Bacon's Rebellion

Democracy Thrives in Sunlight

Virginia’s Business Tax Climate: Down to 27th Best

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by

James A. Bacon
in ,

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Governor Terry McAuliffe is traveling overseas at the moment in search of foreign investment in Virginia. His job of selling the Old Dominion is made none the easier by a new report issued by the Tax Foundation. In a ranking of which states have the most competitive business tax regime, Virginia tumbled to the lowest level in living memory, 27th place.

As Tim Wise observes in his Growls blog, Virginia’s business tax climate has eroded each year from 2012 when the state ranked 23rd.

I’m old enough to remember when Virginians could debate whether or not it was fair to describe the commonwealth as a “low tax” state. I think that argument is over. A better question now, given the trajectory of our political economy, is how many years will it take to join the ranks of Maryland, New Jersey and New York as a high tax state.

For what it’s worth, Virginia scored best for its corporate tax rate (6th best) and sales tax (6th best); worst for its personal income tax rate (39th best) and unemployment insurance rate (37th best); and in the middle of the pack for property taxes (26th).

To respond to the obvious retort to this news, yes, there’s a lot more to a state’s business climate than its tax rate. If high taxes are invested productively and provide a high level of amenities and services, the net result can be beneficial to economic growth — a very big “if.” Another caveat is that the primary determinant of a state’s economic performance in the short run isn’t its business climate but its business mix. Every state with a major oil-and-gas industry right now, for instance, is doing well regardless of other considerations. But the evidence shows that over the long run lower tax states out-perform higher tax states on average.

At present, it’s easy to blame Virginia’s economic woes on sequestration and the squeeze on federal employment and contracting in Northern Virginia and Hampton Roads. But the loss of economic dynamism preceded sequestration by a decade or more. Virginia has lost its mojo. And the decline in performance, coincidentally or not, has overlapped with a decline in tax competitiveness.

— JAB

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10 responses to “Virginia’s Business Tax Climate: Down to 27th Best”

  1. jwgilley Avatar
    jwgilley

    Looks like VA is still ahead of Maryland but behind Pa, WV, Kentucky, Tennessee and NC? That is because we have become addicted to federal spending. And it is not all defense spending either. Over the past ten years Virginia lost more than 50 manufacturing plants in Southside and Western Virginia and at the same time federal spending for SS, Medicare, Medicaid and college loans has risen dramatically making western Virginia even more dependent on federal spending than say Tidewater.
    Yet five governors before the current one never had an economic development vision or plan for Virginia in the 21st Century. And McDonnell was the worst one of all with his Rube Goldberg tax schemes for transportation etc. and his so called funding 100,000 more college graduates. Hopefully the current governor will lay out a vision soon and that could be his legacy.

  2. larryg Avatar
    larryg

    re: ” federal spending for SS, Medicare, Medicaid and college loans has risen dramatically making western Virginia even more dependent on federal spending ”

    not understanding the point here.

    Virginia is much more dependent on Federal spending for the military.

    SS and Medicare Part A are funded from FICA taxes not general revenues.

    Medicare Part B is funded from general revenues but not sure how Virginia is in any different situation on that issue than other states.

    MedicAid – we are one of the stingiest states in the Union – and MediAid is totally voluntary. We can elect to not participate in it …

  3. NoVaShenandoah Avatar
    NoVaShenandoah

    The theory, and valuations, say that low taxes are the key to growth. Empirical evidence says that a sound infrastructure, including transportation/communications, an extensive network of universities and research facilities produce strong and sustained growth. Obviously the theory is flawed. Just as obviously these valuations are irrelevant.

    As for Virginia’s problem: yes, we are dependent on federal spending. SO WHAT!? We need to accept that it is a big part of our economy and use it as a basis for the economic plans we lay down. We need to stop pretending that we can rely on a different industry, since unlike TX we don’t have oil (friendly reminder: Texans did not have a hand in that). We also need to invest in infrastructure (that means spending money which includes taxes). After all, without the investments in Tysons Corner, Balston & Crystal City, Virginia would be indistinguishable from Mississippi.

  4. TooManyTaxes Avatar
    TooManyTaxes

    As I have written on many occasions, one of Virginia’s biggest problems is that it treats rights in dirt as being more valuable than any other property rights. We subsidize real estate investments by building transportation facilities where they will enable development, rather than where they will produce the greatest return on investment in terms of reduced traffic congestion and improved safety.

    Despite clear evidence NoVA needs more transportation capacity running in an east-west direction, there remains a strong likelihood a large segment of the Outer Beltway will be constructed. Some landowners are still reeling after the Loudoun County BoS turned down their development plans for traffic reasons way back in the first years of the Kaine Administration. They need taxpayers to build them a road and an Outer Beltway segment will fill that bill. MWAA, which has a cost problem at Dulles, is supporting the same road so it can sell or lease land to air freight companies that will magically appear after the road is constructed. Why fix Dulles’ cost structure when taxpayer money can be plundered? And I’m sure there are similar situations in other parts of the state. We simply waste billions of dollars trying to enrich owners of dirt, rather than improve transportation needs.

    Yet elected officials still lack the stones to stand up and say, “Let’s just build what actually improves the quality of life for Virginians, which, in turn, will attract business development.” Were McAuliffe to do this, it would produce results much better than any economic development plan.

    1. larryg Avatar
      larryg

      re: “rights in dirt”

      is why people who oppose connectivity – win.

      right?

      what would it take to improve the transportation system in NoVa?

      wouldn’t it take – putting new roads and connectors where people who own dirt would oppose it?

      1. TooManyTaxes Avatar
        TooManyTaxes

        I often disagree with the Smart Growth crowd, but do agree that transportation dollars should first be used to address existing problems, be they congestion or safety. In a complex place, such as NoVA, we need a variety of transportation improvements, including roads, intersections and bridges; mass transit; bike lanes and trails; and sidewalks and trails. Route 28 in Fairfax and Loudoun County is a good example of what should be done.

        I struggle to see why Virginia should spend taxpayer money on “build it and they will come.” Just as the landowners who get density from rail stations need to pay heavily towards those facilities, so too should the land speculator who just bought two farms in Loudoun, Prince Williams or points south and west. And when the speculator is not willing to carry much of the costs, it tells me the road will not benefit the general public.

        And, yes, improving transportation in NoVA clearly means “putting new roads and connectors where people who own dirt would oppose it.” But it’s time to get them off welfare.

  5. FreeDem Avatar
    FreeDem

    De-lurking here after a long, long time away. Moved into DC, voting in the DC election, cutting almost all of my ties with Virginia, but I still keep following what’s going on in the state with a morbid fasciation.

    In the last few weeks I’ve had an assortment of random meetings that all seemed to align my concerns. Talking to college administrators from one of Virginia’s top public schools, economic development officials in Fairfax County, and then some folks from VDOT primarily about 460, but other issues as well. Also finished Stephen Nash’s excellent book Virginia Climate Fever on the impacts of climate change on the Commonwealth.

    It’s hard for me not to express concern about Virginia, not just because of the business tax climate. Just sort out the impacts.

    Federal austerity is hitting Northern Virginia and Hampton Roads hard. Hampton Roads is extremely vulnerable to sea level rises and I don’t see leadership at the state or local level to tackle it anytime soon. Hampton Roads itself suffers from being a sort of Pittsburgh on the Atlantic, demographically a rust belt, non-college working class community heavily dependent on the military and the ports. The area has never shown an ability to work together between the various independent cities. The whole area is going to continue to zig and zag from one big flashy economic development project to the next, be it the 460 fiasco to offshore drilling to casinos.

    Until Northern Virginia and the entire DC region addresses affordability it’s going to continue to just compete with the rest of the East Coast megapolis for high income, high education individuals. Projects like the Silver Line and the Columbia Pike Streetcar can make certain TODs possible and make the difference between that individual living in Virginia vs. DC or Maryland, but I don’t think they will be game changers that expand the draw of the localities. Affordability will continue to push out lower income service workers to places like Prince William or Stafford. Those localities aren’t getting development right, we’re building a new generation of exurban ghettos.

    Hampton Roads is sinking, both physically and economically. Northern Virginia becomes more of a gated community with those looking in on the affluence being pushed to the suburbs and exurbs. The decline of coal and the absolute failure of any economic development from the Tobacco Commission are quick indictments of Southwest and Southside Virginia. For rural communities in particular, there’s a growing argument that federal transfers through traditional Social Security, disability, and Medicare artificially inflate the cost of living in those localities (giving Seniors more purchasing power) and shift the labor market toward service jobs (especially in health care) that drive up the cost of doing business for other trade oriented sectors. Locating manufacturing in these rural communities still doesn’t always make financial sense despite the relatively lower cost of living, because they should have an even lower cost of living. Add in problems with a skilled labor force and you’re pretty much dooming everything from Bristol to Lawrenceville.

    There’s some rays of hope for the Charlottesville-Lynchburg-Roanoke-Harrisonburg rectangle. Agriculture in the Valley should continue to be strong, Charlottesville has an advantage with UVA but I don’t think the community is very strong in spinning off the research from the university into actual development, and Roanoke-Lynchburg-Smith Mountain Lake have a decent appeal in retirement, tourism, and some business services. This isn’t enough to power the entire state though, it’s just an area that I think will muddle on doing good enough.

    That leaves Richmond. Any hope there? Affordable compared to Northern Virginia. Even a little bit hip and cool these days. Tysons to Richmond is a little over 100 miles, same from Washington. That’s more than New Haven to NYC, but less than Hartford to NYC. Less than Hudson to NYC. Is Richmond the escape community from DC? But how does that work if DC itself is having a rocky time with austerity? What sets Richmond apart? And even if you start to focus on Richmond, is that enough to help the rest of the state? Or are we all stuck until we get leaders who can fix Northern Virginia and Hampton Roads, both of which have relied far too long on outside help for economic development.

    1. TooManyTaxes Avatar
      TooManyTaxes

      Very interesting comments.

      I do disagree that TOD means lower-priced housing. We first need to separate workforce housing from market-based housing. Fairfax County is mandating 20% workforce housing in all Tysons rezonings. Inside the TOD area, the associated costs are passed along to other tenants to the extent the market permits. Outside the immediate TOD ring, landowners get bonus density for workforce housing.

      Fairfax County is not proposing or requiring the even less expensive affordable housing in Tysons. The land and construction costs are simply too high.

      Since all housing within the immediate TOD areas are going to be located in high-rise, elevator buildings, construction costs are very high and so will rents. Plus one must toss in the costs of the Phase 1 rail district, which are slowly phasing down, but is being replaced with service district tax that will likely increases penny-for-penny with the rail district tax decline. Taxes in Tysons are higher than in many other locations around the county. Moreover, with the higher land prices and improvement valuations in Tysons, rents are going to be higher in order to produce the same level of profit for landlords and builders.

      Short of a huge and continuing economic slowdown, housing prices in NoVA will remain very high – TOD or no TOD.

      1. FreeDem Avatar
        FreeDem

        My point is not that TOD is more affordable housing, it’s that it’s a bidding war for the set pool of high income, high education workers moving into the DC metropolitan area. If that flow is fixed because the federal government is stuck in austerity and there’s no private capital boom in DC, an emphasis on TOD and quality of life in Virginia could make or break the decision of where those workers move to (vs. DC or Maryland).

        The yuppies that in years past may have been fine living in a separated single family housing unit in the suburbs and driving into work, or driving and parking to go grocery shopping, are increasingly changing in their habits. Virginia’s just running to stay in place in keeping an edge in attracting those workers. But Virginia is doing absolutely nothing to increase the overall number of those workers in the DC metropolitan area. They are being lured by the federal government (and various NGOs, consulting firms, lobbying, etc.) and Virginia is just bidding against DC and MD for where they live.

        1. TooManyTaxes Avatar
          TooManyTaxes

          Thanks for the clarification. I understand your argument much more clearly. I agree there should be a choice of urban living in an area as large as the DMV. I recognize the desirability of this type of housing for both empty nesters and young professionals.

          But the long-term stagnant state of wages for many workers, especially those entering the workforce has, IMO, artificially kept many of them in an extended state of being 23. Assuming a recovery that includes broad increases in compensation, which, in turn, causes more households to form, I think suburban/exurban living will increase in number because of schools. Look at the difference between Arlington and Alexandria.

          I don’t think we attract the type of people who will develop or expand businesses. There are a huge number of extremely bright people in this area. But most of them have skills and the mindset to deal with, supply or challenge government.

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