, tax rebate checks of $100 for single filers and $200 for joint filers and changes to the state’s income tax brackets that closely mirror a recommendation from the Joint Legislative Audit and Review Commission.

Youngkin had proposed dropping the state’s top tax bracket, which kicks in at $17,000 of taxable income, from 5.75% to 5%. Knight’s proposal wouldn’t lower the top rate but instead adjusts all the brackets to have the top rate apply to income over $30,000.

The proposed bracket structure aligns with a JLARC recommendation to tweak the brackets to account for inflation since 1990. Leaving the brackets the same creates so-called “bracket creep,” where the tax burden for low- and middle-income filers grows faster than their income because more of the money they make is taxed at the highest rate.

Knight said the numbers crunched on his plan show it “helps lower-income people a whole lot better than what we have today.”

“It was a recommendation of JLARC to do that,” Knight said. Documents outlining the proposal suggest the bracket changes were seen as a way to make the tax code “more progressive” without raising taxes on the rich.

By fiscal year 2025, the bracket adjustments would make up $655 million of the roughly $911 million impact on the budget. The standard deduction increase would cost $200 million, with smaller tax breaks for military retirement pay and business interest making up the rest.

Knight said he’s ready to meet with any other Senate Democratic leaders to discuss the proposal.

“I want a budget deal,” he said. “I am operating with them in good faith.”

What the Senate wants

Senate negotiators have instead pushed for one-time tax relief, largely in the form of rebates, while rejecting structural tax cuts that many say could imperil Virginia’s financial stability as federal COVID-era funds are spent down.

“We’re fortunate that we do have additional revenue,” said Sen. Emmett Hanger, R-Augusta. “But the thing that I’ll continue to cite is you have to look at where that came from.”

Instead, Senate negotiators say they are prioritizing one-time investments in services like education and behavioral health, pointing to shortfalls like the estimated $25 billion needed to modernize and construct school buildings around Virginia and the state’s troubled mental health system, which in 2021 was forced to temporarily close admissions at five facilities. Youngkin has made the overhaul of that system a signature priority, rolling out an ambitious $230 million “Right Help, Right Now” proposal this December that has garnered bipartisan support.

“The reality from my perspective is we have starved some of our services for far too long,” said Deeds.

Barker’s counter-proposal was a bigger round of one-time tax rebates without structural tax cuts. Senate negotiators said they put forward two proposals this week: an initial $670 million tax relief plan that was rejected, followed by an $890 million plan that would have included a $200 rebate payment for single filers and $400 for couples as well as other tax changes.

“It gets money in the hands of the people of Virginia at a time where we have the resources to be able to do it,” Barker said, without “locking” the state into structural cuts that could cause budgetary damage if a recession occurs.

The proposal to alter the tax brackets has sparked tentative interest. Deeds said it “probably makes sense, but I think in order to make sure it’s revenue-neutral, you have to add another bracket at the top.” Hanger said while he’s in favor of changing the brackets, the policy needs to be evaluated more broadly.

“If you’re going to have a progressive tax code structure, the people who can afford it need to pay more than those who can’t afford it,” he said.

Both Hanger and Deeds emphasized the need to resume talks, although Deeds said the situation was not unprecedented, pointing to a 2001 standoff between then-Gov. Jim Gilmore and the Senate that ultimately kept the General Assembly from amending its biennial budget.

“It’s totally unacceptable to not produce a budget,” said Hanger. “That is totally inadequate to the needs of the commonwealth.”

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This article first appeared on Virginia Mercury and is republished here with permission. Virginia Mercury is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Virginia Mercury maintains editorial independence.