Category Archives: Taxes

Tracking Virginia’s Quality of Life

Source: 2015 State of the Commonwealth Report

Source: 2015 State of the Commonwealth Report, (Click for larger image)

by James A. Bacon

Virginia’s economy, dependent upon federal spending, has under-performed the national economy since 2010, and will continue to do so in 2016, according to the Virginia Chamber of Commerce’s 2015 State of the Commonwealth Report. But lead author James V. Koch, president emeritus of Old Dominion University, does find a silver lining:

Once we adjust for differences in the cost of living, the spendable “real” income of most Virginians exceeds that earned by typical residents of the cities along the East Coast to whom we are frequently compared. Our dollars go further and our money has more purchasing power than that of our competitors. The moral to the story: If you’re concerned about your standard of living, there’s hardly any better place to live than Virginia.

Gini coefficient for selected Virginia localities. Source: 2015 State of the Commonwealth report

Gini coefficient for selected Virginia localities. Source: 2015 State of the Commonwealth report

The most common yardstick for standard of living is median household income, in which 50% of households earn more and 50% earn less. But that indicator misses a lot. As Koch points out, it does not take into account the cost of living. Thus, median household incomes in New York City are high — but so is the cost of living, canceling the advantage of higher incomes. As Koch also notes, median household income doesn’t tell us how equally those incomes are distributed. If incomes are hogged by the so-called top “1%,” that’s not much comfort to the other 99% of the population.

The Virginia Chamber and the Strome College of Business at ODU present the report with the idea that “thoughtful discussion of the challenges confronting Virginia can make it even a better place to live.” So, kudos to Koch for contributing to a deeper understanding of how to measure a community’s quality of life.

But the State of the Commonwealth report is only a first step. I would argue that further adjustments to quality-of-life metrics are needed to create a meaningful basis for comparing communities.

  1. Adjust for taxes. We should be looking at disposable income — income after taxes. Higher incomes push households into higher federal income tax brackets. Also, some states and localities soak up a much larger share of personal income than others. Virginia state/local government imposes a moderate-low level of taxation as a percentage of income upon its residents, making more disposable income available. This data is readily available and should be relatively easy to calculate.
  2. Adjust for transportation. Some regions have more efficient land use patterns than other, allowing for more varied transportation options, such as walking, biking and mass transit. As a consequence people in some communities spend a much larger percentage of their income on the cost of owning and operating automobiles without adding to their quality of life. Sprawling development in Virginia detracts from the standard of living. The H&T Index (housing & transportation) attempts to measure this effect. Perhaps there is a way to incorporate it into a more comprehensive quality-of-life measure.
  3. Adjust for time. People assign a monetary value to the time they spend commuting, which is time they could be doing something more productive or enjoyable. Localities vary widely in the amount of time residents burn moving from location to location. The Census Bureau captures this metric and a value assigned to peoples’ time.
  4. Adjust for education. Although government pays for most K-12 education in the United States by means of the public school system, Americans attach a monetary value to the quality of education, as seen by the vast sums they expend on private schools or the premiums they pay to live in better better school districts. Thus, the high quality of schools in, say, Northern Virginia would offset to a significant degree the frustration of longer commutes and higher transportation costs.

The conversation could be expanded even beyond those measures to include quality-of-life metrics relating to arts, entertainment and culture; the affordability and accessibility of higher education; and the comprehensiveness of the social safety net.

As we think about how to build more prosperous, livable and sustainable communities, it is important to expand the conversation beyond maximizing income, as desirable as that is, to moderating taxes, creating more efficient human settlement patterns, and improving the quality of education, with all the complex trade-offs those objectives entail.

When’s the Last Time a Virginia Governor Proposed a Business Tax Cut?

mcauliffeGovernor Terry McAuliffe announced yesterday a package of tax cut and credit proposals to improve Virginia’s business climate and stimulate economic growth.

A proposed reduction in the corporate income tax rate from 6% to 5.75% would generate nearly $64 million in tax relief for Virginia businesses over two years, while other proposals would create incentives for research and development and early-stage financing, including:

  •  Creation of a new R&D Tax Credit with a $15 million cap to benefit companies spending more than $5 million annual in research spending.
  • Increasing the statewide cap for an existing R&D Tax Credit by $1 million to $7 million.
  • Increasing the cap on Virginia’s Angel Investor Tax Credit by $4 million to $9 million.

The proposals come at a time when Virginia’s ranking in national business climate surveys has fallen steadily from a once-lofty perch. In a press release, McAuliffe specifically cited competitive pressure from North Carolina, a perennial rival in the competition for corporate investment, which has reduced its corporate tax rate from 6.9% to 5% in the past two years. The rate is scheduled to drop to 4% next year.

Bacon’s bottom line: While these tax cuts may be regarded as incremental and “small ball” in scale, they are cuts. Virginia has seen little but tax hikes over the past decade. Add up these initiatives, and they amount to $84 million. When’s the last time Virginia cut business taxes by $84 million? I can’t even remember. Good for McAuliffe.

One more point: The governor, who loves to wheel and deal, could have proposed an increase to the Governor’s Opportunity Fund, used to sweeten corporate investment deals, but he didn’t. As his press release notes, “The broad-based tax proposal will provide significant benefits for all corporations rather than selecting winners and losers.” Once again, good for him.

Update: Michael Cassidy with the Commonwealth Institute reminds me that there have been several business tax cuts/credits over the past 10 years: elimination of the estate tax ($140 million annually), cutting estate tax for multi-state manufacturing companies ($59 million annually), sales tax exemption for data centers ($7 million annually), and film tax credit expansion ($6.5 million annually).

— JAB

Virginia's Tax Code the 35th Most "Unfair"

Source: Insitute for

Source: Institute on Taxation and Economic Policy. (Click for larger image.)

On the subject of state and local taxes (see previous post), a 2015 report by the Institute on Taxation and Economic Policy says that Virginia has the 35th “most unfair” state and local tax system in the United States. By “unfair,” the Institute means regressive — poor households pay a larger share of their income in state and local taxes than do affluent households. As seen in the chart above, the lowest 20% the lowest-income families in Virginia pay 8.9% of their income, while the top 1% of richest families pay 5.1%.

Presumably, 35th most unfair is equivalent to the 16th most fair. In other words, despite the pro-business slant of Virginia’s tax code, it does not load as much of the burden on low-income citizens as the codes of other states.

I would expand the definition of what constitutes a “fair” tax code. The “fairest” tax code is that which does most to stimulate job creation. A weak labor market is the major explanation for the lack of wage growth in the United States. A tax regime that supports job creation, like that proposed by the Thomas Jefferson Institute for Public Policy, arguably would indirectly help wage growth, which would do far more to help the bottom 20% than tweaking the tax code to make it more progressive. A progressive tax code that inhibits job creation does no favors to the poor.

Update: I have re-written extensive portions of this post. In the original version, I had failed to comprehend that the 35th most “unfair” equated to 16th most “fair.” Thanks to reader “Slowlane” for pointing out the obvious. All I can say in defense of my carelessness is, “Duh!”

— JAB

Virginia’s Tax Code the 35th Most “Unfair”

Source: Insitute for

Source: Institute on Taxation and Economic Policy. (Click for larger image.)

On the subject of state and local taxes (see previous post), a 2015 report by the Institute on Taxation and Economic Policy says that Virginia has the 35th “most unfair” state and local tax system in the United States. By “unfair,” the Institute means regressive — poor households pay a larger share of their income in state and local taxes than do affluent households. As seen in the chart above, the lowest 20% the lowest-income families in Virginia pay 8.9% of their income, while the top 1% of richest families pay 5.1%.

Presumably, 35th most unfair is equivalent to the 16th most fair. In other words, despite the pro-business slant of Virginia’s tax code, it does not load as much of the burden on low-income citizens as the codes of other states.

I would expand the definition of what constitutes a “fair” tax code. The “fairest” tax code is that which does most to stimulate job creation. A weak labor market is the major explanation for the lack of wage growth in the United States. A tax regime that supports job creation, like that proposed by the Thomas Jefferson Institute for Public Policy, arguably would indirectly help wage growth, which would do far more to help the bottom 20% than tweaking the tax code to make it more progressive. A progressive tax code that inhibits job creation does no favors to the poor.

Update: I have re-written extensive portions of this post. In the original version, I had failed to comprehend that the 35th most “unfair” equated to 16th most “fair.” Thanks to reader “Slowlane” for pointing out the obvious. All I can say in defense of my carelessness is, “Duh!”

— JAB

Job Stimulus through Tax Reform

free_lunchby James A. Bacon

It is an axiom of economics that there is no such thing as a free lunch. Like Isaac Newton’s laws of physics, the adage is universally true… most of the time. Just as Newtonian physics breaks down at the quantum level, however, the free-lunch maxim breaks down in the realm of taxes. Some taxes depress economic activity so much that replacing them with less harmful taxes stimulates economic growth and job creation while remaining revenue-neutral.

Finding the right combination of taxes is the animating force behind the four-year effort of the Thomas Jefferson Institute for Public Policy (TJI) to restructure Virginia’s tax code. Working with Chmura Economics & Analytics, President Michael Thompson introduced the idea in 2012 and has been refining the approach ever since. The Institute has just published an update.

In the past year, Thompson has been talking to groups representing business, municipal government and tax reform to identify a restructured tax system for Virginia that would be not only economically beneficial but politically palatable. The approach that emerged from the years-long process would eliminate three counterproductive business taxes — the Business Professional and Occupational License tax, the Machine & Tools tax, and the Merchants Capital tax — and replace lost revenue by expanding the sales tax to encompass currently exempt services. The health care sector would remain exempt.

Of the 23 scenarios examined, the one that produced the most positive economic benefits was “Scenario 5,” which included the reforms noted above plus eliminating the state’s bottom two personal income tax brackets (up to $5,000) and shaving the other two brackets by 9.25%. According to Chmura, the results would be:

  • 79,000 increase in private employment
  • $287 million increase in investment
  • $2.85 billion increase in real disposable income
  • $8.4 billion increase in state GDP

One important caveat: Thompson describes the economic model as a “dynamic tax/spending” model. If I correctly understand the meaning of that phrase, the model achieves revenue neutrality by including in its forecast revenues generated by the economic growth. While I prefer dynamic analysis to static analysis (basing tax policy on the assumption that changes in tax policy have no effect on real-world economic behavior), the approach does entail an extra layer of assumptions, which in turn introduces an added element of uncertainty to the analysis.

If Governor Terry McAuliffe wants to put Virginians back to work, tax policy may be the biggest lever he has at his disposal. He needs to give the idea serious consideration.

The Case for a Regional Approach to Economic Development

warehouseby James A. Bacon

The economies of 17 Virginia localities and one North Carolina locality in the Hampton Roads region are more inter-related than they were 10 years ago. Almost two-thirds (more than 65%) of all workers in the metropolitan statistical area commute to jobs outside the jurisdiction where they live — up from less than 60% in 2005, according to a new report, “Our Jobs Are Also Your Jobs,” published by the Hampton Roads Economic Development Alliance.

That fact has profound implications for economic development strategy, argue the report’s authors James V. Koch and Vinod Agarwal with Old Dominion University. Political leaders of Hampton Roads jurisdictions act as if “the only really good economic development project is the one that is located squarely inside their own city our county,” they write. What that assumption overlooks, however, is the extent to which the economic impact — and benefits — are diffused throughout the metropolitan economy.

Koch and Agarwal gave the hypothetical example of a new warehouse facility built in Suffolk to serve the growing cargo business flowing through the ports in Norfolk and Portsmouth. Suppose that warehouse employs 250 people averaging $50,000 annual pay (including managerial salaries but not including fringe benefits). Here is how they predict those jobs, income and sales tax revenues would be distributed geographically.

diffused_impact

In this example, while Suffolk would enjoy the biggest impact, the benefits would be broadly distributed through the region. Suffolk residents would reap about one-third the jobs, income and sales tax revenues. Yet, to pick a different locality, the project also would create 20 jobs for Virginia Beach residents and generate $40,000 a year in additional sales tax revenues.

Moreover, the Suffolk warehouse would spend money on products and services from area businesses, which also would be distributed geographically.

“When more than 65 percent of individuals cross city and county lines to travel to their place of employment, it is inevitable that economic benefits will be widely diffused,” write Koch and Agarwal. “The moral to the story is that regional cooperation and regional economic development efforts make sense. … Parochial approaches to economic development are not likely to achieve great success — if success is interpreted to mean capturing the economic benefits that are generated by a new or expanded business. … The economic success of one city or county soon becomes another’s.”

Bacon’s bottom line: What applies to Hampton Roads applies to every other metropolitan region in Virginia. Nowhere in Virginia do political boundaries coincide with economic boundaries. From a regional perspective, economic development is best pursued as a regional enterprise.

Koch and Agarwal highlight an important insight, although they do overlook a critical facet of economic development that will not change without a dramatic re-write of Virginia’s tax code: The locality where a new warehouse, manufacturing plant or corporate facility locates captures 100% of the property tax revenue. Because property tax is the largest single source of local revenue in Virginia, local governments are highly motivated to see to it that a particular project lands within their boundaries. Unless subsidies are offered to attract the investment, such facilities are a big winner for the locality in question because business operations require little in the way of public services. Indeed, the fact that 2/3 of a company’s employees are located outside the jurisdiction means the locality in question is saddled with the cost of providing educational and other government services to only 1/3 of the workforce. Thus, ironically, the more economically interdependent the localities of a region are, the more local governments are incentivized to capture the tax benefits of bagging a corporate investment.

The only way to change that dynamic is to change the tax code to allow for (or require) the regional sharing of revenue from commercial and industrial property. And that will never happen because any change would create winners and losers, and the losers would fight like hell to thwart it.

But the Koch-Agarwal paper does make a sound argument for supporting regional economic development organizations like the Hampton Roads Economic Development Alliance. Fortunately, most Virginians get it, and a regional approach to economic development predominates in the Old Dominion.

A Tax Structure Finely Tuned for… a 20th Century Economy

virginia_business_tax_burden

Virginia business tax rates. Image credit: Tax Foundation, KPMG

A new study by the Tax Foundation and KPMG of state business taxes differs from previous studies, which look at average levels of taxation, by examining how state tax structures affect different types of business. The big conclusion from “Location Matters: The State Tax Costs of Doing Business“: Firms experience dramatically different tax rates because their exposure varies to different state and local taxes.

The study’s analysis of Virginia’s tax structure suggests that established companies experience much lower overall tax burdens than new companies. The Old Dominion ranks second best in the country for mature, labor-intensive manufacturing operations but only 35th for R&D facilities.

Bacon’s bottom line: I have frequently decried the lack of entrepreneurial dynamism in Virginia as a root cause for our sluggish economic performance. There may be many reasons for Virginia’s mediocre growth record in recent years but, based upon the data shown in the chart above, one of them is certainly the structure of business taxes.

In every category analyzed, new firms experience higher effective tax rates than mature firms. Just as important, look at the comparative ratings. Virginia ranks No. 2 in the country for mature, labor-intensive manufacturing companies — neither a growth sector, nor a particularly high-paying sector — but only 35th for R&D, the kind of economic activity every state covets. If we wanted to design an economy for the 20th century, not the 21st, we’ve done a pretty good job.

(Hat tip: Larry Gross)

The Next Battle in Virginia's Sharing Economy: Airbnb

airbnbby James A. Bacon

The fracas in Virginia over Uber and Lyft has settled down. The two “transportation network companies” have submitted to regulation requiring background and safety checks of drivers, and nearly 19,000 vehicles have registered with the state, according to the Richmond Times-Dispatch. The next legal front in the sharing economy is likely to focus on Airbnb, the company that enables individuals to rent out houses, rooms and apartments for short-term lodging.

The problem, according to the Commonwealth Institute, is that Airbnb does not collect and remit the lodging taxes on these rentals, meaning that local governments could be losing millions of dollars in tax revenue.

Thousands of Virginians have signed up on Airbnb to offer accommodations to paying visitors. A check this morning showed 692 rentals being offered in the City of Richmond as the UCI Road World Cycling Championships approaches, 288 rentals in beach destination Virginia Beach, 489 rentals in the college town of Charlottesville and more than 1,000 rentals each in Fairfax County, Arlington County and Alexandria near the nation’s capital. Charges can vary from $37 per night for a “very, very rustic cabin by the river” in Hinton… to $225 per night for a three-bedroom house in Blacksburg during football weekends… to $2,000 per night for a three-bedroom house in Old Town Alexandria.

The state requires hotels, motels and campgrounds to collect a sales tax of 5.3% to 6% for reservations of less than 90 days. Many localities also collect a local occupancy tax, which in the case of Richmond, Henrico, Hanover and Chesterfield amounts to 8% to cover debt from building the Greater Richmond Convention Center. Other communities use the occupancy tax to support local convention and visitors bureaus (CVBs) and tourism initiatives.

Airbnb is not collecting taxes in Virginia. According to the Commonwealth Institute, the company suggests that renters charge and remit occupancy taxes on their own. But the taxes can be confusing for casual Airbnb hosts to understand and localities are not set up to monitor and enforce collections on casual rentals.

Earlier this year, however, Airbnb reached an agreement with Washington, D.C., to collect and remit occupancy taxes on all of its rentals in the District. That follows agreements in Portland, San Francisco and Wake County (Raleigh, N.C.) to do the same.

Bacon’s bottom line: I can see why the hospitality industry is up in arms over Airbnb. Airbnb rentals under-price hotels and motels offering comparable accommodations but they don’t contribute to the collective efforts of CVBs to market and promote their metropolitan region as a destination. Forcing casual renters to handle the paperwork would be a deal breaker for many, but Airbnb’s administrative systems should be able to execute the task of remitting taxes with little difficulty. I agree with the Commonwealth Institute that the Commonwealth of Virginia and its localities should seek the same kind of tax-collection deal that North Carolina and several of its jurisdictions have struck with the company. Create a level playing field and may the best competitors win!

The Next Battle in Virginia’s Sharing Economy: Airbnb

airbnbby James A. Bacon

The fracas in Virginia over Uber and Lyft has settled down. The two “transportation network companies” have submitted to regulation requiring background and safety checks of drivers, and nearly 19,000 vehicles have registered with the state, according to the Richmond Times-Dispatch. The next legal front in the sharing economy is likely to focus on Airbnb, the company that enables individuals to rent out houses, rooms and apartments for short-term lodging.

The problem, according to the Commonwealth Institute, is that Airbnb does not collect and remit the lodging taxes on these rentals, meaning that local governments could be losing millions of dollars in tax revenue.

Thousands of Virginians have signed up on Airbnb to offer accommodations to paying visitors. A check this morning showed 692 rentals being offered in the City of Richmond as the UCI Road World Cycling Championships approaches, 288 rentals in beach destination Virginia Beach, 489 rentals in the college town of Charlottesville and more than 1,000 rentals each in Fairfax County, Arlington County and Alexandria near the nation’s capital. Charges can vary from $37 per night for a “very, very rustic cabin by the river” in Hinton… to $225 per night for a three-bedroom house in Blacksburg during football weekends… to $2,000 per night for a three-bedroom house in Old Town Alexandria.

The state requires hotels, motels and campgrounds to collect a sales tax of 5.3% to 6% for reservations of less than 90 days. Many localities also collect a local occupancy tax, which in the case of Richmond, Henrico, Hanover and Chesterfield amounts to 8% to cover debt from building the Greater Richmond Convention Center. Other communities use the occupancy tax to support local convention and visitors bureaus (CVBs) and tourism initiatives.

Airbnb is not collecting taxes in Virginia. According to the Commonwealth Institute, the company suggests that renters charge and remit occupancy taxes on their own. But the taxes can be confusing for casual Airbnb hosts to understand and localities are not set up to monitor and enforce collections on casual rentals.

Earlier this year, however, Airbnb reached an agreement with Washington, D.C., to collect and remit occupancy taxes on all of its rentals in the District. That follows agreements in Portland, San Francisco and Wake County (Raleigh, N.C.) to do the same.

Bacon’s bottom line: I can see why the hospitality industry is up in arms over Airbnb. Airbnb rentals under-price hotels and motels offering comparable accommodations but they don’t contribute to the collective efforts of CVBs to market and promote their metropolitan region as a destination. Forcing casual renters to handle the paperwork would be a deal breaker for many, but Airbnb’s administrative systems should be able to execute the task of remitting taxes with little difficulty. I agree with the Commonwealth Institute that the Commonwealth of Virginia and its localities should seek the same kind of tax-collection deal that North Carolina and several of its jurisdictions have struck with the company. Create a level playing field and may the best competitors win!

Alpha Natural Resources: Running Wrong

Alpha miners in Southwest Virginia (Photo by Scott Elmquist)

Alpha miners in Southwest Virginia
(Photo by Scott Elmquist)

 By Peter Galuszka

Four years ago, coal titan Alpha Natural Resources, one of Virginia’s biggest political donors, was riding high.

It was spending $7.1 billion to buy Massey Energy, a renegade coal firm based in Richmond that had compiled an extraordinary record for safety and environmental violations and fines. Its management practices culminated in a huge mine blast on April 5, 2010 that killed 29 miners in West Virginia, according to three investigations.

Bristol-based Alpha, founded in 2002, had coveted Massey’s rich troves of metallurgical and steam coal as the industry was undergoing a boom phase. It would get about 1,400 Massey workers to add to its workforce of 6,600 but would have to retrain them in safety procedures through Alpha’s “Running Right” program.

Now, four years later, Alpha is in a fight for its life. Its stock – trading at a paltry 55 cents per share — has been delisted by the New York Stock Exchange. After months of layoffs, the firm is preparing for a bankruptcy filing. It is negotiating with its loan holders and senior bondholders to help restructure its debt.

Alpha is the victim of a severe downturn in the coal industry as cheap natural gas from hydraulic fracturing drilling has flooded the market and become a favorite of electric utilities. Alpha had banked on Masset’s huge reserves of met coal to sustain it, but global economic strife, especially in China, has dramatically cut demand for steel. Some claim there is a “War on Coal” in the form of tough new regulations, although others claim the real reason is that coal can’t face competition from other fuel sources.

Alpha’s big fall has big implications for Virginia in several arenas:

(1) Alpha is one of the largest political donors in the state, favoring Republicans. In recent years, it has spent $2,256,617 on GOP politicians and PACS, notably on such influential politicians and Jerry Kilgore and Tommy Norment, according to the Virginia Public Access Project. It also has spent $626,558 on Democrats.

In 2014-2015, it was the ninth largest donor in the state. Dominion was ahead among corporations, but Alpha beat out such top drawer bankrollers as Altria, Comcast and Verizon. The question now is whether a bankruptcy trustee will allow Alpha to continue its funding efforts.

(2) How will Alpha handle its pension and other benefits for its workers? If it goes bankrupt, it will be in the same company as Patriot Coal which is in bankruptcy for the second time in the past several years. Patriot was spun off by Peabody, the nation’s largest coal producer, which wanted to get out of the troubled Central Appalachian market to concentrate on more profitable coalfields in Wyoming’s Powder River Basin and the Midwest.

Critics say that Patriot was a shell firm set up by Peabody so it could skip out of paying health, pension and other benefits to the retired workers it used to employ. The United Mine Workers of America has criticized a Patriot plan to pay its top five executives $6.4 million as it reorganizes its finances.

(3) Coal firms that have large surface mines, as Alpha does, may not be able to meet the financial requirements to clean up the pits as required by law. Alpha has used mountaintop removal practices in the Appalachians in which hundreds of feet of mountains are ripped apart by explosives and huge drag lines to get at coal. They also have mines in Wyoming that also involve removing millions of tons of overburden.

Like many coal firms, Alpha has used “self-bonding” practices to guarantee mine reclamation. In this, the companies use their finances as insurance that they will clean up. If not, they must post cash. Wyoming has given Alpha until Aug. 24 to prove it has $411 million for reclamation.

(4) The health problems of coalfield residents continue unabated. According to a Newsweek report, Kentucky has more cancer rates than any other state. Tobacco smoking as a lot to do with it, but so does exposure to carcinogenic compounds that are released into the environment by mountaintop removal. This also affects people living in Virginia and West Virginia. In 2014, Alpha was fined $27.5 million by federal regulators for illegal discharges of toxic materials into hundreds of streams. It also must pay $200 million to clean up the streams.

The trials of coal companies mean bad news for Virginia and its sister states whose residents living near shut-down mines will still be at risk from them. As more go bust or bankrupt, the bill for their destructive practices will have to borne by someone else.

After digging out the Appalachians for about 150 years, the coal firms have never left coalfield residents well off. Despite its coal riches, Kentucky ranks 45th in the country for wealth. King Coal could have helped alleviate that earlier, but is in a much more difficult position to do much now. Everyday folks with be the ones paying for their legacy.