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Governor Hints At Local Business Tax Reform

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On Friday, after skirting the topic in a major address to a business conference in Williamsburg, Governor Ralph Northam told a reporter that “he’s planning to ask the General Assembly to tackle business tax reform,” adding it would be “comprehensive.”

The reporter asked about it because of other comments made by Secretary of Finance Aubrey Layne and the President of the Virginia Economic Development Partnership, Stephen Moret.  Since his arrival in Virginia, Moret has from time to time mentioned local business taxes as a hindrance to economic recruitment and business start-ups. He did that again Friday in his own presentation to the Virginia Chamber of Commerce.

For more than a decade local business taxes, especially two of them, have been the focus of the Thomas Jefferson Institute for Public Policy, among others.  The taxes are generally despised by the business community, but local governments are highly attached to them, because they are a revenue source other than residential real estate taxes.

One is the Business, Professional and Occupational License Tax (BPOL), a tax on business gross receipts, and the other is the Machinery and Tools Tax, imposed on all forms of equipment and paid annually as long as you use it (such as a WWII era lathe I could tell you about). Efforts in the past to eliminate and replace them, or reform them in other ways, have been shot down in the conflict with local governments. The Virginia Manufacturers Association is constantly complaining about the M&T tax, with good reason.

Michael Thompson, president of the Thomas Jefferson Institute, pointed to one approach it has suggested: “Localities can be protected by allowing them to collect these taxes and then the businesses can deduct them from their state tax filings the following year. This is clean, easy and doable and will eliminate the impact of these job-destroying taxes.”

The recent federal tax reform effort has sparked discussion about changing Virginia’s tax system, in part because an influx of related revenue provides some flexibility. But none of that lagniappe drops into local government coffers, so using the additional business tax dollars flowing to the state to solve a local funding problem gets challenging. Using the individual income tax dollars to address business tax reform would be even more problematic.

It is hard to know whether the Governor, Layne and Moret are really working on something or just responded favorably to a suggestion from the reporter. They have been dead silent on the Thomas Jefferson Institute’s proposal to lower the corporate income tax rate as the corrective move to prevent a conformity tax increase on Virginia businesses.

No question, Virginia is long overdue for a conversation on tax policy, with state and local business taxes high on the agenda. It will be difficult (impossible) to accomplish in the coming short session, which is followed by a bitter election season, without bipartisan consensus upfront. To date, we haven’t seen that. Those are the reasons the Thomas Jefferson Institute did not go straight to those idea when considering the response to conformity.

But thanks to that group there is a body of work on a possible approach, expanding the reach of the sales tax to more services to replace those local business taxes. It has developed a tax modeling tool around that idea. And Virginia is taking baby steps in that direction. A few years back it adopted a sales tax on various communication services which is statewide in scope and which eliminated local taxes.

They haven’t been framed that way, but the new hospital assessments that will be paying for Medicaid expansion represent a new gross receipts tax on medical services and could be expanded to pick up more of the Medicaid program. That breached tax a wall and the idea can now spread elsewhere in the medical industry. It’s not much different than a straight sales tax on those services.

Then again, discussion of comprehensive tax reform might also be a brilliant delaying tactic. It drives a wedge into the business community. Many businesses would much prefer to lower or eliminate those taxes, paid for with the higher state corporate income tax imposed by conformity with the new federal system. The problem is, other businesses don’t care at all about BPOL and M&T.

How bad can those local taxes be if the vaunted Amazon is locating its new headquarters in the heart of local-tax heavy Arlington and Alexandria? Well, we haven’t seen all the details of the deal, have we? Arlington has a very attractive local incentive for technology firms, which will greatly lower Amazon’s BPOL tax for ten years. The incentive grows higher with the number of employees, but it is not clear yet that Amazon’s location fits the map.

Which brings up a final point. There are pernicious reasons local governments won’t part with these taxes. They will negotiate them down or totally away, but only in exchange for something they want. They have become a reverse proffer, a powerful economic incentive ploy that will disappear if the state replaces them.

Which means, of course, some favored businesses escape them, their competitors are stuck, and once again government is picking the winners and losers in the economy. If Governor Northam is serious about business tax reform, great, but the timing is going to be a problem and an easy opportunity may slip away.

(This article first ran in Bacons Rebellion on December 11, 2018.)

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