Not every tax policy decision should be made or measured on whether it stimulates more economic activity and thus more taxable revenue for the government. There are things the government should not tax.
Yet, returning once again to the well-thumbed June report on manufacturing incentives produced by the Joint Legislative Audit and Review Commission, that economic value add test was applied to one of the oldest tax exemptions under the sales tax rules, an exemption for equipment purchased to comply with federal or state environmental laws.
It failed that test, of course, producing minimal economic activity. The JLARC report notes that the main purpose of the rule is to reduce the cost of environmental compliance for those businesses, not to stimulate investment. There is no need to create an incentive for companies to make investments which are mandatory. The question is, should they be taxed?
The Pollution Control Equipment and Facilities Sales Tax Exemption goes back to 1972, soon after the initial 1966 creation of Virginia’s sales and use tax. Most states with a sales tax provide some level of tax break or other financial consideration for pollution control and abatement investments, JLARC reports.
The real rub in Virginia is not over the sales tax collected by the state on the original construction or installation, but the continuing annual exemption from local real estate or machinery and tools taxes that comes with it. The $27 million in sales taxes not collected by the state between 2010 and 2017 is dwarfed by the local tax exemption, not calculated or really recognized by the JLARC report.
The issue is covered in pages 50 through 53 of the JLARC report (here), which was the subject of an earlier Bacon’s Rebellion posts about its discussion of income tax rules (here) and the incentives granted to the data center industry (here). Those are tax policy issues where it make more sense to try to do an economic score of their effectiveness.
JLARC’s staff listened to complaints from the manufacturers who seek to exempt these investments from sales tax (and thus local taxes). From this short report section three substantial recommendations flowed, one of which may produce legislation in 2020. If adopted, companies would expand use of the process to cut their taxes.
- The Department of Environmental Quality and Department of Mines, Minerals, and Energy should develop guidance documents on (1) the types of pollution control equipment and facilities that are exempt from the retail sales and use tax and (2) the decision-making process for approving certification.
- The Department of Environmental Quality should develop a list of pre-approved equipment and facilities that typically meet the pollution control certification requirements and create an expedited certification process for equipment and facilities on that list.
- The General Assembly could amend § 58.1-609.3 or § 58.1-3660 of the Code of Virginia to clarify that the equipment or facility does not need to be constructed before certification can be granted for purposes of claiming the Pollution Control Equipment and Facilities Sales Tax Exemption.
For example, if one factory has installed an Acme Dust Collection System to gather and dispose of hazardous dust from a production process, with DEQ clearance for the tax breaks, another company making an identical installation has to go through the entire review process. It is not like the sales tax holiday where there is a list of what is and isn’t taxable. Adding to the fun, the exemption decision comes after the work is done and the taxes start being paid, so it’s a matter then of seeking a refund.
That request for a list of standard equipment or facilities that have been approved before and would likely be approved again has long been requested by groups like the Virginia Manufacturing Association. It sparked a six-page letter from DEQ Director David Paylor detailing numerous reasons why it hasn’t done so. You will find that near the end of the report in Appendix L.
Even when a company is spending money to protect the public from possible pollution, investments made at the mandate of government, some in government still want to collect sales tax up front and an annual pound of property tax flesh forevermore. More and more in Richmond are among those Winston Churchill described as considering private enterprise “a cow they can milk.”
There was this in the JLARC text, arguing against the exemption:
While the pollution control equipment exemption helps businesses defray part of the costs of complying with federal environmental regulations, it may not be an efficient and effective tool for reducing pollution. Research suggests these subsidies violate the “pollution payer principle,” which requires the pollution emitter to bear the cost of managing or reducing pollution. The exemption instead passes the cost on to society in the form of reduced tax revenues. Exemptions and other subsidies may also encourage the use of pollution control equipment instead of the adoption of newer, less polluting production technologies and practices. Exemptions and other subsidies, which reduce costs of production, may encourage businesses to produce more, which results in more pollution than would occur without the subsidy (Jenkins and Lamech 1994; Goulder and Parry 2008).
And in its response to that part of the draft report, causing one to wonder if this is really why DEQ won’t make this process any easier, one finds this over Paylor’s signature:
While “passes the cost on to society” may be correct on a macro level, the impact of the lost revenue resulting from the exemptions is borne by the people of the Commonwealth and its localities. The sales tax exemption in §58.1609.3.9 impacts the Virginia revenue directly once per project, and property tax exemption takes money from the coffers of Virginia localities continually, every year the property continues to meet the definition in §58.1-3660. The funds that are lost by state and local government to the exemptions are either made up from other sources (i.e., other taxpayers), or result in fewer government services being provided to the citizens of the state and localities.
Some of the hostility to this exemption may flow from a recent General Assembly decision to stretch it beyond its original purpose and apply it to to renewable energy equipment, which is neither mandatory nor dictated by environmental regulations and generates great profits. But that’s another story, one not touched on by JLARC. Sacred cows are not milked at all.
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