Category Archives: Taxes

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!”


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.


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.

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


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


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


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.