Category Archives: Taxes

Taking a Hard Look at Historic Tax Credits

tobacco_rowby James A. Bacon

A General Assembly subcommittee is giving well-deserved scrutiny to Virginia’s tax credits for rehabilitating historic properties.

That program, which has provided more than $1 billion in tax credits since its inception in 1997, is widely credited with revitalizing older neighborhoods across Virginia, particularly in the City of Richmond with its wealth of historic properties. However, as the state grapples with a $1.5 billion revenue gap in the current two-year budget, it is encouraging to see lawmakers employ economic thinking for a change.

“It is really hard for us to make a good business decision here when we don’t know what kind of return we are getting on our money,” said Del. Jimmie Massie, R-Henrico, according to the Richmond Times-Dispatch. “If we are getting a 10 to 15 percent return, that is one thing. If we are getting 5 percent, that’s another.”

Virginia allows developers to claim credits of 25 percent of eligible expenses on renovations of certified historic structures, explains the T-D. With a federal historic tax credit of 20 percent, developers can claim total credits of 45 percent. They can use the credits against their own tax liabilities or syndicate the credits for investors.

According to a 2014 study by the Center for Urban and Regional Analysis at Virginia Commonwealth University, 2,375 projects tapping tax credits generated almost $4 billion in economic activity in the state between 1997 and 2013. A survey of developers indicated that 85% would not have made their investment without the credits.

The Richmond regions has benefited disproportionately from the credit. About 1,185 projects generated about $2 billion in expenditures. However, the program also has defenders from other cities, such as Staunton, which has seen a downtown renaissance in recent years.

Bacon’s bottom line: No question, the tax credit has been a boon to urban-core economies. I’m a big fan of restoring and rehabilitating historic buildings. (I restored two ante-bellum houses in Church Hill.) I greatly prefer historic architectural styles to modern motifs.

But saying that developers would not have undertaken historic renovations without the tax credit is not saying that they would have done nothing. Presumably, those developers would not have stayed idle. What the VCU study could not measure is what projects they would have undertaken in the absence of the credits. Thus, while stating that every $1 in tax credits generated $4 in construction activity sounds impressive, it is a meaningless metric of net economic impact.

I see historic tax credits as analogous to conservation tax credits. A decade ago, conservation tax credits were being handed out indiscriminately, sometimes going to properties of dubious conservation value. The General Assembly cracked down, imposing a $100 million cap. Likewise, historic tax credits may have gone to development projects of dubious value. I recall hearing that developers game the system by preserving a small historic structure, or part of a structure like a wall, and incorporating it into a larger project while pocketing credits for the full amount. (Sorry, I don’t have time this morning to document such instances for this blog post.)

The tax credits represent a drain on the state treasury. It’s about time the General Assembly started asking tough questions of the program. I am particularly concerned how much “gaming” the system goes on. Tightening up the requirements might be in order. Further, lawmakers might well consider a yearly cap, as the state does with conservation easements. As much as I personally love historic renovations, preserving the integrity of the public fisc is the greater good.

Ranking States by “Bang for the Buck”

Source: WalletHub

by James A. Bacon

Most people would acknowledge that there is a trade-off between taxes on the one hand and the quality of government services on the other. It takes money to fund good schools, colleges, infrastructure, criminal justice systems and other basic services. At the risk of over-simplifying, the red state model for state-and-local governance errs to the side of lower taxes, while the blue state model errs to the side of more generously funded government services.

Then there is the body of thought that low taxes and quality government services are both desirable, and that the goal should be to generate the best services per tax dollar expended.

Now comes WalletHub, the financial services website and compulsve list compilers, with a ranking that addresses this very point. Which states deliver the most bang for buck? By WalletHub’s estimate, Virginia does a good job — 4th best in the country.

That’s reassuring. I suspect that Virginia’s high ranking reflects its “purple” state coloring of Virginia’s electorate and the strong two-party competition that prevents either party from indulging the worst instincts of its political base. (I can think of no other reason why Virginia would fare so well — it certainly can’t be our system of governance, which caters to the political class in so many ways.)

Of course, the survey ranking is only as valuable as the methodology that stands behind it. WalletHub compiled 20 metrics to gauge the quality of government services in education, health, public safety, economy and infrastructure & pollution. Then it compared each state’s Average “Government Service” Score to its “Total Taxes per Capita (Population Aged 18 & Older)” Ranking in order to provide a clear ROI hierarchy for taxpayers across the 50 states.

According to this ranking, red states have better ROIs overall with an average ranking of 23.4 versus blue states with 27.4.

Unclear, however, is how WalletHub defines a state to be “red” or “blue.” One could argue that Virginia is a blue state because the governor, Terry McAuliffe, is a Democrat. But both bodies of the General Assembly are controlled by Republicans. Similarly, Ohio is judged to be a “blue” state, even though its governor, John Kasich, is a Republican. Perhaps WalletHub should establish a “purple” state category. I would be interested to see how purple states fared by this reckoning.

We can argue over the methodology all day long. The larger, more important point, I believe, is the question that WalletHub is asking: Which states have optimized the tradeoff between taxes and services — who is getting the most bang for the buck? If we can answer that question, we can move on to even more compelling questions: Which policies, strategies and institutions account for the superior results?

Virginia Property Taxes — Not as Bad as Jersey but Worse than D.C.

No one much pretends that Virginia is a “low tax” state anymore. Indeed, the Old Dominion has ensconced itself solidly in the ranks of the middle-tax states. If there is anything good to be said about the state’s tax structure, it’s that revenue sources are diversified across a broad array of taxes — income, sales, property and many smaller sources — so that state revenues aren’t excessively vulnerable to, say, a real estate crash, a consumer recession, or a decline in capital gains-generated income tax revenue.

One downside is that Virginia taxes personal property — primarily real estate and automobiles — more heavily than the typical state. I have combined data from the latest WalletHub offering to show that, using WalletHub’s methodology, Virginia has the 14th highest property tax burden among the 50 states (and Washington, D.C.) The real estate tax rate is modest (16th lowest) but it combines with relatively high median housing prices (11th highest) to create the 23rd highest average tax on the median-value house.

The car tax (2nd highest in the country) is a killer. Throw that into the mix, and Virginia has the 14th highest overall property tax burden in the country. If you adjust the taxes as a percentage of average household income, the numbers look a little better. Still, there’s no escaping the conclusion that Virginia’s “low tax” days are long gone — even at the local level.

The main limit to this analysis is that it obscures the tremendous divide between NoVa and RoVa. NoVa is in a league of its own when it comes to housing values and property tax rates. If you split the state into two, I’d guess, NoVa probably would look more like New York and RoVa more like North Carolina.


Your Tax Breaks at Work


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).