by James A. Bacon
Both Terry McAuliffe and Ken Cuccinelli have proposed reducing or eliminating three locally imposed business taxes — the Business Professional Occupation Licensing (BPOL) tax, the Machinery and Tool (M&T) tax and the Merchants Capital (MC) tax. Both sides of the partisan divide agree that Virginia should be able to find a way to raise local tax revenue that doesn’t discourage business activity and investment.
I’m totally in favor of scrapping the business taxes, but it’s not so easily accomplished. According to the center-left Commonwealth Institute, local governments collected $899 million in 2012 from the three business taxes — 6.2% of locally generated tax revenue statewide.
“All but two of Virginia’s 171 cities, towns, and counties collect at least one of these local taxes, according to a survey by the state’s auditor: 130 collect BPOL, 153 collect M&T, and 47 collect MC taxes,” states CI in a new position paper. Cities and towns are especially reliant upon the taxes. Also, as a generality, lower-income and less property-rich localities are more reliant upon them.
How could localities offset the lost? Not the income tax, argues CI — that is largely proscribed for local government in Virginia. Not the meals and lodging tax — 75% of Virginia localities already have one. That effectively means higher property taxes… unless the state reimburses local governments for lost revenue. But Virginia has already tried that once, with the car tax, and it didn’t work out so well. As CI reminds us:
The “Personal Property Tax Relief Act” of 1998 sought to eliminate the locally imposed car tax, but the cost of reimbursing the local car tax was such a drain on state revenues that the General Assembly was never able to give 100 percent reimbursement and had to cap it at just 70 percent in 2002. Then, beginning in 2006, reimbursements were frozen at $950 million and distributed based on each locality’s 2005 reimbursement.
I totally understand the desire to eliminate the business taxes, but there are inherent difficulties in using state revenues to make up for lost local revenues. Eliminating the car tax bestowed its blessings very unevenly around the state: Jurisdictions with higher tax rates got back a lot more money than those with lower tax rates. The same would be true if the state eliminated BPOL and its cousins. I am open to clever ways to solve the problem but I am skeptical that any exist.
Raise property taxes instead. If business taxes are bad for business, perhaps local governments should take the lead in eliminating them by raising property taxes
Consider this thinking out loud. I’m playing with the idea to see where it goes. And, yeah, yeah, I know, such a move potentially would be regressive, shifting the tax burden from businesses to homeowners. But hear me out.
Local governments have enormous power to create taxable real estate value — or to destroy it — through the types of investments it makes in infrastructure and other public improvements. The more heavily local governments depend upon property tax revenues, the more focused they will be upon broadening their tax base by maximizing property values.
In an ideal world, local governments would share knowledge and adopt best practices on which investments create the most value. As I have repeatedly pointed out on this blog, public investments vary widely in economic Return on Investment. Some improvements, like parks and bike/pedestrian-friendly streets, create value. Other so-called “improvements” — like street-road hybrids known as stroads – destroy economic value. One way to measure economic value created and destroyed is to measure the change in property value. In theory, shifting to the property tax could incentivize local governments to invest their capital budgets in ways that enhance property values. Aligning local government incentives with wealth creation is a good way to create more wealth.