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Virginia: 31st in Tax Climate

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James A. Bacon
in

Source: The Tax Foundation

Just a reminder: Virginia is not a low-tax state. According to the Tax Foundation’s 2018 ranking of state business tax climate, Virginia scored 31st. While the Old Dominion scores pretty well for corporate taxes and sales taxes, it flunks the grade for individual taxes and unemployment insurance taxes.

Here are the category rankings:

Overall rank: 31
Corporate taxes: 6
Individual taxes: 40
Sales taxes: 10
Property taxes: 31
Unemployment insurance taxes: 41

If you are taxaphobic, the best states in the country are Wyoming, South Dakota, Alaska, and Florida. The worst: New Jersey, New York, California, Vermont, and Minnesota.

On the positive side, higher taxes pay for higher levels of services and amenities such as schools, higher-ed, public safety, roads, mass transit, Medicaid, and social services. On the negative side, you don’t always get what you pay for. In many states, public employee unions have captured a big share of tax revenue, and lots of the money has been spent to little effect. Tax-paying citizens continue to vote with their feet, leaving high-tax states and seeking opportunity in lower-tax states.

Update: “The Tax Foundation’s State Business Tax Climate Index (SBTCI) that you cited actually is not primarily intended to be reflective of business tax burdens in states,” notes Stephen Moret, president of the Virginia Economic Development Partnership (VEDP). “It is more of a ranking of tax complexity or tax structure than it is a ranking of state/local tax burdens.” See his full observation highlighted in the comments section.

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14 responses to “Virginia: 31st in Tax Climate”

  1. V N Avatar
    V N

    More services? Not seen that, at least in Hampton Roads. It is take from us to pay for future projects AND build infrastructure for the developers.

  2. LarrytheG Avatar
    LarrytheG

    well I don’t see Virginia as a high tax state , nor a low tax state – more a middle of the road at 31 .

    And I’m curious about the states that have no income tax or no sales tax in terms of their rating but also in terms of services compared to states with higher taxes overall.. Some of those no income, no sales tax states have other taxes to make up the difference – property taxes and I believe in New England, maybe New Hampshire – the state itself levies a property tax.

    at any rate – you’d need a fairly comprehensive set of data to do a legitimate apple-to-apples comparisons .

  3. Rowinguy1 Avatar
    Rowinguy1

    Well, I guess this says something. However, the study itself concludes:

    “Virginia has low taxes, but a poorly structured system, ranking 31st in @taxfoundations rankings.”

    So, you can combine any number of items, judge them by some internal proprietary ranking and reach any conclusion you want. Why, for instance, if you are trying to compare “business” taxes, do you include tax rates on individuals? What does “poorly structured” mean? In whose opinion.

    We don’t seem to be doing too bad in business development, compared to our highly ranked neighbor West Virginia, for instance.

  4. LarrytheG Avatar
    LarrytheG

    re: ” Why, for instance, if you are trying to compare “business” taxes, do you include tax rates on individuals? What does “poorly structured” mean? In whose opinion.”

    yup. good questions and ones that ought to be addressed with any would-be “rating” thing.

    it’s pretty hard to say that Virginia is not a low tax state when it ranks dang near to the lower third of the states…

    and if you were going to look at Virginia in terms of cutting “fat”.. where would you?

  5. Acbar Avatar
    Acbar

    Cut the fat? Obesity is a state of mind.

  6. LarrytheG Avatar
    LarrytheG

    One metric … maybe along the lines of the point that Gillespie was making – cutting taxes by not rehiring from attrition… in a state with over 8 million people and 100,000 employees… if my math is right that comes out to about .0125 state employees per capita or perhaps one state employee per 80 people.

    that seems pretty lean especially when it includes K-12 and Higher Ed… but perhaps a comparative against other states might shed more light.

    See .. this sort of goes to the concept of how much “govt” is actually needed and for what – or conversely what is NOT needed for govt and how much of THAT do we have?

    Conservatives always tend to tread on this ground is various narratives..but never really get to these kinds of specifics and metrics..it’s always, instead, some vague idea that we pay too many taxes for too much govt – and in doing so – we squander money that if you believe them goes into a black fiscal hole whereas if it went back to the “people” it would supercharge the economy.

    so … good discussion … if we actually dig a little into it more than just cursory.

    how much govt is “too much” in Virginia and how much is it “costing” us?

  7. LarrytheG Avatar
    LarrytheG

    amazing what you can find just doodling around with Google…

    States With Most Government Employees: Totals and Per Capita Rates

    http://www.governing.com/gov-data/public-workforce-salaries/states-most-government-workers-public-employees-by-job-type.html

    AND they break it down between State and Local!

    Alaska has 245 state FTE per 10K residents… Indiana and Illinois 46/49, Virginia – 82

    you’d think that Illinois with it’s debt and pension issues would have a lot more employees per 10K .

    interesting chart…

    1. James A. Bacon Avatar
      James A. Bacon

      Interesting numbers. But use them carefully. States differ in whether particular functions are carried out by state government or local government. Thus, in Virginia, VDOT maintains the vast majority of the road-and-highway network. In other states, local governments have the primary responsibility.

  8. TBill Avatar
    TBill

    When I see Virginia tax rankings like this, I feel you have to separate Virginia into its two halves (1) the lower tax half and (2) the higher tax half. You know where this going…tax up here is not so moderate and inevitably heading higher.

  9. LarrytheG Avatar
    LarrytheG

    I think Alaska, Texas, North Carolina and Virginia have the State DOTs responsible for both State and local roads. So if you sort the column that says State FTEs per 10K of population – you do get Alaska at the top, but not the other 3 next… In fact, you have Delaware-190, Wyoming-160, Hawaii-148, Vermont-146… with Virginia, NC, and Texas..way down the list with 82,80 and 65… state employees per 10K population… then for State/local combined

    Alaska – 392 (245 state only) = 147 local only
    Virginia – 226 (82 state only) = 144 local only
    NC – 260 (80 state only) = 180 local only
    Texas – 209 (65 state only) = 144 local only

    Alaska just looks like it’s got more workers overall.. probably not unexpected.. it’s probably bigger in land area that the next 3 combined..

    Delaware is 63 local
    Wyoming is a whopping 286 local
    Hawaii – 117
    Vermont – 88

    I’m sure there is some knowledge to be gained here….. who would have thought Wyoming had more local FTEs than the other three?

    one too many glasses of wine at this point to dig much deeper and have it be mathematically correct and make sense!

  10. James A. Bacon Avatar
    James A. Bacon

    Comment posted on behalf of Stephen Moret, president of the Virginia Economic Development Partnership (VEDP):

    Over the last decade, I’ve spent a lot of time getting to know the folks at the Tax Foundation. I used to visit them regularly when I was leading the VEDP of Louisiana (the Louisiana Department of Economic Development, or LED). More recently, we’ve asked for their thoughts about business taxation in Virginia.

    One thing that is important to note is that the Tax Foundation’s State Business Tax Climate Index (SBTCI) that you cited actually is not primarily intended to be reflective of business tax burdens in states. It is more of a ranking of tax complexity or tax structure than it is a ranking of state/local tax burdens. Indeed, the SBTCI methodology document provided on the Tax Foundation’s website (see this link) says (emphasis added), “While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems, and provides a roadmap for improvement.” For example, in the SBTCI, states are penalized for having multiple tax brackets and for offering various tax exemptions and credits, due primarily to the complexity associated with them, even if they result in lower business tax burdens.

    A few years ago, the Tax Foundation and KPMG began publishing a separate report, Location Matters (see link), which ranks states based on their state/local business tax burdens, taking into account not just tax types and rates but also the availability of tax credits and exemptions for certain industry sectors and situations (e.g., statutory tax credits for job creation).

    The distinction between Location Matters and the SBTCI is referenced in the introductory section of Location Matters (emphasis added): “Some studies, including the Tax Foundation’s widely cited annual State Business Tax Climate Index, define model tax structure principles and measure the state’s tax code relative to those principles. The State Business Tax Climate Index is a useful tool for lawmakers to understand how neutral and efficient their state’s tax system is compared to other states and to identify areas where their system can be improved. However, [the SBTCI] does not address the bottom line question asked by many business executives: ‘How much will our company pay in taxes?’”

    One cool aspect of Location Matters is that the Tax Foundation and KPMG show how the same state/local tax structure can result in different tax burden rankings by industry sector, as well as different rankings for new investment (i.e., a greenfield location or an expansion of an existing firm) vs. mature firms. For example, states with relatively high property taxes on real and personal property rank poorly for manufacturers. Attached is a recap of Virginia’s rankings in Location Matters (note: a ranking of no. 1 in this ranking would be the lowest-tax state). Virginia is unique in that it is one of a relatively small number of states for which it ranks more poorly for any type of new investment or expansion than for mature firms. The primary reason for this distinction is a lack of statutory tax credits or exemptions in Virginia (in comparison to other states) to encourage job creation and/or capital investment. In fact, this relatively unique distinction of Virginia was one of the leading causes for Virginia’s decline in the various business climate rankings over the last few years, as the results of Location Matters were directly incorporated into business climate rankings published by Forbes, CNBC, Pollina Corporate Real Estate, Site Selection, and possibly others.

    As you compare the rankings of states in the two rankings, you will notice that there is not a strong correlation in their rankings in one study vs. the other. That’s because the two studies are intended to measure states against different standards – SBTCI provides a ranking of the business tax structures of states, whereas Location Matters provides a ranking of state/local business tax burdens of states.

  11. LarrytheG Avatar
    LarrytheG

    I think us readers and commenters are fortunate to have Mr. Moret share his thoughts… which seem to be totally on target and relevant to Virginia:

    ” The primary reason for this distinction is a lack of statutory tax credits or exemptions in Virginia (in comparison to other states) to encourage job creation and/or capital investment. In fact, this relatively unique distinction of Virginia was one of the leading causes for Virginia’s decline in the various business climate rankings over the last few years, as the results of Location Matters were directly incorporated into business climate rankings published by Forbes, CNBC, Pollina Corporate Real Estate, Site Selection, and possibly others.”

    To this point – economic development policy in Virginia …at least to me…seems to be a bit of a mish-mash legislatively – without any real focus – more of a hodge-podge of individual legislators pet beliefs and the Gov sort of doing his own thing as best he can within that vague legislative framework.

    It will be interesting and a challenge for Mr. Moret to see if he can re-steer the ship Virginia on economic policy… like he was successful with Louisiana. Sometimes the “Virginia Way” is a euphemism for what individual legislators with power – want or don’t want no matter who is advising them…

    But much thanks for Mr. Moret taking the time to share his thought and providing the link to Location Matters which is going to take a little time to go through and digest fully.

  12. LarrytheG Avatar
    LarrytheG

    so first cut of the referenced doc is a pretty informative and illuminating one…

    and I can see Mr. Moret using it to develop a strategy for Virginia and to get the General Assembly on board.

    I think the local BPOL is a BAD tax in Virginia and this is an example of what a locality might do when Dillon allows it – though to be realistic – it’s self harm at the county level if their nearby competitors don’t have one or have a lower one.

    I don’t have a real problem with the sales tax at the retail level.. you either get some revenues there for pubic safety and schools or you have to get it somewhere else – property taxes..etc..

    How about sales tax on services since the economy is shifting to service economy?

    Also curious what the unemployment tax is not uniform across industries… or does it look that way because of manpower allocations per industry. At any rate.. is Virginia particularly higher than other states..and/or provides “better” unemployment benefits? I clearly don’t understand that aspect enough.

    mature vs new businesses – as well as industry needs to have a more level playing field especially if Virginia wants to attract businesses with 21st century models.

  13. djrippert Avatar
    djrippert

    I thought this was an interesting article about which states would suffer the most of local and state tax deductibility were to be rescinded in the new tax bill. Looks like a lot of high earners may leave the Old Dominion.

    https://www.bloomberg.com/news/articles/2017-11-27/in-greenwich-and-manhattan-tax-hike-fears-fuel-talk-of-exodus

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