Bacon's Rebellion

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Regarding Prince William’s Computer Tax…

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by

James A. Bacon
in

by Stephen D. Haner

The Prince William County Board of Supervisors yesterday voted to maintain a special tangible personal property tax rate on “programmable computer equipment” used in a business, providing a live and real-world example to continue our discussion on tax preferences and other incentives used to lure and keep businesses.

The general personal property tax rate in Prince William County is $3.70 per $100 of value, with the value basically set as the purchase price. Individuals pay the tax on cars, trailers and boat, but businesses pay annual property taxes on just about all their tangible goods -– furniture, art, machinery and tools, etc.  State law says that the tax rate on business property cannot exceed the rate on personal property (and that all by itself makes Judge Dillon a hero in my book).

About twenty years ago the leaders of Prince William, seeking to lure the computer industry (and I bet the industry proposed it first), lowered the tax rate to $1.25 on computer equipment. As far as I can tell the provision is uniformly available to any and all businesses with computers, which these days is about all of them. But of course it has proven very attractive to the data center industry.

This became news because Corey Stewart, the chairman of the board and a U.S. Senate wannabe, proposed ending the special lower tax rate, in effect tripling the tax on all the business computers in the county. He further proposed to use all of the additional revenue produced thereby to finance a modest reduction in the real estate tax rates – something he then advertised to the voters (oops, taxpayers) in a county-financed mailer.

I just noticed Jim’s post on Amazon. The competition for tech investment, of course, provides a huge additional headwind to Stewart’s idea. But here’s my take on the proposal, and feel free to challenge me.

As long as the county had made no explicit promises to data businesses as they located or expanded in Prince William, it is fair to question whether the preferential rate should be permanent. Prince Williams’ general property tax rate is still lower than that of surrounding localities. And it already automatically depreciates the cost basis behind the tax, so as an asset ages the tax bill goes down.

Stewart’s big mistake was to use the additional revenue to lower the real estate tax by a penny, a proposal that smacks of political pandering (in an election year, imagine that). Republicans who complain that businesses pay too few taxes are in vogue these days.

It would have been so much more effective and fair to propose to lower the overall tangible property tax rate instead, especially to set a slightly lower rate for all business property. After all, individuals still get part of their car tax paid by the state (the Gilmore Switcheroo), but the full tax falls on any business vehicle. Trade a specific preference for one favored investment for an incentive for all investments.

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13 responses to “Regarding Prince William’s Computer Tax…”

  1. LarrytheG Avatar
    LarrytheG

    business taxes become expenses and they get passed on to customers. If the business is local – it just becomes an addition to the sales tax but if the company is selling products and services in competition with companies in other jurisdictions – a higher tax boosts the price of the product/service in relation to competitors in other jurisdictions that don’t have that tax.

    The idea that we’d tax businesses to pay for infrastructure and services for citizens – in effect a subsidy – is dumb but then a lot that comes out of Stewarts mouth these days has that flavor.

    1. TooManyTaxes Avatar
      TooManyTaxes

      Bingo. To the extent the market allows businesses to recoup all, more than, or less than, the amount of a local tax, the business could be disadvantaged vis a vis similar businesses in neighboring markets without the tax at issue. Higher prices may equal fewer sales. But that’s probably short-term in occurrence. Over the longer pull, a lot of studies have shown the higher-taxed business might well move or pay less rent, at least in real terms. The long-term economic incidence of the tax probably rests with owners of real estate.

  2. LarrytheG Avatar
    LarrytheG

    I’d be curious to hear Steve’s view of sales tax on services…

  3. idiocracy Avatar
    idiocracy

    Something special about Prince William County where businesses don’t pay real estate taxes?

    Of course not–they all do, whether they own or rent.

    But somehow that just keeps getting overlooked in every analysis of this issue that I’ve read, including this one.

  4. Steve Haner Avatar
    Steve Haner

    Where did I say they don’t pay RE taxes? There is no special rate for any computer firms or other businesses, so it really wasn’t relevant to a discussion of business personal property taxes.

  5. Mom Avatar
    Mom

    I’m more than a little familiar with this so let me see if I can answer some questions or provide some insight.

    The initial proposal some time ago was to double the “programmable computer equipment tax” to $2.50 from $1.25 (the next lowest jurisdiction at the time was Loudoun at $4.20). As there was no basis for setting the initial rate in 1999 that anyone could recall, the new rate would still be 40% lower than the nearest competing jurisdiction.

    The thought was to take the $19 million in additional revenue and portion out $11.8 million to offset two cents on the real estate rate (which would benefit the data centers as well as residential properties), $1.8 million to raise the BPOL threshold to $1 million thus exempting 83% of Prince Williams businesses while maintaining the lions share of the BPOL revenues from the remaining, mostly big box, businesses; and send the remaining millions directly to the school division. Corey screwed up by not properly messaging it and going for a tax rate too far. In most circumstances a compromise would likely have been hammered out but the Prince William BOCS is simply too much of a dysfunctional shit-show to accommodate compromise.

    Larry, the premise that data centers consume no public services is flawed. Generally they consume significant fire and rescue resources and place a significant drain on power and water resources for which they (unlike the residents) are able to negotiate significantly lower rates and require construction of additional infrastructure on the public dime to their doorsteps, a particular force main project comes immediately to mind.

    Idiocracy, your question about real estate taxes is timely and interesting one. Up until two years ago, data centers in Prince William paid significantly lower real estate taxes based on significantly lower assessments than in Loudoun. The same remains true today for a vast majority of those data centers. The curious thing that has come to light in recent weeks is that the newest data centers (made operational in the last 24 months) are being assessed by Prince William at a rate per square foot 400-900% higher than their pre-existing compatriots. There is also an outlier data center which leased out or sold its facilities two years ago that has seen it’s assessment climb from $83 million in 20176 to $132 million last year and $209 million this year, 250% growth in two years with no change in the property.

    In that last part lies the true rub and the problem now facing Prince William County. Like any reasonably sophisticated business, the data centers locating in Prince William did reasonably thorough due diligence before siting the data centers, due diligence that included an analysis of the expected tax burdens including the real estate tax. Imagine the shock and horror of the head bean counters when they were presented with a real estate tax bill (as was the case of one of the new ones) of $2+ million when the expected bill was on the order of $450 K. As one might imagine, the reaction by the data centers were swift and appeals of their assessments were immediately filed. My guess is that based on the documentation I am sure they have (in conjunction with the secret and seemingly shady way the county does real estate assessments), the data centers will be successful in their appeals be the appeals heard by the Board of Equalization or the Circuit Court. As the County’s CXO has baked those real estate tax revenues into the adopted FY19 budget, Prince William County will then have a $8-20 million dollar hole in the budget to fill. I think we all know whose taxes will increase to fill that hole.

    Everything clearer now?

  6. LarrytheG Avatar
    LarrytheG

    well. MOST localities like Prince William’s budget is largely for schools and public safety for citizens… My bet is if you look at how much residential “uses” county-funded services and compare to other types of service-users .. businesses, including data centers.. non use more than what residential does and on a real-estate tax basis – we pretty much know that real-estate taxes, as well as personal property don’t fully fund the budget.

    So.. I’m arguing that you don’t give them breaks AND you don’t penalize them – just let them do their thing like other businesses.

    1. Mom Avatar
      Mom

      Well I guess we are in agreement then, the problem is that Prince William does give them a break and in so doing, penalizes everyone else. The Prince William difference is that, until recently, it was the only jurisdiction with such a bi-furcated rate drawn to incentivize the data centers, even though they didn’t exist at the time the rate was drafted.

  7. Steve Haner Avatar
    Steve Haner

    I had not heard anything about the real estate tax side of this, which is indeed highly relevant after all. Glad I gave you a reason to fill us in. Based on that brief synopsis I agree those appeals apparently have merit and if the county is not being uniform in its assessments there will be damage to its reputation. Who do they think they are, Arlington?

    I’m glad there was at least some discussion of using the revenue to lower some other business tax.

  8. LarrytheG Avatar
    LarrytheG

    that’s literally the govt picking winners and losers, but isn’t that essentially what the region is attempting to do with Amazon?

    In other words.. the motivation is to offer incentives of some type or kind to attract a type of businesses deemed “good” for the region or locality?

    1. idiocracy Avatar
      idiocracy

      @SteveHaner: That was my point–if the revenue from raising the data center BPOL tax is used to lower the RE tax it benefits all real property owners (and renters) in the county, business or residential.

      It might be said that the current tax structure favors data center operators at the expense of other types of businesses.

      1. Mom Avatar
        Mom

        You win a cookie and are far more intelligent than the majority of the PWC BOCS. (Don’t get a big head however as my brain-damaged dog is more intelligent than a majority of the PWC BOCS)

      2. LarrytheG Avatar
        LarrytheG

        The BPOL tax itself increases expenses on business though who has to pass that cost on to their customers which can put those businesses at a competitive disadvantage against businesses that do not have a BPOL tax.

        In my view – a better, and more fair way of having those who need infrastructure and services “pay” for them is not through increased prices from BPOL but from expanding the sales tax to include services – like we already tax goods.

        Businesses don’t “subsidize” residential. They just pass that cost on to customers. It’s not a question of who pays – the customers pay. But is the tax a fair tax that applies equally to all businesses without penalizing certain kinds of businesses – and industries?

        Is there any good justification for taxing different businesses and industries with different tax rates in the first place?

        A VAT… a tax on consumption, in my view, puts the tax where it ought to be and holds harmless – businesses – and permits them to be compete and remain viable.

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