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