M&T Fix: A Chance To Win at Whack-A-Mole

Everybody knows (and hates) the car tax, right?  Imagine you bought a six-year-old used car, but when the county sent you the tax bill it based the tax on the brand-new-off-the-lot price paid by the original owner.  Imagine if the Tax Man then smiled and said, this is your annual assessment for the rest of the life of the car, and the next owner pays that, too.

Well, that is what Virginia law does to manufacturers and others who fall under the most insane tax on the books, the local machinery and tools tax.  If a locality chooses, the original price paid by the original owner is the basis for tax forever, even for the next owner of the machine and the next owner after that.

House Bill 2640, which meets its first big test Monday morning in the House Finance Committee, would tax machinery and tools on the price actually paid for them by that business, assuming it was an arm’s length transaction.  The outcry from the various local governments and their associations is an instructive lesson in greed and shortsightedness.

Five Axis CNC Machine

The bill was in the same committee a week ago and was mugged by the usual local government mob, led at this time by Hanover County Attorney Sterling Rives.  Rives is the victor in a tax dispute with the former owners of the bankrupt Bear Island Paper Company, written up in the Richmond Times-Dispatch.  Picking at the corpse of a dying entity, he won a Virginia Supreme Court decision reaching the brilliant insight that the law says what it says until the General Assembly changes it.

The General Assembly should finally change it.  The local governments should back off, let the bill pass, and then apply the new law uniformly.  It’s a pro-investment policy decision.  But with three votes against the bill in subcommittee (two of them Republicans), signs are the fight is on.

Before the 2017 Supreme Court case there was a Tax Commissioner ruling in 2013, stating:  ”…the original total capitalized cost refers to the original price of an asset purchased new. Thus, the original total capitalized cost is the cost of the tangible property paid by the owner who first purchased the property as capitalized, not the costs paid by any subsequent purchasers.”  Previous Attorney General opinions reached the same conclusion.

Plenty of businesses buy machinery and tooling equipment used, often well-used, for prices well below the original.  Finding out what was paid at the start, one or more owners back, perhaps in another country on another continent, can be impossible.  Only a few localities force companies to try, but it meant so much money to Hanover the argument went to court.

When the government and a taxpayer go to court, the legal costs alone tends to crush the will of the taxpayer (who is paying both bills).  It is never a fair fight.  In this case, $5 million was on the line, but usually it’s not that much.  The unfair fight continues down at the General Assembly, where most localities use tax dollars to hire their own permanent lobbyists or send their elected officials to town on a regular basis.

Years ago, in Senate Finance, when representing the Virginia Chamber of Commerce, bills to simplify the tax code or give taxpayers more appeals routes were routinely opposed by a platoon of these people, playing a game called Local Government Whack-A-Mole.   As soon as you satisfied one county, another popped up whining.  As soon as you compromised with the cities, the county association undercut it.

Dominion beats you with brute force and money.  The localities swarm you like stinging bees, enjoying one unrecognized advantage:  Many legislators started their careers with local governments, and all legislators know their likely opponents currently serve in local government.

So, back to the bill.  Another advantage local governments have is they get a special fiscal impact statement, prepared by the captive Commission on Local Government, which simply passes on without question their inflated estimate of doom if the bill passes.  In this case one locality (these should be under oath) claims the bill would cost them $1 million and another claims $475,000. The threat is always an increase in the taxes on people’s homes, a third rail.

Using talking points she was probably provided, bill sponsor Del. Kathy Byron, R-Lynchburg, told the House Finance committee last Monday it would clarify the law.  Rives, from Hanover County, pounced on that and correctly pointed out that the Supreme Court was pretty darn clear.  This bill changes the law.

Rives then claimed the issue was one of uniformity.  If two companies had the same machine, and it was the same age, it wouldn’t be fair to apply a lower tax to the company which bought it used.  That’s when Rives got brought up short by a committee member who is a CPA, the new Delegate Joe McNamara, R-Roanoke.

Counties that use the original cost method often couple it with a sliding scale.  The company that owned the machine longer would likely be at the bottom of that scaled tax rate and paying less tax that the other company with the used machine, McNamara pointed out.  The complications in this arena are maddening for anybody but a tax accountant.  That alone is a strong argument for change.

When the situation is reversed, and a major piece of equipment (or car) rises in value and is bought for more than original price, you can expect the Tax Man to just change course and tax the higher value.  With this bill (perhaps this will finally dawn on them, but they’re slow) that becomes proper.

Claims that Virginia is always pro-business and complaints that the Dillon Rule is bad bring some of us to laughter.  Taxing tools at all, imposing a higher marginal cost on investments in new technology and innovation, encouraging the use of old stuff, is nothing short of stupid.  Taxing them based on what they cost an original user in Milan or Shanghai a decade ago is shameless.