Category Archives: Taxes

A Tax Structure Finely Tuned for… a 20th Century Economy

virginia_business_tax_burden

Virginia business tax rates. Image credit: Tax Foundation, KPMG

A new study by the Tax Foundation and KPMG of state business taxes differs from previous studies, which look at average levels of taxation, by examining how state tax structures affect different types of business. The big conclusion from “Location Matters: The State Tax Costs of Doing Business“: Firms experience dramatically different tax rates because their exposure varies to different state and local taxes.

The study’s analysis of Virginia’s tax structure suggests that established companies experience much lower overall tax burdens than new companies. The Old Dominion ranks second best in the country for mature, labor-intensive manufacturing operations but only 35th for R&D facilities.

Bacon’s bottom line: I have frequently decried the lack of entrepreneurial dynamism in Virginia as a root cause for our sluggish economic performance. There may be many reasons for Virginia’s mediocre growth record in recent years but, based upon the data shown in the chart above, one of them is certainly the structure of business taxes.

In every category analyzed, new firms experience higher effective tax rates than mature firms. Just as important, look at the comparative ratings. Virginia ranks No. 2 in the country for mature, labor-intensive manufacturing companies — neither a growth sector, nor a particularly high-paying sector — but only 35th for R&D, the kind of economic activity every state covets. If we wanted to design an economy for the 20th century, not the 21st, we’ve done a pretty good job.

(Hat tip: Larry Gross)

The Next Battle in Virginia’s Sharing Economy: Airbnb

airbnbby James A. Bacon

The fracas in Virginia over Uber and Lyft has settled down. The two “transportation network companies” have submitted to regulation requiring background and safety checks of drivers, and nearly 19,000 vehicles have registered with the state, according to the Richmond Times-Dispatch. The next legal front in the sharing economy is likely to focus on Airbnb, the company that enables individuals to rent out houses, rooms and apartments for short-term lodging.

The problem, according to the Commonwealth Institute, is that Airbnb does not collect and remit the lodging taxes on these rentals, meaning that local governments could be losing millions of dollars in tax revenue.

Thousands of Virginians have signed up on Airbnb to offer accommodations to paying visitors. A check this morning showed 692 rentals being offered in the City of Richmond as the UCI Road World Cycling Championships approaches, 288 rentals in beach destination Virginia Beach, 489 rentals in the college town of Charlottesville and more than 1,000 rentals each in Fairfax County, Arlington County and Alexandria near the nation’s capital. Charges can vary from $37 per night for a “very, very rustic cabin by the river” in Hinton… to $225 per night for a three-bedroom house in Blacksburg during football weekends… to $2,000 per night for a three-bedroom house in Old Town Alexandria.

The state requires hotels, motels and campgrounds to collect a sales tax of 5.3% to 6% for reservations of less than 90 days. Many localities also collect a local occupancy tax, which in the case of Richmond, Henrico, Hanover and Chesterfield amounts to 8% to cover debt from building the Greater Richmond Convention Center. Other communities use the occupancy tax to support local convention and visitors bureaus (CVBs) and tourism initiatives.

Airbnb is not collecting taxes in Virginia. According to the Commonwealth Institute, the company suggests that renters charge and remit occupancy taxes on their own. But the taxes can be confusing for casual Airbnb hosts to understand and localities are not set up to monitor and enforce collections on casual rentals.

Earlier this year, however, Airbnb reached an agreement with Washington, D.C., to collect and remit occupancy taxes on all of its rentals in the District. That follows agreements in Portland, San Francisco and Wake County (Raleigh, N.C.) to do the same.

Bacon’s bottom line: I can see why the hospitality industry is up in arms over Airbnb. Airbnb rentals under-price hotels and motels offering comparable accommodations but they don’t contribute to the collective efforts of CVBs to market and promote their metropolitan region as a destination. Forcing casual renters to handle the paperwork would be a deal breaker for many, but Airbnb’s administrative systems should be able to execute the task of remitting taxes with little difficulty. I agree with the Commonwealth Institute that the Commonwealth of Virginia and its localities should seek the same kind of tax-collection deal that North Carolina and several of its jurisdictions have struck with the company. Create a level playing field and may the best competitors win!

Alpha Natural Resources: Running Wrong

Alpha miners in Southwest Virginia (Photo by Scott Elmquist)

Alpha miners in Southwest Virginia
(Photo by Scott Elmquist)

 By Peter Galuszka

Four years ago, coal titan Alpha Natural Resources, one of Virginia’s biggest political donors, was riding high.

It was spending $7.1 billion to buy Massey Energy, a renegade coal firm based in Richmond that had compiled an extraordinary record for safety and environmental violations and fines. Its management practices culminated in a huge mine blast on April 5, 2010 that killed 29 miners in West Virginia, according to three investigations.

Bristol-based Alpha, founded in 2002, had coveted Massey’s rich troves of metallurgical and steam coal as the industry was undergoing a boom phase. It would get about 1,400 Massey workers to add to its workforce of 6,600 but would have to retrain them in safety procedures through Alpha’s “Running Right” program.

Now, four years later, Alpha is in a fight for its life. Its stock – trading at a paltry 55 cents per share — has been delisted by the New York Stock Exchange. After months of layoffs, the firm is preparing for a bankruptcy filing. It is negotiating with its loan holders and senior bondholders to help restructure its debt.

Alpha is the victim of a severe downturn in the coal industry as cheap natural gas from hydraulic fracturing drilling has flooded the market and become a favorite of electric utilities. Alpha had banked on Masset’s huge reserves of met coal to sustain it, but global economic strife, especially in China, has dramatically cut demand for steel. Some claim there is a “War on Coal” in the form of tough new regulations, although others claim the real reason is that coal can’t face competition from other fuel sources.

Alpha’s big fall has big implications for Virginia in several arenas:

(1) Alpha is one of the largest political donors in the state, favoring Republicans. In recent years, it has spent $2,256,617 on GOP politicians and PACS, notably on such influential politicians and Jerry Kilgore and Tommy Norment, according to the Virginia Public Access Project. It also has spent $626,558 on Democrats.

In 2014-2015, it was the ninth largest donor in the state. Dominion was ahead among corporations, but Alpha beat out such top drawer bankrollers as Altria, Comcast and Verizon. The question now is whether a bankruptcy trustee will allow Alpha to continue its funding efforts.

(2) How will Alpha handle its pension and other benefits for its workers? If it goes bankrupt, it will be in the same company as Patriot Coal which is in bankruptcy for the second time in the past several years. Patriot was spun off by Peabody, the nation’s largest coal producer, which wanted to get out of the troubled Central Appalachian market to concentrate on more profitable coalfields in Wyoming’s Powder River Basin and the Midwest.

Critics say that Patriot was a shell firm set up by Peabody so it could skip out of paying health, pension and other benefits to the retired workers it used to employ. The United Mine Workers of America has criticized a Patriot plan to pay its top five executives $6.4 million as it reorganizes its finances.

(3) Coal firms that have large surface mines, as Alpha does, may not be able to meet the financial requirements to clean up the pits as required by law. Alpha has used mountaintop removal practices in the Appalachians in which hundreds of feet of mountains are ripped apart by explosives and huge drag lines to get at coal. They also have mines in Wyoming that also involve removing millions of tons of overburden.

Like many coal firms, Alpha has used “self-bonding” practices to guarantee mine reclamation. In this, the companies use their finances as insurance that they will clean up. If not, they must post cash. Wyoming has given Alpha until Aug. 24 to prove it has $411 million for reclamation.

(4) The health problems of coalfield residents continue unabated. According to a Newsweek report, Kentucky has more cancer rates than any other state. Tobacco smoking as a lot to do with it, but so does exposure to carcinogenic compounds that are released into the environment by mountaintop removal. This also affects people living in Virginia and West Virginia. In 2014, Alpha was fined $27.5 million by federal regulators for illegal discharges of toxic materials into hundreds of streams. It also must pay $200 million to clean up the streams.

The trials of coal companies mean bad news for Virginia and its sister states whose residents living near shut-down mines will still be at risk from them. As more go bust or bankrupt, the bill for their destructive practices will have to borne by someone else.

After digging out the Appalachians for about 150 years, the coal firms have never left coalfield residents well off. Despite its coal riches, Kentucky ranks 45th in the country for wealth. King Coal could have helped alleviate that earlier, but is in a much more difficult position to do much now. Everyday folks with be the ones paying for their legacy.

Virginia’s Tax on Money

gold_coinBy Steve Haner

You can now walk into a retailer in Virginia (or buy from a Virginia retailer online) and get your gold or silver without having to pay sales tax — but only if you have $1,000 to spend.

House Bill 1648 and Senate Bill 1336, signed into law this year, were companion bills that created a new sales and use tax exemption for gold, silver and platinum bullion. Similar bills had been offered for years without success. Are we looking at another example of a government policy promoting income inequality? To get the exemption, you have to spend at least $1,000. The buyer picking up $250 or $500 of bullion is still being taxed.

Effective July 1 the sales and use tax (5.3 percent in most of Virginia, 6 percent in Northern Virginia and Hampton Roads) was not applied to items which met the following tests:

  • It must be refined to a purity of at least 90 percent precious metal. It can be a bar, ingot or coin – but cannot be artwork or jewelry.
  • The sale price must not exceed 120 percent of the value of the precious metal content.
  • The total transaction, which can include more than one exempt item, must exceed $1,000. That is only one ounce of gold, but it is more than four pounds of silver.

You can read the Tax Department guidelines here. Disclaimer: Yes, I worked in support of this bill on behalf of a Virginia Beach company. The $1,000 minimum purchase matches Maryland’s law and in theory limited the fiscal impact. Actually, I’m convinced Virginia has been collecting very little tax on bullion. It was too easy not to pay it.

More than 30 other states – including the largest – already exempt these popular investment items or have no sales tax at all. Virginia dealers have been required to impose the sales tax on any Virginia buyer, which meant most Virginia buyers purchased their bullion somewhere else to save 5-6 percent. They went to the U.S. Mint, which charges no sales tax, or used out-of-state on-line providers and ignored the requirement to pay the use tax.

The smaller investor, spending less than $1,000, will still be doing that. They will still turn around and walk out of the store or cancel the e-transaction before paying the tax. This market is a perfect example of the impact e-commerce makes when there is any marginal price advantage.

Virginia remains behind the times when it comes to the other (and larger) side of this business – collector coins. The introduced bills also would have exempted legal tender, but that far the Assembly would not go. Yes, Virginia, you tax hard money — another investment item not taxed by 30 or more other states.

Investors in coins do much of their business at large national and regional shows, which fill hotel rooms and restaurants in their host cities for a week – generating plenty of other taxes to compensate for the lost sales tax on the coins. None of those lucrative shows will ever come to Virginia unless the General Assembly takes that additional step and stops taxing money. Virginia collectors and investors in these products (big and small) will continue to bypass Virginia dealers and shop on-line.

Stephen D. Haner is the principal of Black Walnut Strategies.

Shining the Light on Tax Cronyism

cronies

Image credit: The Economist

Virginia has one of the least transparent systems in the country for reporting tax carve-outs for special interests, reports the American Legislative Exchange Council (ALEC) in a report on tax cronyism, “The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth.” While five states report nothing at all, Virginia is one of eight that ALEC classified as “infrequent or incomplete” in its reporting.

The most recent report was in FY 2009. Individual and corporate tax breaks in Virginia amount to $791 million, or more than two percent of the budget, ALEC reports.

ALEC also cites a New York Times study of targeted business incentives, which typically entail tax breaks, that identified 1,125 Virginia grants to companies. While Virginia’s tax carve-outs pale in comparison to, say New York’s (more than 50,000 grants to companies), it is massive compared to Wyoming (only 8) or even neighboring Maryland (260).

“Cronyism,” writes ALEC, “refers to the use of public policy to benefit a specific industry, firm, or individual, as opposed to setting broad and generally applicable rules and polices that apply to society as a whole.” While tax preferences can be used to induce corporations to invest in a state, the cumulative result is to shift the tax burden to existing companies with less political clout, thereby, inhibiting their growth of those firms — and the state economy as a whole.

Government does not know which firms will provide innovation, employment growth and tax revenue growth for the state. Empowering government to cater to a few high-profile firms while not fixing underlying problems in the state tax code is poor policy, as policy makers and bureaucrats are unlikely to outperform diversified market performance relative to their narrow picks.

ALEC advocates eliminating special tax carve-outs in a tax-neutral fashion by decreasing general corporate tax rates. If cronyism cannot be eliminated entirely, inducements should be restructured from the tax breaks (which tend to be permanent and rarely subject to review) to budgetary outlays (where the spending is subject to annual review). At the very least, tax cronyism should be subject to rigorous reporting standards to ensure transparency.

Bacon’s bottom line: Yeah, yeah, I know, ALEC is a tool of the evil oil-guzzling Koch Brothers and, therefore, everything it says and does is ipso facto tainted and illegitimate. But can we, for once, focus on the merits of ALEC’s arguments instead of the provenance of its funding? I think ALEC’s tax principles are sound, and the evidence suggests that Virginia’s practices fall far short of openness and transparency.

Who Are the Real Fiscal Conservatives?

Source: "Truth and Integrity  in State Budgeting"

Source: “Truth and Integrity in State Budgeting”

Paul Volcker is one of the real heroes of the modern economic profession. During the late 1970’s and early 1980’s he conquered the “Great Inflation” by taming the growth of the money supply. Interest rates rose to levels unprecedented in modern American history. During my time in charge of cash management at AIG, I bought and sold money market securities yielding 20%; today similar instruments yield less than 1%. His efforts led to President Ronald Reagan’s “Morning in America” and a renewed attention to monetary policy. His success, as painful as it was,  gives him lots of “street cred.”

The Volcker Alliance recently published an analysis of the budgets in three states:  California, Virginia, and New Jersey.  The results will be surprising to many.  He gives kudos to California and Virginia, and holds a dim view of New Jersey, home of Republican presidential wanne-be, Chris Christie.

Standing alone, California would be the world’s eighth biggest economy with domestic output equaling US$2.1 trillion. Under Democratic Governor Jerry Brown, the Golden State’s credit ratings have been raised multiple times by the rating agencies.  Under his leadership,  voters have approved some temporary tax hikes, increasing budget reserves and improved funding for pension liabilities of teachers and other government employees.  According to Volcker, California’s outstanding debt has been reduced by approximately US$10 billion in three years.

The Old Dominion comes in for praise by the former Fed Chairman.  In an interesting comment he states that the budget professionals in Richmond serve for many years while the Governor is restricted to one 4-year term.  Budget cycle planning, which takes as long as 6 years, removes some of the politics out of Virginia’s budget process.  Virginia’s unfunded pension liability of US$ 3,436 per employee is only a few dollars more than that of the Golden State.

New Jersey, home of Gov Christie, leaves much to be desired according to the former Fed Chairman.  Volcker’s analysis paints a messy picture of the Garden State’s fiscal condition.  Volcker lists myriad accounting and financial tricks that have been employed to balance the home of the Jersey Boys: these do include not using the proceeds of bond sales for their stated purposes.  Frequent use of non-recurring revenues for operating purposes.  And diverting tolls from the turnpike from their stated use to maintain that highway.

It is a shame that Volcker did not include Kansas in his analysis.  Governor Sam Brownback, a Tea Party favorite, has enacted a budget cutting, tax reducing program that only a “fauxconomist” like David Bratt would endorse.  The budget deficit has ballooned, school systems in some detracts have closed early due to lack of funding, and a liberal website reports today that the Kansas Gov has threatened to cut off funding for the judicial system if it does not rule in his favor should a court challenge arise to his policies.

— D. Leslie Schreiber

Taxation and the Creative Class

science_stars

Urban geographer Richard Florida has famously argued that members of the “creative class” — scientists, entrepreneurs, artists and other professions who contribute disproportionately to economic growth — gravitate to metropolitan regions marked by the three “t’s” — technology, talent and tolerance. Now new research suggests that he may have to add a fourth “t” — taxes.

A National Bureau of Economic Research paper, “Taxation and the International Mobility of Inventors,” studies the effects of taxation on the international mobility of inventors, with an emphasis on the superstars who have the most, or most valuable patents. The results suggest that a 10 percentage-point cut in a nation’s top tax rates is associated with about a 1% increase in the number of domestic superstar inventors. The number is even higher for the number of foreign inventors — a 10 percentage-point increase drop is associated with a 38% increase for this group. Inventors who have worked for multinational firms appear to be most likely to respond to tax differentials.

Another study, “The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists,” finds that tax sensitivity is even greater when accounting for cross-state location of top corporate scientists in the U.S.; there is little effect on academic or government researchers.  “Overall, we conclude that state taxes have a significant effect on the geographical location of star scientists and possibly other highly skilled workers. While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter.”

Sad to say, Virginia doesn’t even rank in the list of the ten states with the largest populations of star scientists. But if we’re serious about wanting to attract corporate research here, personal tax rates are a factor that must be considered.

— JAB

How Tax Policy Favors Trucks over Rail

Source: Congressional Budget Office. Instead of publishing a range of costs, I include here an average cost figure for the top four categories. For CO2 emissions, I include CBO's middle-rage estimate.

Source: Congressional Budget Office. Instead of publishing a range of costs, I include here an average cost figure for the top four categories. For CO2 emissions, I include CBO’s middle-range estimate.

The “external” costs of transporting goods differ widely by truck and rail, but freight-transport prices do not reflect those costs, argues a new report by the Congressional Budget Office (CBO). In very rough numbers, I calculate from the CBO numbers, the differential amounts to $.03 per ton-mile transported.

That differential is not reflected in the taxes paid by trucking and rail companies. The result is that a far greater share of products are shipped by truck than by rail. Writes David Austin, author of “Pricing Freight Transport to Account for External Costs“:

Adding unpriced external costs to the rates charged by each mode of transport—via a weight-distance tax plus an increase in the tax on diesel fuel—would have caused a 3.6 percent shift of ton-miles from truck to rail and a 0.8 percent reduction in the total amount of tonnage transported. Such a policy would have eliminated 3.2 million highway truck trips per year and saved about 670 million gallons of fuel annually (including the increase in fuel used for rail freight). On net, accounting for the effect of fuel savings on revenue from the fuel tax, such a policy would also have generated about $68 billion per year in new tax revenue and reduced external costs by $2.3 billion.

I don’t know the odds of such a weight-distance tax being implemented on the federal level. I wonder if Virginia could implement it on the state level. One consideration not included here: the cost of administering such a tax.

— JAB

Two Stories on Change in Richmond’s Suburbs

 

New wegmans site

New wegmans site

By Peter Galuszka

Well, well,

Jim Bacon has this month’s cover story in the Henrico Monthly about the changing nature of office parks in one county that has plenty of them.

Not to be outdone, I have my own cover story in the Chesterfield Monthly, a sister magazine published by the same people.

My piece is about how Midlothian Turnpike, the main artery of suburban sprawl in Chesterfield County, is being led into its next iteration y two new types of grocery stores.

One is the high-end Wegmans. The other is New Grand Market, a large-scale international food store that reflects Richmond’s fast-growing diversity and foreign flare.

I think both of our pieces, in different ways, reflect big shifts in two of the largest counties in the state. (I wonder if I got paid more than he did).

Private Immigrant Jail May Face Woes

Farmville jail protest

Farmville jail protest

By Peter Galuszka

Privatization in Virginia has been a buzzword for years among both parties. In this tax-averse state, contracting off public functions is seen as a wise and worthy approach.

But then you get debacles such as the U.S. 460 highway project. And now, you might have one brewing down in Farmville.

The small college town is in Prince Edward County, which gained international notoriety from 1959 to 1964 when it decided to shut down its entire school system rather than integrate. Many white kids ended up in all-white private schools and many African-American children were cheated out of an education entirely.

About six years ago, another creepy project started there – a private, for-profit prison designed exclusively to imprison undocumented aliens. It’s a cozy little deal, as I outline in a piece in Sunday’s Washington Post.

Farmville gets a $1 per head, per day (sounds like slavery) from the U.S. Immigration and Customs Enforcement agency. Immigration Centers of America, the private firm run by Richmond executives Ken Newsome and Russell Harper, gets profits. Then, in turn, also pay taxes to Farmville and the county.

The ICA facility, whose logo includes an American flag, pays taxes as well and provides about 250 jobs locally. The project even got a $400,000 grant from the scandal-ridden Virginia Tobacco Indemnification and Community Revitalization Commission for water and sewer works.

What might sound like a no-lose operation, except for the mostly Hispanic inmates who might have entered the country illegally, overstayed their visas, or had other bureaucratic problems, may face problems.

The census now at the jail is about 75 percent of what it could be. President Obama has issued an executive order that could free some five million undocumented aliens. It is being challenged by 26 states but Virginia Atty. Gen Mark Herring has filed an amicus brief in favor of Obama.

So what happens to Farmville if Obama wins? It could affect 96,000 aliens in Virginia. Could there someday be no prisoners? Wouldn’t that be too bad for Farmville?

Recent history is instructive. Back in the 1990s, Gov. George Allen, a conservative darling, was pushing private prisons in Virginia as he successfully got rid of parole in part of his crime crackdown. Slave labor was part of the deal.

Executive Intelligence Weekly wrote in 1994:

“Slave labor in American prisons is increasingly being carried out in what are called “private prisons.” In his campaign to “reform” Virginia’s penal laws, Gov. George Allen pointed to prison privatization as the wave of the future, a moneymaking enterprise for the investor, and a source of good, cheap labor for Virginia’s municipalities. Indeed, after taxes, pay-back to the prison, and victim restitution are removed, the inmate earns an average of $1 per hour in these facilities.”

Well guess what happened. Allen pushed for more public and private prisons. They were overbuilt. Demographics changed. Crime rates dropped. Prisons had to be shut down.

So, if immigration reform ever comes about what happens in Farmville? Don’t forget, the private jail came at a time when a construction boom, especially in Northern Virginia had drawn in many immigrants especially from Latin America. Their papers may not have been in order.

Neo-racists like Corey Stewart, chairman of the board of supervisors of Prince William County, ordered a crackdown on brown-skinned people who spoke Spanish. But when the real estate market crashed, fewer Latinos arrived. And, if they did, they avoided Stewart’s home county.

Wither Farmville?