Category Archives: Taxes

Your Tax Breaks at Work

terraces_at_manchester

Terraces at Manchester

by James A. Bacon

The Terraces at Manchester, a 148-unit luxury apartment across the river from downtown Richmond, opened in August. Its amenities include views of downtown and the river, an outdoor pool, a club room, a sky lounge, a rooftop dog park and, of course, an active urban lifestyle. Its cheapest apartment, with a small bedroom, a small bathroom and a living-kitchen area, rents for $1,200 per month.

Thank to an “affordable housing” ordinance enacted in 2014, the developer was able to pocket $2 million in real estate tax breaks over 10 years by renting 15% of the units to individuals making $41,000 a year or less. The company isn’t required to offer reduced rents in exchange for the breaks.

poolNow City Council has activists’ remorse. Councilwoman Ellen F. Robertson, author of the measure, wants to close the “loophole” she designed in the first place. “Once we realized there was a loophole, we decided to revise the legislation to make it more restrictive,” she was quoted as saying by the Richmond Times-Dispatch. “It was unfortunate that we did have a developer that didn’t operate in the true spirit of the law.”

Yeah, right, it was the developer’s fault! He read the fine print. Shame on him!

“We fully complied with the ordinance,” said Robin Miller, one of the principals in the project. However, he added, after the project’s use of the tax breaks were reported last month, his staff has reduced rents for some tenants.

Isn’t that special? Tenants making up to $41,000 (more than the median household income for the City of Richmond) who voluntarily signed a lease, presumably because they found the cost-to-value proposition attractive, suddenly get a break in their rent. Well, that certainly promotes the cause of affordable housing for the city’s lower-income residents!

So, what’s Robertson’s fix? Here’s the T-D’s explanation:

Robertson … said her proposed changes tighten eligibility requirements for developers seeking to qualify. Among the changes the City Council will consider: requiring developers to charge rent proportional to a qualifying tenant’s income and lowering the maximum salary that a qualifying low-income tenant can make up to $31,200, which is 60 percent of the area’s median income.

If the program changes are adopted, the most an individual tenant could be charged is $780 monthly.

Charge rents proportional to the tenant’s income? That sounds like a winner. Imagine how tenants will game the rules on that one (with landlords doing a wink, wink, nod, nod). Say an unmarried couple wants to live in a project qualifying for the tax break. The partner with the lowest income rents the apartment in his or her name, qualifying for a rent reduction. Then the other partner moves in, too, and pays all the utilities and groceries. Trust me, this fix is ripe for abuse.

Here’s an idea: Maybe City Council should stop trying to “fix” the housing market and start acquainting themselves with the law of supply and demand. Instead of passing tax breaks and incentives, maybe it should loosen up zoning restrictions against building new housing stock. If the supply of housing increases faster than the demand, prices will fall.

But what happens, I hear the economically illiterate ask, if builders just build luxury apartments that generate the biggest profits?

Here’s what happens. People moving into the luxury apartments and condos presumably lived somewhere else. They put their properties on the market (or free up apartments for someone else to rent). Someone else moves in, and they create vacancies where they formerly lived. Ultimately, vacancies open up in the lower end of the housing market, creating options that poor people didn’t have before. Here’s the really astounding thing — it doesn’t take any tax dollars, and it doesn’t herd poor people into crime-ridden projects.

Unfortunately, a fostering a free market in housing doesn’t help the politicians. After all, any politician worth his or her salt gets re-elected by “doing something” that proves they “care” (regardless of whether what they do actually works). Even scarier for politicians, their low-income constituents might move out of their district — maybe out of the city entirely — to be replaced by affluent constituents living in luxury apartment who, gadzooks, might vote for someone else!

Sadly, in the war between economic logic and political logic, political logic usually prevails. As the T-D article concludes, Robertson’s proposal is on Council’s consent agenda, an indication that it is considered “likely to receive unanimous approval.”

Is Virginia Ready for Car Tax Reform?

Toyota Prius. Want greener cars? Try reforming the car tax.

Toyota Prius. Want greener cars? Try reforming the car tax.

by Bill Tracy

I was encouraged last week when Sen. Chap Petersen, D-Fairfax, joined the “car tax blues” chorus.* According to the Washington Post, Petersen filed bills proposing  to eliminate the car tax through a constitutional amendment and then giving localities the option of levying a local gasoline tax to make up for the lost revenue.

Many localities given the freedom to tax cars to balance their budgets went over-board with a car “super-tax.” That’s what’s happened in Northern Virginia, where the cumulative tax levy can approach 30% of a vehicle’s original cost over the 12-year average life of a vehicle. Of course, thanks to former Governor Jim Gilmore, the state of Virginia pays much of the local car tax for most residents. Unfortunately, the effect of the state subsidy has diminished as the cost of new cars escalates faster than the capped state payments.

Can you imagine up to $12,000 cumulative car taxes** on a $40,000 Ford F-150, America’s most popular vehicle? Even after Gilmore’s tax relief, the total tax bill still could be as high as $10,000 in NoVa. This compares unfavorably to our neighbors in Maryland and D.C. with a flat 6% excise tax ($2,400).

Parenthetically, Virginia’s car tax relief program does NOT reduce or solve the local car tax issue. It simply means that the state of Virginia, as a stop-gap corrective measure, sends a check to the locality on your behalf to help you cover your car tax bill.

Due to high local car taxes, many Virginians have learned to be modest in their new car selections, or they purchase used cars instead.  As a consequence, we are throttling new car sales.  In addition, the tax functions as a de facto green car penalty. For example, a hybrid typically costs about $4,000 more than an equivalent  non-hybrid. That price premium gets fully taxed.

Auto manufacturers believe that the Obama administration’s 54 miles-per-gallon standards for 2025 will force them to sell more electric plug-in cars to meet their regulatory quotas. California, the largest and most important U.S. car market, already mandates a substantial portion of electric car sales. Former GM executive Bob Lutz speculated that automaker were trying to recoup the cost of unprofitable plug-in sales by jacking up prices on other cars, especially trucks, SUVs and crossovers. Whatever the cause, we are seeing a trend towards more expensive conventional vehicles and more expensive green cars. As the average cost of a new car trends to $34,000 and higher, our current car tax system will prove increasingly painful to Virginia residents.

A year or so back, the McAuliffe administration invited me to submit my proposal for reforming the car tax to Transportation Secretary Aubrey Layne. The secretary nixed it on the logic that the localities, not the state, have ownership of the car tax issue.

To summarize my proposal, I said there is nothing wrong with a modest local car tax. At last count, about 18  states have some form of a local car tax.  I have studied the car tax formulas of many other states, and I strongly feel that we could devise an improved formula for Virginia.

As a fiscal “conservative” fearing another temporary, stop-gap solution, I am reluctant to totally kill off our car tax. As a possible alternative, perhaps we could move to a life-time 6% upper limit on the (tax deductible) local car tax in addition to the normal 4% Virginia state tax, for a total 10% total car tax. Perhaps give the buyer the option to pay a lump sum on the local tax.  I believe the lump sum approach is how Georgia weaned its localities from a prior “super-tax” approach.

I also agree with Petersen, and a related proposal by Sen. Frank Wagner, R-Virginia Beach, that allowing localities to charge more for local gasoline taxes at the pump might be a good idea. But, holy cow, let’s not give localities carte blanche on that.

Am I too bold to suggest that reducing the car tax would stimulate enough new car sales that localities might come out ahead? Only if we play our cards right, with good planning.

Bill Tracy is a retired engineer living in Burke, Virginia.  He owns a 2006 Prius and a 2009 Minivan (both white).


* The Virginia Car Tax Blues

(Parody song by Bill Tracy, 2013, to the tune White Christmas.)

 I’m dreamin’ of a white Prius, with every car tax check I write,
Where the hybrids pay more, and big cars pay less, 
To use, Virginia’s bumpy roads.

I’m dreamin’ of a new Prius, but I don’t think it makes sense here.
Low de-pre-ci-a-tion, high val-u-a-tion,
You pay, more car tax every year.

Now thinkin’ of a used Chevy, just like the ones Gramp used to drive.
If you think that’s crazy, you’re right!
But may all your Priuses…be White. 

** Calculations for 5% annual car tax, with and without 30% tax relief below $20,000 value, for a $40,000 vehicle at a low 15% depreciation rate. Cumulative total tax for 12-year ownership. Includes 4.15% state sales tax on cars.  Assumes no further local car tax rate increases.

Tracking Virginia’s Quality of Life

Source: 2015 State of the Commonwealth Report

Source: 2015 State of the Commonwealth Report, (Click for larger image)

by James A. Bacon

Virginia’s economy, dependent upon federal spending, has under-performed the national economy since 2010, and will continue to do so in 2016, according to the Virginia Chamber of Commerce’s 2015 State of the Commonwealth Report. But lead author James V. Koch, president emeritus of Old Dominion University, does find a silver lining:

Once we adjust for differences in the cost of living, the spendable “real” income of most Virginians exceeds that earned by typical residents of the cities along the East Coast to whom we are frequently compared. Our dollars go further and our money has more purchasing power than that of our competitors. The moral to the story: If you’re concerned about your standard of living, there’s hardly any better place to live than Virginia.

Gini coefficient for selected Virginia localities. Source: 2015 State of the Commonwealth report

Gini coefficient for selected Virginia localities. Source: 2015 State of the Commonwealth report

The most common yardstick for standard of living is median household income, in which 50% of households earn more and 50% earn less. But that indicator misses a lot. As Koch points out, it does not take into account the cost of living. Thus, median household incomes in New York City are high — but so is the cost of living, canceling the advantage of higher incomes. As Koch also notes, median household income doesn’t tell us how equally those incomes are distributed. If incomes are hogged by the so-called top “1%,” that’s not much comfort to the other 99% of the population.

The Virginia Chamber and the Strome College of Business at ODU present the report with the idea that “thoughtful discussion of the challenges confronting Virginia can make it even a better place to live.” So, kudos to Koch for contributing to a deeper understanding of how to measure a community’s quality of life.

But the State of the Commonwealth report is only a first step. I would argue that further adjustments to quality-of-life metrics are needed to create a meaningful basis for comparing communities.

  1. Adjust for taxes. We should be looking at disposable income — income after taxes. Higher incomes push households into higher federal income tax brackets. Also, some states and localities soak up a much larger share of personal income than others. Virginia state/local government imposes a moderate-low level of taxation as a percentage of income upon its residents, making more disposable income available. This data is readily available and should be relatively easy to calculate.
  2. Adjust for transportation. Some regions have more efficient land use patterns than other, allowing for more varied transportation options, such as walking, biking and mass transit. As a consequence people in some communities spend a much larger percentage of their income on the cost of owning and operating automobiles without adding to their quality of life. Sprawling development in Virginia detracts from the standard of living. The H&T Index (housing & transportation) attempts to measure this effect. Perhaps there is a way to incorporate it into a more comprehensive quality-of-life measure.
  3. Adjust for time. People assign a monetary value to the time they spend commuting, which is time they could be doing something more productive or enjoyable. Localities vary widely in the amount of time residents burn moving from location to location. The Census Bureau captures this metric and a value assigned to peoples’ time.
  4. Adjust for education. Although government pays for most K-12 education in the United States by means of the public school system, Americans attach a monetary value to the quality of education, as seen by the vast sums they expend on private schools or the premiums they pay to live in better better school districts. Thus, the high quality of schools in, say, Northern Virginia would offset to a significant degree the frustration of longer commutes and higher transportation costs.

The conversation could be expanded even beyond those measures to include quality-of-life metrics relating to arts, entertainment and culture; the affordability and accessibility of higher education; and the comprehensiveness of the social safety net.

As we think about how to build more prosperous, livable and sustainable communities, it is important to expand the conversation beyond maximizing income, as desirable as that is, to moderating taxes, creating more efficient human settlement patterns, and improving the quality of education, with all the complex trade-offs those objectives entail.

When’s the Last Time a Virginia Governor Proposed a Business Tax Cut?

mcauliffeGovernor Terry McAuliffe announced yesterday a package of tax cut and credit proposals to improve Virginia’s business climate and stimulate economic growth.

A proposed reduction in the corporate income tax rate from 6% to 5.75% would generate nearly $64 million in tax relief for Virginia businesses over two years, while other proposals would create incentives for research and development and early-stage financing, including:

  •  Creation of a new R&D Tax Credit with a $15 million cap to benefit companies spending more than $5 million annual in research spending.
  • Increasing the statewide cap for an existing R&D Tax Credit by $1 million to $7 million.
  • Increasing the cap on Virginia’s Angel Investor Tax Credit by $4 million to $9 million.

The proposals come at a time when Virginia’s ranking in national business climate surveys has fallen steadily from a once-lofty perch. In a press release, McAuliffe specifically cited competitive pressure from North Carolina, a perennial rival in the competition for corporate investment, which has reduced its corporate tax rate from 6.9% to 5% in the past two years. The rate is scheduled to drop to 4% next year.

Bacon’s bottom line: While these tax cuts may be regarded as incremental and “small ball” in scale, they are cuts. Virginia has seen little but tax hikes over the past decade. Add up these initiatives, and they amount to $84 million. When’s the last time Virginia cut business taxes by $84 million? I can’t even remember. Good for McAuliffe.

One more point: The governor, who loves to wheel and deal, could have proposed an increase to the Governor’s Opportunity Fund, used to sweeten corporate investment deals, but he didn’t. As his press release notes, “The broad-based tax proposal will provide significant benefits for all corporations rather than selecting winners and losers.” Once again, good for him.

Update: Michael Cassidy with the Commonwealth Institute reminds me that there have been several business tax cuts/credits over the past 10 years: elimination of the estate tax ($140 million annually), cutting estate tax for multi-state manufacturing companies ($59 million annually), sales tax exemption for data centers ($7 million annually), and film tax credit expansion ($6.5 million annually).

— JAB

Virginia’s Tax Code the 35th Most “Unfair”

Source: Insitute for

Source: Institute on Taxation and Economic Policy. (Click for larger image.)

On the subject of state and local taxes (see previous post), a 2015 report by the Institute on Taxation and Economic Policy says that Virginia has the 35th “most unfair” state and local tax system in the United States. By “unfair,” the Institute means regressive — poor households pay a larger share of their income in state and local taxes than do affluent households. As seen in the chart above, the lowest 20% the lowest-income families in Virginia pay 8.9% of their income, while the top 1% of richest families pay 5.1%.

Presumably, 35th most unfair is equivalent to the 16th most fair. In other words, despite the pro-business slant of Virginia’s tax code, it does not load as much of the burden on low-income citizens as the codes of other states.

I would expand the definition of what constitutes a “fair” tax code. The “fairest” tax code is that which does most to stimulate job creation. A weak labor market is the major explanation for the lack of wage growth in the United States. A tax regime that supports job creation, like that proposed by the Thomas Jefferson Institute for Public Policy, arguably would indirectly help wage growth, which would do far more to help the bottom 20% than tweaking the tax code to make it more progressive. A progressive tax code that inhibits job creation does no favors to the poor.

Update: I have re-written extensive portions of this post. In the original version, I had failed to comprehend that the 35th most “unfair” equated to 16th most “fair.” Thanks to reader “Slowlane” for pointing out the obvious. All I can say in defense of my carelessness is, “Duh!”

— JAB

Job Stimulus through Tax Reform

free_lunchby James A. Bacon

It is an axiom of economics that there is no such thing as a free lunch. Like Isaac Newton’s laws of physics, the adage is universally true… most of the time. Just as Newtonian physics breaks down at the quantum level, however, the free-lunch maxim breaks down in the realm of taxes. Some taxes depress economic activity so much that replacing them with less harmful taxes stimulates economic growth and job creation while remaining revenue-neutral.

Finding the right combination of taxes is the animating force behind the four-year effort of the Thomas Jefferson Institute for Public Policy (TJI) to restructure Virginia’s tax code. Working with Chmura Economics & Analytics, President Michael Thompson introduced the idea in 2012 and has been refining the approach ever since. The Institute has just published an update.

In the past year, Thompson has been talking to groups representing business, municipal government and tax reform to identify a restructured tax system for Virginia that would be not only economically beneficial but politically palatable. The approach that emerged from the years-long process would eliminate three counterproductive business taxes — the Business Professional and Occupational License tax, the Machine & Tools tax, and the Merchants Capital tax — and replace lost revenue by expanding the sales tax to encompass currently exempt services. The health care sector would remain exempt.

Of the 23 scenarios examined, the one that produced the most positive economic benefits was “Scenario 5,” which included the reforms noted above plus eliminating the state’s bottom two personal income tax brackets (up to $5,000) and shaving the other two brackets by 9.25%. According to Chmura, the results would be:

  • 79,000 increase in private employment
  • $287 million increase in investment
  • $2.85 billion increase in real disposable income
  • $8.4 billion increase in state GDP

One important caveat: Thompson describes the economic model as a “dynamic tax/spending” model. If I correctly understand the meaning of that phrase, the model achieves revenue neutrality by including in its forecast revenues generated by the economic growth. While I prefer dynamic analysis to static analysis (basing tax policy on the assumption that changes in tax policy have no effect on real-world economic behavior), the approach does entail an extra layer of assumptions, which in turn introduces an added element of uncertainty to the analysis.

If Governor Terry McAuliffe wants to put Virginians back to work, tax policy may be the biggest lever he has at his disposal. He needs to give the idea serious consideration.

The Case for a Regional Approach to Economic Development

warehouseby James A. Bacon

The economies of 17 Virginia localities and one North Carolina locality in the Hampton Roads region are more inter-related than they were 10 years ago. Almost two-thirds (more than 65%) of all workers in the metropolitan statistical area commute to jobs outside the jurisdiction where they live — up from less than 60% in 2005, according to a new report, “Our Jobs Are Also Your Jobs,” published by the Hampton Roads Economic Development Alliance.

That fact has profound implications for economic development strategy, argue the report’s authors James V. Koch and Vinod Agarwal with Old Dominion University. Political leaders of Hampton Roads jurisdictions act as if “the only really good economic development project is the one that is located squarely inside their own city our county,” they write. What that assumption overlooks, however, is the extent to which the economic impact — and benefits — are diffused throughout the metropolitan economy.

Koch and Agarwal gave the hypothetical example of a new warehouse facility built in Suffolk to serve the growing cargo business flowing through the ports in Norfolk and Portsmouth. Suppose that warehouse employs 250 people averaging $50,000 annual pay (including managerial salaries but not including fringe benefits). Here is how they predict those jobs, income and sales tax revenues would be distributed geographically.

diffused_impact

In this example, while Suffolk would enjoy the biggest impact, the benefits would be broadly distributed through the region. Suffolk residents would reap about one-third the jobs, income and sales tax revenues. Yet, to pick a different locality, the project also would create 20 jobs for Virginia Beach residents and generate $40,000 a year in additional sales tax revenues.

Moreover, the Suffolk warehouse would spend money on products and services from area businesses, which also would be distributed geographically.

“When more than 65 percent of individuals cross city and county lines to travel to their place of employment, it is inevitable that economic benefits will be widely diffused,” write Koch and Agarwal. “The moral to the story is that regional cooperation and regional economic development efforts make sense. … Parochial approaches to economic development are not likely to achieve great success — if success is interpreted to mean capturing the economic benefits that are generated by a new or expanded business. … The economic success of one city or county soon becomes another’s.”

Bacon’s bottom line: What applies to Hampton Roads applies to every other metropolitan region in Virginia. Nowhere in Virginia do political boundaries coincide with economic boundaries. From a regional perspective, economic development is best pursued as a regional enterprise.

Koch and Agarwal highlight an important insight, although they do overlook a critical facet of economic development that will not change without a dramatic re-write of Virginia’s tax code: The locality where a new warehouse, manufacturing plant or corporate facility locates captures 100% of the property tax revenue. Because property tax is the largest single source of local revenue in Virginia, local governments are highly motivated to see to it that a particular project lands within their boundaries. Unless subsidies are offered to attract the investment, such facilities are a big winner for the locality in question because business operations require little in the way of public services. Indeed, the fact that 2/3 of a company’s employees are located outside the jurisdiction means the locality in question is saddled with the cost of providing educational and other government services to only 1/3 of the workforce. Thus, ironically, the more economically interdependent the localities of a region are, the more local governments are incentivized to capture the tax benefits of bagging a corporate investment.

The only way to change that dynamic is to change the tax code to allow for (or require) the regional sharing of revenue from commercial and industrial property. And that will never happen because any change would create winners and losers, and the losers would fight like hell to thwart it.

But the Koch-Agarwal paper does make a sound argument for supporting regional economic development organizations like the Hampton Roads Economic Development Alliance. Fortunately, most Virginians get it, and a regional approach to economic development predominates in the Old Dominion.