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You
know you are in trouble when you’ve lost control
of the language. When
the “estate tax” became the “death tax” the
battle was half over.
When media started the drumbeat that Virginia’s budget has been “cut” $6 billion, those who
knew otherwise could no longer be heard.
And
when the Richmond Times-Dispatch editorial
page started making noises about “corporate
loopholes” in the Virginia
tax code, as it did last week, the earth is in
danger of shifting.
This
needs to be nipped in the bud.
The governor’s proposal to change the
corporate income tax and impose the “throwback
rule” has nothing to do with closing a loophole.
It is purely and simply a tax increase
falling most heavily on our already struggling
manufacturing sector.
The
headline was different in the TD on
April 2, 1981. “Tax Shift Called Corporate Lure,” was the way
it introduced the article about the same issue.
It reported on legislation sponsored by two
of the legislative heavyweight champions of all
time, Hunter Andrews and Edward Willey, and approved
without dissent in both houses.
The bill they passed working with Gov. John
Dalton helped fuel two decades of economic growth.
A
tax system created intentionally by the legislature
is not a loophole. Loopholes are the unintended
consequences of tax law that some taxpayers exploit.
But whether you consider this particular situation
wise tax policy or not, this governor seeks to
reverse it.
He
has lots of allies. The proposed new language is
included in more than a half dozen different pending
bills, with sponsors from both parties, including
Senate Finance Chairman John Chichester. Even if the
governor has second thoughts, the issue is now out
of his hands and rests with the tender mercies of
the legislature.
The
proposed change is short enough to reproduce here:
§
58.1-415.
When sales of
tangible personal property deemed in the
Commonwealth. Sales
of tangible personal property are in the
Commonwealth if such property (i) is received
in the Commonwealth by the purchaser, or (ii) is
shipped from an office, store, warehouse, factory,
or other place of storage in the Commonwealth and
the corporation is not taxable in the state of the
purchaser.
It
would affect just about any production facility or
warehouse in Virginia
that also has a facility in another state and
therefore apportions its income tax. Companies pay
corporate income tax only in states where their
physical presence creates nexus.
In those cases, the share of net income that
is taxable by
Virginia
is determined by a formula.
The formula uses the share of the firms’
total payroll located in Virginia, the share of its total property located in Virginia, and the share of its total sales to customers
inside Virginia.
With
the italicized language above, the sales numerator
would also include sales delivered to any state or
country where the firm does not pay an income tax.
Those transactions would be “thrown back” into Virginia
for tax purposes. (The
denominator remains total sales.)
To
see the impact on a hypothetical company, we ran the
taxes on a manufacturing firm with identical
factories in
Virginia
and North Carolina
and with 75 percent of its sales in states where it
pays no corporate income tax. Under current law both
Virginia and North Carolina impose their tax on 30
percent of the company’s net income, but with
“throwback” in place Virginia would impose its
tax on almost 50 percent of the profit. Even though
North Carolina
has a slightly higher tax rate, the CEO of this firm
would see a great advantage in moving future
production to
North Carolina. (You can see the math
here. PowerPoint presentation.)
The
example makes another key point.
This one hypothetical company with $10
million net income would see its corporate income
tax rise $110,000. The
Department of Tax is estimating only a $10 million
total revenue gain from this change, and that
estimate is clearly low.
In Friday’s Norfolk Virginian-Pilot,
a spokesman for a single company, Smithfield Foods,
estimated the throwback rule might cost it $1.2
million.
There
are probably individual firms that would pay $10
million more annually, assuming they couldn’t get
their operations out of state within that first
year.
And
that’s the point. Why
would anybody want to change the tax code to impose
a 40, 50 even 60 percent income tax increase on the
very manufacturers we are praying will start hiring
again? Why
target one of the most vulnerable and valuable
sectors of our economy?
Why give them one more reason to expand
elsewhere or overseas?
Why send out recruiters who praise Virginia’s friendly tax structure and stability, and then
give into the anti-corporate propaganda that is the
real basis for this proposal?
(No,
Virginia, there is no inconsistency in the Virginia
Chamber of Commerce's position here. Yes, we have
endorsed the general taxes in the pending
legislation while challenging this one corporate
provision. The general tax increases -- sales,
gasoline, and a new marginal income tax rate on six
figure incomes -- are all taxes paid by our members
companies, their employees and owners. It has long
been our position to move away from a myriad of
complex targeted taxes to broad, simple, general
taxes. Those who complain business is not paying its
fair share really want business and business owners
to pay twice.)
You
can read all about the rationale for the governor's proposal
at the website for the Center for Budget and Policy
Priorities (http://www.cbpp.org/4-9-02sfp.htm)
an advocacy group nobody would confuse with the
Heritage Foundation. They call this “nowhere
income,” because it shows up nowhere in any
state’s income tax calculation. Again, they are
trying to win the game by using loaded language.
Why
are the only good dollars taxed dollars?
Is it nowhere income if the result is new or
retained manufacturing jobs, and all the economic
benefits that they produce?
The corporate income tax on a facility is
peanuts compared to the sales taxes, income taxes
and various local taxes it pays, and their
multiplier effect in the region.
Is
it nowhere income if it ends up in somebody’s
pocket as a higher salary or a dividend check, again
only to be taxed as personal income? The dollars we
are talking about are very much “somewhere
income,” and if this very bad idea passes, it will
become “somewhere else income.”
--
February 2, 2004
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