Virginia Explained: Why can just nine localities impose a sales tax for school capital projects?

Courtesy of Virginia Mercury

The responsibility of meeting school construction costs has shifted out of reach for some localities in Virginia. Many schools, lawmakers say, have fallen into disrepair, while others need modernization.

In recent years, some lawmakers have said supporting school capital projects is the onus of local governments. In response, some localities have successfully asked the legislature to allow them to increase their sales tax to fund school capital projects pending approval by voters in a referendum. However, legislative efforts to support other extensions of that right – including one for Prince Edward County and for the entire state – remain in limbo. To understand why, let’s start from the beginning with Dillon’s Rule.

The Dillon Rule

Virginia cities, towns and counties have had limited powers since the commonwealth adopted the “Dillon’s Rule” interpretation of state law more than a century ago.

In the 1860s, Iowa Judge John F. Dillon, who was considered to be an expert on municipal law, outlined the principle that local governments only have those powers explicitly given to them by the state. The rule was adopted by the Virginia Supreme Court in 1896, creating a legal framework for ordinances and laws passed by local and state governments. The rule is commonly used when there is a question of whether a local government has a certain power.

“It does restrict localities to some extent,” said Roger Wiley, general counsel to the Virginia Municipal League, which represents many local governments in the commonwealth. Despite the restrictions, Wiley said local governments often find ways to comply with the rule and exercise their powers by taking different approaches.

Since Virginia is a Dillon Rule state, localities’ representatives must request the legislature to give them certain powers. For example, a locality might ask for changes to their taxation and regulatory authority, such as allowing them to increase the meals tax or requiring county residents to mow their grass.

Localities have control over adjustments to their property tax rates – but aren’t allowed to change the sales tax rate. Amending sales tax rates has become one of the most common requests by local governing bodies.

A sales tax for Halifax

In 2019, Halifax County, once known for its textile and tobacco products, was the first locality authorized by the General Assembly to impose a 1% sales tax to pay for capital projects at Halifax schools.

Del. James Edmunds II, R-60th, of Halifax, patroned the bill, which allowed voters to decide by referendum if their local board should impose the tax.

“Coming from a very poor area, you all recognize that rural areas have very little opportunities to generate tax revenue,” Edmunds said to a House finance subcommittee in 2019 about the dilapidated high school. He also said the Halifax School Board and Board of Supervisors expressed support for the legislation.

Despite the locality previously raising the property tax rate to remodel the elementary schools and middle school, Edmunds said constructing a new high school was “too heavy of a lift for our tax rate and beyond.”

Lawmakers debated the precedent the decision would create during a Jan. 30, 2019 committee hearing. The bill initially failed, but the House Finance Committee reconsidered it two days later.

Del. Bobby Orrock, R-54th, Caroline, said then the legislation would “disproportionality” impact those with lower incomes.

However, Del. Matt Fariss, R-30th, of Campbell, encouraged his colleagues to support the measure, claiming that 2014 legislation that exempted solar equipment from local property and real estate taxation had impacted Halifax’s potential tax revenues.

“The biggest commercial projects in Halifax County in the last two years and in the foreseeable future have been solar operations,” Fariss said. “So we’ve really, really hurt that county’s ability to tax the biggest up-and-coming tax industry in Halifax County.”

Halifax is now projected to collect millions in revenues from solar projects after the commonwealth changed how local governments can tax large-scale solar in 2020.

House Finance Committee members said they were comfortable voting for the legislation because the locality expressed interest in taxing itself. Others, including Del. Rob Bloxom Jr., R-100th, of Accomack, said the legislature was “killing” localities with tax exemptions and instead should consider reforming the entire tax policy.

“This is going to be piecemealed for the next 20 years,” Bloxom said. “We’re going to have every county coming up here with something. I think we’re starting a bad precedent.”

The measure ultimately became law.

A statewide expansion?

The legislature has since passed similar legislation for eight other localities to impose a 1% sales tax for school construction and renovation. In addition to Halifax, the list includes the counties of Charlotte, Gloucester, Henry, Mecklenburg, Northampton, Patrick and Pittsylvania and the city of Danville.

However, legislation to expand the 1% sales tax option to all localities failed to pass the House this session for a second straight year after clearing the Senate.

“They can’t meet those needs by themselves,” said state Sen. Jennifer McClellan, D-9th, of Richmond, who patroned the two bills. “Providing a high-quality public education is a state responsibility. Students cannot learn in buildings that are falling apart or, in the case of a school my children attend, if they burn down.”

During her pitch to a House finance subcommittee on Feb. 17, she said localities can’t meet the responsibilities of school construction costs, because more than 50% of Virginia schools are over 100 years old and the total cost to replace them would be over $25 billion.

Despite these challenges, the legislation died in a Republican-controlled subcommittee.

Legislation to impose sales tax for capital school projects is uncertain

Raising taxes is not something that is embraced among Republicans, Sen. Tommy Norment, R-3rd, of Williamsburg, told the Mercury on Tuesday.

However, in some cases, Republicans have supported legislation authorizing certain localities to impose a sales tax increase.

In 2020, Norment carried legislation to provide an increased sales tax option for Gloucester County after the locality pushed back its school maintenance plans due to a lack of resources. He said he’s uncertain why House Republicans voted to authorize the increased sales tax for the few localities. But he noted the support and interest from the school board, governing body and local business community was vital.

“My prerequisite has been if we can get the convergence of support from those groups, I will go forward with you,” Norment said, “but if you cannot get the support of each and every one of those groups, I’m not doing it.”

Sen. Lynwood Lewis, D-6th, of Accomack, the patron of the 2020 Northampton sales tax bill, said in a statement to the Mercury, “Northampton County had significant school infrastructure needs and did not really have the tax base to address those needs. Other counties had sought and received the ability to impose the additional sales tax. I am at a loss as to why the assembly would not give localities this tool to voluntarily tax themselves when we have such significant school infrastructure needs.”

Four years after voting against the Halifax legislation, Orrock said he’s still opposed to creating “bifurcated taxing provisions” between one jurisdiction and another, especially for school capital projects. The former educator said he sympathizes with the schools, but he’s opposed to using sales tax because it takes a greater amount from those living on lower incomes.

“I think the current means of funding things need to be done statewide using the existing formula and reviewing the current funding formula,” Orrock said. “In past efforts to try and do that, there have always been more political losers than winners. So numerically, that’s why we’ve never changed the funding formula that was established 40-some years ago.”

Del. Buddy Fowler, R-55th, of Hanover, said he is uncertain if a statewide bill to authorize localities to impose a sales tax for capital projects will ever pass in the General Assembly. He said he believes one way to help many areas and increase the amount of capital funding for school projects is to do a complete statewide tax reform.

“We’re relying, particularly with local governments, on outdated taxes that are inefficient toward economic growth,” Fowler said. “And so when we advance tax policy like one little piece at the time — like the sales tax — it makes it much harder to come up with a comprehensive tax reform.”

The future of the legislation is uncertain since the last two bill carriers, Del. Jeff Bourne, D-71st, of Richmond, and McClellan are not expected to return next session. Bourne recently announced that he would not seek reelection, and McClellan was elected to Congress on Tuesday.