General Assembly budget leaders say they will back off expansion of Virginia's sales tax if state revenues continue to be high enough to pay for legislative priorities.

Those priorities include expanded state funding for public education and health care, as well as toll relief in Hampton Roads and additional money for the Washington Metro public transit system.

Senate Finance Chair Louise Lucas , D-Portsmouth, and House Appropriations Chairman Luke Torian , D-Prince William, confirmed on Friday that state tax collections appear to be high enough to support spending priorities in the next two-year budget without expanding the sales tax to digital services, including software service packages purchased from one business to another.

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Gov. Glenn Youngkin, third from left, and legislative leaders speak to the media inside the state Capitol on April 17. Youngkin and Democratic leaders announced they had reached an agreement to extend the timeline for budget talks into a May special session.

"There might be enough money to take care of this without having to go full bore on the New Economy (sales tax) or (business to business)," Lucas said in a phone interview.

"We may not have to do it at all," she added.

Sen. Louise Lucas, D-Portsmouth, head of the Senate Finance and Appropriations Committee, said state tax collections appear to be high enough to support spending priorities in the next two-year budget without expanding the sales tax to digital services. Del. Luke Torian, D-Prince William, head of the House Appropriations Committee, agrees.

Among the priorities Lucas expects to include in the budget are toll relief she has sought for Hampton Roads and additional state funding for the Washington Metro transit system.

Gov. Glenn Youngkin has said he would not sign off on a budget that includes a tax increase.

State income taxes

State income taxes were due on Wednesday, so Lucas and Torian said they are waiting to see whether revenues will be sufficient to support the $188 billion, two-year budget that has been in limbo because of a dispute with Youngkin over tax policy.

After the assembly rejected Youngkin's revised budget proposal on April 17, legislative leaders appeared with the governor at a Capitol news conference to announce a May 13 special session on the budget where they hope to introduce a compromise tax and spending plan, based on better-than-expected revenue collections through March.

"It was determined by the conferees (legislative budget negotiators) that we had enough resources coming in to take care of the priorities we put forward," Torian said in a phone interview. "We determined we would focus on passing the budget and then look at reforming the tax code and tax structure."

Lucas and Torian believe Virginia must eventually expand the sales tax to some services, after a shift over the past decade away from goods, such as compact discs and DVDs, toward audio and digital streaming services that are not subject to tax.

Youngkin proposed the expanded sales tax in December to "close the big tech loophole," but he also wanted to cut income tax rates and raise the sales tax, resulting in a net $1 billion tax reduction over the next two years.

Democrats balked at raising the sales tax or cutting income tax rates, but embraced the expanded sales tax for digital services, which Lucas and the Senate expanded to include some business-to-business services.

The Democratic-controlled legislature referred almost all tax policy legislation — including those proposed by Lucas and Youngkin — to a joint tax policy subcommittee that will report by Nov. 1.

The subcommittee will also look at potential changes in state income taxes, including a potential new top bracket for the highest earners, who currently pay the same rate as many middle-income Virginians.

Torian said the legislature is taking a prudent approach both to the upcoming budget and potential changes in tax policy.

"We are taking very seriously looking at our current tax structure and putting something forth that is fair and equitable to all," he said.

Lucas said the state cannot ignore the shift by consumers and its effect on future tax revenues.

"At some point, we've got to deal with a whole new tax structure," she said.

Cordial budget discussions

Senate Minority Leader Ryan McDougle, R-Hanover, said he opposes expanding the sales tax through the budget instead of by standalone legislation.

"It should be done legislatively and then you capture the revenues in the budget," he said.

But he said budget discussions this week have been cordial and productive.

"Everybody has been working in a collaborative manner, and I continue to be optimistic," McDougle said.

Youngkin is returning from a weeklong trade mission to Europe.

Lucas removed her tax policy legislation from the Senate Finance docket after refusing to hear bills that would have created a state authority to finance a $2 billion sports and entertainment district that Youngkin had proposed in Alexandria for the Washington Capitals and Washington Wizards professional sports franchises. The assembly also dropped the proposal from the budget, and the teams' owner instead reached an agreement to keep them at the Capital One Arena in Washington, D.C.

The budget conference committee will meet again on Tuesday.

"We will talk to the governor after the conferees meet," Lucas said.

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