Business Taxes Not a Problem State Gov’t Should Try to Solve

Maybe Richmond doesn't know best.
Maybe Richmond doesn’t know best.

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.

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13 responses to “Business Taxes Not a Problem State Gov’t Should Try to Solve”

  1. DJRippert Avatar

    Bus taxes not a problem state government should try to solve?

    State government shouldn’t do much of anything othern than pass through its powers to localities.

    There are very, very few legitimate economic functions that should be performed at the state level. Almost none. Schools, local roads, law enforcement, jails – all should be managed by the localities.

    Virginia should lower its state income and corporate taxes and let localities levy their own income taxes and corporate taxes.

    Some localities will elect high taxes and high services. Some will elect low taxes and low services.

    People will choose where they prefer to live.

    Choice = Freedom.

    Those who use Dillon’s Rule to enrich the oligopoly through the bought and paid-for actions of the Imperial Clown Show in Richmond hate this idea.

  2. larryg Avatar

    there’s an option – not mentioned and I’m surprised.

    Here in my county – with the new conservatives – they would say that you not only cut those taxes but you got spending by that same amount!

    You get you county Admin to establish priorities – get the BOS input, have a public hearing then do the deed.

    how come that option is not considered?

    1. If they can cut spending without harming the delivery of essential services, more power to them. It won’t be easy.

  3. Do all Virginia counties play games with the BPOL tax rate? Or is it just Fairfax County?

  4. larryg Avatar

    here’s the deal. Task the County Admin to bring a budget that does not have business tax revenues.

    discuss it at the BOS level – discuss the cuts … then generate a scenario where the business cuts are replaced with other taxes, like property taxes.

    then have a public hearing and listen to the taxpayers.

    if more than 1/2 are opposed to the cuts and willing to pay higher property taxes, you’re golden!

    otherwise – time for the BOS to do their job and weigh the taxpayers views and seek something that satisfies the majority of taxpayers.

    we have in our county – believe it or not – people who show up at the budget hearing to ask for tax increases on property taxes for schools!

    in our area TMT – they’re getting rid of the 3 taxes…..

  5. larryg Avatar

    re: ” 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.”

    I’d like to hear more about how local govt should invest their capital budgets to enhance property values ……

    how would that play out? Most of the capital budgets I am familiar with involve building schools, libraries and public safety facilities.

    how does that incentivize wealth?

    1. For example, when a county builds a new school building. Does it enhance neighboring property values to wall off the school from nearby houses so kids have to ride to school? Or does it enhance property values to integrate the school with a walkable neighborhood? I don’t know the answer. But counties could find out. And they should respond accordingly.

  6. larryg Avatar

    okay, I get it… using capital projects to boost the prices of homes in neighborhoods….

    not sure that is done or if it would be supported if it diverted infrastructure from other needs

  7. “$899 million in 2012 from the three business taxes”

    Open a casino (or two) and distribute the proceeds equally. Problem solved.

    Oh wait, distribute equally? Never mind.

  8. Breckinridge Avatar

    Bacon — doesn’t the real estate market already do what you are talking about? A new school building, or more likely a school with a great reputation for success, increases real estate values in the neighborhood. Or a Metro stop in Northern Virginia. Or a lovely park. The assessments reflect the value and the owners pay higher taxes than those collected in run down neighborhoods.

    What worried me about this misguided focus on those three local taxes (BPOL, M&T and Merchant’s Capital) is they would be very easy to eliminate by being replaced by something far more obnoxious to the business climate. And the most commonly mentioned option could be just such a problematic solution — imposing the sales tax on a host of services, from education (sales tax on a UVA tuition bill?) to haircuts to health care.

    I say this to the Virginia businesses who are lying awake with dreams of low or no local tax bills — you make wake up to a nightmare.

    1. larryg Avatar

      but those 3 taxes in particular are arbitrary and capricious relative to how they are selectively levied.

      they create winners and losers in the business environment.

      at the same time – why should some businesses have to levy the sales tax and not others?

      are some businesses actually having to pay one or more of the 3 taxes plus sales taxes?

      when we tax businesses – to essentially generate more local revenue for schools and law enforcement, infrastructure – we not only make businesses de-facto tax collectors but we set up these insane jurisdictional commercial retail building wars that usually result in dead or half-dead shopping centers.

      okay… someone make a principled argument in favor of business taxes…seriously… I’m sure there is a legitimate “pro” but I’m only seeing the “con”.

    2. You ask, “Doesn’t the real estate market already do what you are talking about? A new school building, or more likely a school with a great reputation for success, increases real estate values in the neighborhood. Or a Metro stop in Northern Virginia. Or a lovely park.”

      That’s precisely the point. Public infrastructure and amenities have a significant impact on property values. Usually, one thinks of the improvements as positive. But sometimes they are negative, like “stroads.”

      Also, the design of the amenity and how it is integrated into the urban fabric is critical. Not all schools have the same impact. A school like Fox Elementary in the Fan, which is integrated seamlessly into the walkable community, will lift property values a lot more than, say, Byrd Middle School, which is cordoned off from surrounding neighborhoods and accessible only by car.

      Not all Metro designs are created equal. Metro stations surrounded by mid-rise buildings in a walkable context in Arlington create a lot more value than Metro stations surrounded by commuter parking lots, a la Vienna Metro station.

      Not all parks are created equal. Some contribute to the vitality of street life. Others become havens for bums and homeless people.

      Urban design matters. We have some awesome urban design in the Richmond region and some really sucky urban design. Our local governments need to get better at it.

  9. larryg Avatar

    I was struck by the lady who won how much? 370 million after taxes were deducted from 570 million?

    and she won when someone let her in front of them at the checkout.

    and that set me to thinking if this lady or any of us would “share” perhaps a million of that as a magnanimous gesture of our good luck or not.

    In fact for just about any lottery winner – total luck is involved – the opposite of which is ” There but for the grace of God (go I)” and share it with others in some fashion as a charitable donation or set up a charitable foundation in emulation of some our own entrepreneurial philanthropists.

    After all – the govt takes the taxes out before you get it but you still have to file a tax return where you could “re-direct” some of that tax via charitable deductions.

    At any rate, I was wondering how many folks who win the lottery actually give some to others less fortunate …

    about the only thing you can say about the 84-year old lady is ….. and I feel terrible for thinking this… she’s probably got some very happy younger relatives … unless of course she gives it all away then she’d have some really pissed off younger relatives… eh?

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