It’s the Tax Rate, Stupid

A fascinating new study by the Tax Foundation and KPMG digs deeper than the usual analysis that ranks states by business tax burden. This report, “Local Matters: A Comparative Analysis on State Tax Costs on Business,” recognizes that tax rates vary depending upon the type of business. Thus, while Virginia ranks 11th best among all the states for its taxes on mature firms, it ranks a humble 38th for taxes on new firms.

And that, my friends, goes a long way to explaining the conundrum I have frequently posed: Why does Virginia, especially outside of Northern Virginia, have so few fast-growth small and midsized companies? It’s the tax rate, stupid.

Here’s a breakdown if how Virginia ranks by sub-classifications:

Mature corporate headquarters — 9th
Mature R&D facility — 28th
Mature retail store — 7th
Mature call center — 15th
Mature distribution center — 10th
Mature capital-intensive manufacturing — 28th
Mature labor-intensive manufacturing — 8th

New corporate headquarters — 28th
New R&D facility — 39th
New retail store — 19th
New call center — 25th
New distribution center — 28th
New capital-intensive manufacturing — 49th
New labor-intensive manufacturing — 44th

You get what you tax lightly and drive away what you tax punitively. We want more start-ups, more fast-growth enterprises, more R&D and more advanced manufacturing. And what do we tax the heaviest? Those very same categories of business. Does it look to you like Virginia’s tax code serves the future… or interests of the corporate status quo?

Bacon’s Rebellion — asking the questions no one else asks.


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  1. of course we have a contrarian view. In past posts, we have railed about given incentives to one business and not another one but isn’t this similar?

    the folks who support incentivizing for certain things.. are basically in the same church as those who want different tax rates.


  2. DJRippert Avatar

    It’s not the tax rate, it’s the talent pool. And comparing states is a fool’s errand. You have to look at statistical metropolitan areas (until a better measure is available).

    I don’t start a business in Virginia. I start a business in Richmond or Charlottesville. What happens hundreds of miles away from my start-up should be largely irrelevant.

    As for the study’s usefulness, California is rated #45 for new firms. Come walk around with me in San Francisco some day. I’ll point out 100 new firms thriving in that “challenged” environment.

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