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.

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25 responses to “M&T Fix: A Chance To Win at Whack-A-Mole

  1. I agree and it’s ironic that Conservative types are not all over this and this passes easily like their votes against the ERA and guns in Churches and Dominion-friendly stuff.

    And I’d INCLUDE the localities where there are GOP/Conservative Boards of Supervisors who talk about how taxes hurt business… I seldom see those guys in Richmond countering their brethren arguing to keep those taxes !!!

    Of course, it’s all about – always about – how to pay for local govt needs and this is not the only thing they are shameless about. The car tax is also an abomination in my view – as well as how some counties do assessments of property in almost a predatory manner such that challenging them requires an attorney and certified land appraiser.

  2. One of my many memorable moments with the late legislator-lobbyist Bill Axselle, one of the really good guys in my book, involved him lecturing me about just who was and wasn’t pro-business around the GA. When I went to the Chamber of Commerce I saw clearly what he had been telling me about how it was the Republicans that needed watching in those days.

    https://www.richmond.com/news/plus/ralph-l-bill-axselle-jr-former-henrico-delegate-and-retired/article_0f17a873-5fda-55ce-a32e-4ee175a6ba5c.html

  3. Always interesting when Jim “Busybody” Bacon cites ideas which channel Harry S Byrd in some article about how he (and his confederates in the Imperial Clown Show) know how others should live. Jim and some in the General Assembly don’t like the way some localities raise taxes. What possible business is it of theirs? Let me answer that … it’s none of their damn business. The people in those localities have every opportunity to vote out of office any of the local politicians who enact taxes they don’t like. If city councils or county boards of supervisors enact dumb tax laws then it’s on the voters in the cities and counties to change things. How can any self-professed libertarian think that Virginia needs to become even more of a Nanny state? The net effect of this proposed legislation is that some semi-socialist General Assembly member from Fairfax County gets to tell the people in Goochland County how they should raise local taxes. No thank you.

    How would the bourbon and branch water elites in Richmond like the Federal Government dictating how Virginia raises state taxes?

    A competent high school junior can explain the marginal utility of money. It’s the intellectual basis of progressive tax rates – like the ones being used at the federal level. The stupefyingly simple logic is that the last dollar Jeff Bezos’ earns in 2019 will mean less to him than the last dollar a minimum wage single Mom earns. Therefore, why should the single Mom and Bezos pay the same percentage of tax on that last dollar? Well, they shouldn’t. But in Virginia they essentially do. Virginia’s essentially flat tax rate ignores the marginal utility of money. Perhaps the Federal Government should enact legislation to correct this economically illiterate implementation of Virginia’s tax code. Let Nancy Pelosi tell us how to finance the state. Oh … that wouldn’t be a good idea? Well what about Virginia’s second lowest state tax on cigarettes? The clown show knows that cigarettes cause all manner of horrific diseases. They also know that those tobacco caused diseases cost everybody money to treat. But they’re beholden to Altria so the tax stays low and non-smoking Virginians subsidize the smokers’ poor decisions. Maybe the Feds ought to step in here too. How much Medicare spending is attributable to tobacco use? Why should the rest of America subsidize our legislatures’ illicit love affair with Big Tobacco? Bring in the Feds to tell Virginia how to tax its citizens!!

    Harry F Byrd has been dead a long time. The Feds forced Virginia to clean up the worst of his messes … implemented by the Virginia General Assembly (e.g. Massive Resistance and the disgraceful 1902 state constitution). It wasn’t Virginians reforming Virginia.

    So, Jim … should the Feds step in again and clean up the incompetent tax policies of Virginia? Or does the adage “the government that governs best governs closest to the people” end at the borders of the Richmond MSA?

  4. Please. DJ, run for Commissoner of Revenue somewhere. You’d fit right in.

  5. Rippert makes a strong argument – I have to admit especially about local taxes.

    However, when it comes to the law and regulation – say Arlington decides
    that CSOs are not really a problem?

    Or some county in Southern Va decides they’re going to set the speed limits and Boss Hog enforcement and protocol?

    Perhaps a middle ground might be that the State REQUIRES local referenda to continue the M&T tax – like they do with the meals tax and some other taxes.

    Or better than that – that citizens can initiate the referenda at the local level!

    I suspect some rural counties would go broke under that scenario.

  6. I’ve paid a little BPOE myself so I am sympathetic to getting normal tax structure. Which reminds me, I need to fill out the BPOE tax form.

  7. DJ makes a terrifying argument for a tyrannical vision of local government, and no business owner would have any illusion about the outcome of such an I&R process. Praise God, Madison and Judge Dillion that is not how Virginia operates.

  8. First, I want to second the comment on Bill Axselle. In my experience as a legislative staffer and in representing local governments at the General Assembly, I found him to be one of the best—smart, courteous, savvy, nice, and good humored. He approached problems and issues, not from a partisan perspective, but with the goal of finding a solution that would meet the needs of all involved. We need more like him.

    I am surprised, Steve, that you deem the machinery and tools tax to be the most egregious of local taxes. I always heard business interests complain the most about the gross receipts tax.

    Despite the protestations of Don and Larry, the General Assembly does tell local governments how they can tax. Virginia is a Dillon Rule state, which means that local governments have only those powers that the state legislature grants them. And the state legislature keeps a tight rein on the power of local governments to tax. The income tax is off limits. The general sales tax for localities is capped at one percent. Only some localities can levy fuel taxes. Counties must have a referendum before they can levy a meals tax (cities and towns don’t have to have a referendum) and the maximum allowable rate on meals by counties is capped. There is a variety of licensing taxes that can be levied on businesses—there is a whole subtitle in the Code of Virginia dedicated to local taxation. The result is that localities must rely most heavily on real property taxes, which have their own inherent problems. So, it is true—if revenue from some other source of taxation is restricted, localities will usually need to make it up, somehow, through the property tax.

    The comparison of dealing with local governments to Whack-a-Mole and a swarm of stinging bees made me laugh out loud. Things must have changed over the decades. When I worked for local governments (granted, many years ago), we always felt outgunned by the Chamber of Commerce, Realtors, small businesses, etc. And, as for those legislators who had previously served on local government bodies, they always seemed to have forgotten the problems of local governments after they had been exposed to the wining and dining of business lobbyists.

    • No question, the local tax system is a mess with nobody seemingly interested in reform. Following some major reforms a couple of decades ago, administration of the BPOL (license) tax improved. All taxes are hated by somebody, but I think a business activity tax is reasonable. The M&T tax could made more reasonable, as this bill does. It was a huge battle, but we finally ended the taxation of tools that had been idled (but were still owned.) During my time with the Realtors, the Chamber, and even the shipyard, I never found it easy to overcome the local governments on an issue.

  9. I support Dillon rule in the same way I support the Feds being superior on some laws. I support consistency and uniformity and a “framework” but also support local option for increased taxation but local option should not change the way that things like roads, imminent domain or criminal justice , education or health care works.

    I LIKE the way that Virginia allocates greater local control to cities and towns and Arlington and Henrico on roads.

    The localities are fairly irresponsible on roads and development. They approve denser rezonings and expect VDOT to “fix” the congestion – right away. I’d support delegating local 600 series roads to the counties the same way we do right now for cities and towns and Arlington and Henrico.

    I’d like to see the localities have the ability to levy impact fees but have the state mandate the spending for schools and roads only, possibly public safety.

    In terms of “overcoming” the localities – they should did it for proffers which were being abused.

    But I was curious if Amazon escape the M&T… or BPOL…

  10. The local roads were made a part of the state system in 1932 in the Byrd Road Act. Harry Byrd was no longer governor, but he still dominated state politics. In that legislation, counties were given the option to join the state system or continue building and maintaining their own roads. Henrico and Arlington were the only ones to opt out. I think both counties remain happy with that decision.

    The problem with transferring the 600 series road to counties now, as it was before 1932, is that many rural counties do not have the economic base to handle that responsibility. Even if they were given the authority to tax fuel, there is not enough traffic in those counties to generate the amount of revenue that would be needed.

    As for counties and development, a frequent complaint in this blog, localities are pretty much hamstrung by state law and court decisions on what they can control in their zoning ordinances. The main impetus for the development of Northern Virginia and Virginia land use law was “Til” Hazel, a land use lawyer and developer and one of the primary movers behind Tysons Corner and massive residential development in Fairfax County. As one observer put it, “If the county board was slow or hesitant to take action on a particular rezoning application or land-use measure, Hazel was quick to turn to the courts. He petitioned often and was almost always successful, as the Virginia courts affirmed the state’s reputation time and again as being more receptive to the rights of landowners than not. In Edge City, Garreau notes that ‘[Hazel] was a buzz saw. During his heyday, he never lost a zoning case in the Virginia Supreme Court.'”

    One of the ongoing battles at the General Assembly is between local governments trying to change state law so as to give them more control over development and the realtors and home builders opposed to such changes.

  11. re: ” The problem with transferring the 600 series road to counties now, as it was before 1932, is that many rural counties do not have the economic base to handle that responsibility. Even if they were given the authority to tax fuel, there is not enough traffic in those counties to generate the amount of revenue that would be needed.”

    Well – to note that more than Henrico and Arlington – most all cities and towns in Va also have that local road responsibility – right?

    Wow! One of the other complaints of NoVa is that they are subsidizing rural roads; your answer seems to confirm that.

    Most of the other states – more than 40 of them, delegate local roads to the counties and many have road commissions with the ability to tax (just like they have School Boards with the ability to tax).

    I also have a problem with our counties taxing the dooda out of vehicles and spending nary a penny of it on transportation while at the same time approving development that stresses the road system.

    I’m sure the county leaders will claim they need every penny of the car tax to pay for education and public safety but it sure seems a disconnect.

    I’m not convinced if counties were mandated to use some of the vehicles taxes towards transportation AND they had to share financial responsibility for new development road impacts – that things would not be better.

  12. It’s a local issue and needs to be left there. Fairfax County taxes tangible business property. Examples of business tangible property include office furniture, computer hardware, specialized tools, machinery, equipment, and vehicles. It differentiates between vehicles, computer equipment and other tangible personal property. Each year, a small portion of the purchase price is subjected to the tax, finally reaching no tax, except for vehicles.

    If some other county has different rules, the residents of those areas, can take them up with their supervisors.

    • Fairfax County has driven off any manufacturing….

      “…finally reaching no tax.” See, that never happens with M&T. When I last checked the shipyard was still paying an annual tax on machines it used for WWII. Look, absent protection in the law, every county supervisor will happily tax any business in sight to the point of absurdity if it means he/she can brag it kept the real estate tax down. And Commissioners of the Revenue, in Virginia’s feudal system of local constitutional officers, doesn’t work for the supervisors.

      • Steve – apparently Fairfax County does not levy this tax. https://www.fairfaxcounty.gov/taxes/business/

        • Even Fairfax cannot tax businesses which have already fled….they ain’t coming back. (Can’t get the land if the wanted to…..) More important, Virginia Beach does not impose the tax, and in the case of that city it has led to new investments.

          Look, I stand by the basic premise that taxing machinery on the basis of the original cost to the original owner, ignoring the cost paid by the actual taxpayer, is greedy and stupid. Wanna defend that? Be consistent – advocate for the same rule for cars and other business property! You cannot, its just nuts.

  13. I am sure that you do not fault local Commissioners of the Revenue for following the plain language of the statute as interpreted by two State Tax Commissioner Rulings, two Attorney General’s Opinions and a Circuit Court decision that was affirmed by the Virginia Supreme Court. We should expect public officials to follow established law.
    The statute authorizes the assessment of M&T at “depreciated cost or a percentage or percentages of total original capitalized cost”. Some localities use depreciated cost, but, as you might imagine, keeping track of the depreciated cost of hundreds of individual pieces of equipment owned by a large manufacturer is burdensome for the taxpayer and difficult to audit. Many localities assess M&T as a static percentage of its original cost when it was purchased new. In Hanover, that percentage is 10%. Clearly this results in an assessed value that is far less than the fair market value of the equipment for most, if not all, of its useable life. The FMV of well maintained equipment still in use rarely drops below 10%. If it does, the owner has the statutory right to present the Commissioner with an appraisal. This low static assessment rate provides manufacturers with a modest incentive to purchase newer equipment when needed.
    The challenge presented by changing “original cost” to mean whatever the current owner paid for it is that the change will result in inequities. If Acme Corporation bought a new machine in 2014 for $1,000,000 and still owns the machine five years later, the machine will be assessed at 10% of its original cost, i.e. $100,000. But, if Blackwater Corporation bought an identical machine, which was originally sold in 2014 for $1,000,000, in 2019 for $600,000, then Blackwater’s machine would be assessed for $60,000. Same machine, same original cost, same age, but a dramatically different assessed value. Does that make sense?
    For localities that use a sliding scale, i.e. Years 1-3 =70%, Years 4-5=50%, etc., the assessment should be based on the years that the machine has been in service, not how long the current owner has had it. If Acme and Blackwater own identical machines that originally cost $1,000,000 and they are both five years old, then the assessment should be 50% of $1,00,000 for both machines.
    To base assessments on whether the current owner is the original owner would be as illogical for M&T as it would be for cars. The FMV of your car is determined by its age and condition, not by whether you were the original purchaser.
    If HB2640 becomes law, local Commissioners will be required to change their assessment methods to avoid the lack of uniformity illustrated above, most likely by shifting to depreciated cost, where no “percentage or percentages” deductions are authorized by statute. This will likely result in higher assessments for many manufacturers.
    Sterling Rives
    BTW, I did not choose the image next to my name and do not know how it was generated. It is not a good likeness.

    • Sadly, Sterling, the photo beside my comments is a reasonable likeness of me!

      I think the outcome of HB2640 will be more fair, not less, and will not interfere with those localities wishing to start with original cost and then decline the percentage of price exposed to tax over future years. It also works with localities such as Newport News, which starts with original cost but taxes only 33 percent of that on a steady annual basis (no further decline even decades in.)

      The tax itself is a heavy disincentive to new investment. If the tax rate for a new machine is imposed even on a used machine, that’s an even heavier disincentive for investment. Setting aside the locality’s constant lust for revenue, the policy behind taxing tools is nuts. Absent total repeal of the tax, we should at least address the easy corrections.

    • Re: “Some localities use depreciated cost, but, as you might imagine, keeping track of the depreciated cost of hundreds of individual pieces of equipment owned by a large manufacturer is burdensome for the taxpayer and difficult to audit.” — What’s so difficult about keeping track of the depreciated cost of machinery and tools? That’s exactly what federal tax returns require, and also Virginia returns that piggy-back on the federal. If it’s a burden, it’s a burden that every Virginia manufacturer has already incurred — compelling the use of depreciated cost for State purposes should impose a zero incremental burden. What am I missing, here?

  14. I do not know about other BOS but ours has at least 3 that have tea-party roots and they have strongly disagreed with VACO on some issues and they _say_ they are not in favor of M&T and BPOL.

    And I totally agree with Steve – these taxes are not only inconsistent between different companies but arbitrarily so – and they are disincentives to investment.

    I’d prefer to replace all business taxes with VATs to include services and let business alone to do it’s thing.

    The idea that we tax businesses to pay for local services and infrastructure for citizens who live there is a loser. We need the jobs more than we need that revenue and citizens should be paying for those things in the first place.

    yes… call me a leftist … 😉

  15. Localities with taxing authority certainly have been known to shoot themselves in the foot, especially where the factions have different visions of the direction things should be moving. If we gave general taxing powers to all Counties (let alone Cities) I guess we’d learn more from the “thousand flowers” about what works and what doesn’t — but at what cost to the localities where a tax experiment blows up, or serves the purposes of only one faction, such as those opposed to suburbanization? Byrd pushed for the State to take over the County control over roads back when driving across the State was a nightmare in some areas — the State’s economy needed the improvement — but also because it relieved the rural areas of the growing tax burden for roads which they couldn’t handle any longer given the Dillon Rule restrictions — one or the other had to go. So control over the roads went to the State. And of course the result was a huge redistribution of wealth to bring decent roads to areas that didn’t have the economy to pay for them under any local tax formulation.

    The feds have done the same sort of redistribution of tax revenue for roads and many other things directly in, e.g, Appalachia, and of course indirectly in thousands of subsidized, target federal programs. Yet we allow, even encourage such things. Would it be better to leave those Appalachian hollows impenetrable, uneducated scrabble farmland like they were in the 1930s?

    I’m all for limiting the redistribution effects of State directives to the Counties and federal directives to the States — but there is a broader purpose served by such efforts to unify and standardize and improve across the board. We need to balance the goals, here: standardization and local control.

    In this case, Steve, you’ve convinced me the State directive is there, but terribly misguided, at least as interpreted. Of course the GA should fix it. Whack that mole!

  16. I know the local road issue can be argued both ways but most states -more than 40, do delegate local road responsibility to the counties – and Virginia does that as well to cities/towns – and he’s the thing – when development proposals involve impacts to roads – localities pay a lot more attention to the proposal instead of essentially letting VDOT (state taxpayers) be “responsible”.

    I would assert that development is more orderly and more responsible when the locality has some skin in the game.

    I would also fully admit that we have subsidized electricity to rural areas – infrastructure the localities and individual could never afford with some level of subsidy – which if one thinks about it is also a wealth transfer.

    I’m NOT in favor of letting the rural areas languish and fall into even more dire fiscal straights. I actually think the local road issue has more import when it comes to more economically prosperous areas – and no where is that more apparent than NoVa where development has been approved to far more extent than their roads can handle. If Fairfax had more skin in that game – would they have been more circumspect and/or require more from developers to help insure enough infrastructure was built to keep pace with development?

    Right now, the state has little money for new roads – in part because the low price of gasoline has decimated the tax revenues but also because there are so many miles of road that VDOT has to maintain. Out of a 5 billion dollar budget, fully half of it goes to maintenance and operations.

    2.5 billion may sound like a lot of money but if you divide it by 100 counties you get 25 million per county. 25 million dollars will buy maybe 25 miles of rural road or 4 miles of urban interstate or 1/2 of an interstate interchange.

    If you want more transportation money – what locality elected guys in Richmond are going to advocate for an increase?

    This is why both NoVa and Hampton Roads were given supplemental regional transportation taxes -money that would NOT go to the rural counties.

  17. When it comes to basic infrastructure like roads, utilities (electricity and also sewage treatment, broadband), and schools — I think the case is much easier to make for redistributive subsidies at the State level. But the case has to be made; there are good reasons not to over-promote growth where it isn’t wanted or planned for. The problem with local control is also its blessing: the horse-trading that quickly degenerates into the sometimes frankly corrupt process of granting franchises and special use permits to companies the locals have invested in or that make the biggest proffers for somebody’s pet project or offer improvements that enhance the value of adjacent land owned by them. We can dismiss all that as just “politics as usual” but the process seems cleaner if administered at a less local level. Maybe that’s only because the politics at the State agency level is less obvious, maybe it’s just my wishful thinking, but we can hope it’s cleaner.

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