Virginia Taxes New Firms Higher, NC the Opposite

The overall effective tax rate on various kinds of businesses in Virginia, and how they rank against the other 50 states. (Lowest = #1) Click for larger view. Source: Tax Foundation and KPMG LLC


by Steve Haner

Virginia is far more tax friendly to established businesses than it is to new ones.  That’s one major conclusion of a major state-by-state business tax comparison released today (here) by the Tax Foundation and KPMG LLC.

In neighboring North Carolina, on the other hand, the tax structure encourages new investment with more attractive rates for incoming businesses of several types. It has been a conscious strategy for that state’s political leaders for some time.

Instead of seeking to put an overall ranking on the state’s business tax climate, as has been done in the past or in other studies, the Tax Foundation devised eight imaginary firms in different industries and then calculated their effective tax rate in each of the fifty states. It used tax laws and incentives as they were in force January 1 of this year.

One of the principal authors is a former General Assembly legislative aide well known around our capital, Jared Walczak, now a vice president at Tax Foundation. This approach of comparing how the various states would tax a set of reasonably typical firms is a big step up from previous methods. 

The lowest effective tax rates it reports in Virginia were for manufacturers, as you can see on the chart. In the case of existing manufacturing firms Virginia ranked in the ten lowest taxers among the states, but for new firms about a quarter of states had lower effective tax rates. Virginia’s manufacturers are aggressive advocates on tax issues, complaining most loudly about local machinery and tools taxes, but the data suggest they have also been effective advocates.

Virginia had among the ten lowest effective tax rates in two other business categories: Existing corporate headquarters and existing distributions centers.  On the other extreme, Virginia effective tax rates were above the national median for existing or new R&D firms, new technology centers and new data centers.

That last one might surprise you as recruiting data centers has been a major Virginia emphasis, but other states are offering aggressive incentives, too. Tax policy is only one thing a company might look at when deciding whether to open a new facility or move an existing one. Major wholesale distribution centers, for example, are going to be near the import ports of entry regardless of other considerations. Data centers will follow the major Internet trunk lines, a huge Virginia advantage.

North Carolina’s effective business tax rates, for comparison to Virginia above. Click for larger view.

But tax policy does matter, and North Carolina provides a great demonstration. Of the 16 tax calculations made, North Carolina’s effective tax rate was in the ten best in eleven of them (compared to Virginia’s four). Several in North Carolina were in the lowest five, and it had the lowest effective tax rate for new corporate headquarters.

There are four company types in North Carolina where new firms enjoy lower effective tax rates than existing ones, and only one (capital intensive manufacturing) where they face substantially higher rates.

The study authors had to lump several tax categories together because in some cases the incoming firms enjoyed negative effective tax rates, meaning the subsidies provided net tax benefit. Is this the right approach? Should Virginia copy it? For years now we have seen this happening and ignored it.

As recently reported, Virginia’s overall tax collections are rising far faster than inflation or population, with the corporate income tax leading the way. That has been the intentional policy  Discussions of using tax reform as a jobs magnet are simply not heard in Richmond. The next big push will be to force Virginia firms with multi-state operations to file a unitary combined return.

Roaming around the report, it is interesting to note that economic growth powerhouse Texas is not ranked all that well on overall tax rates, and in fact is quite high in some categories. Why isn’t that a drag on its economy? Probably because the lack of an income tax is so attractive on both a business and personal basis.

Likewise Florida, another state with strong growth, has nothing to brag about with those effective tax rates on business. Its effective tax rate on distribution centers is almost 50%, again taking advantage of the captive market provided by its many ports. The absence of an income tax and the near absence of winter weather are its magnets, same as with Texas, plus the basic economic truth that growth stimulates more growth, stagnation breeds stagnation.

Once we get past debating which of the GOP gubernatorial contenders is most committed to ending abortion, protecting everybody’s semi-automatic weapon or keeping the Trump flame alive, perhaps we can get back to talking about issues where a governor can actually make a difference, and where our last two have shown zero engagement.

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14 responses to “Virginia Taxes New Firms Higher, NC the Opposite”

  1. You’re right, Steve, Democrats have given no thought to taxes other than how to squeeze more money out of taxpayers with the least political resistance.

    I’m not sure the GOP discussion has been much more intelligent. Republicans talk about cutting taxes without giving much thought to how we’re going to pay for all the state spending. Don’t tell me that it can be done by cutting “waste, fraud and abuse.”

    You’re on the right track. We should be examining each of the dozen or so major tax revenue sources in Virginia with an eye to seeing which ones do the most to stifle GDP and wage growth. We should focus on those taxes that most damage to our economic competitiveness.

  2. tmtfairfax Avatar

    I’m guessing that, around this time next year, I’ll be able to experience business from the NC perspective. I’ve always sensed that NC governors, who have generally been from the Democratic Party, have worked hard to keep a business friendly environment.

  3. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    For each type of business, the biggest chunk of its effective tax rate is attributable to property tax. The property taxes a company pays, of course, is a function of the value of the property and the tax rate. Furthermore, the value of the property includes the value of the land, which in some parts of the state is quite high. Since property value and tax rate are beyond the ability of the General Assembly to affect, what other steps could be taken?

    One area in which the new companies pay more, proportionately, than mature ones is in sales tax. I would expect that is because, by definition, they are just starting up and need to buy more stuff–office supplies, furniture, etc. The General Assembly can’t do anything about that, either.

    1. DJRippert Avatar

      Maybe one of the lawyers on this blog can help here. Seems like the General Assembly has a lot of influence over property taxes based on Article X of the state constitution.

      Additionally, property tax in North Carolina is also assessed and collected by localities. And there are certainly areas in North Carolina where the value of land is high. Anywhere on the coast. A lot of the areas around Asheville, suburban Charlotte.

    2. Stephen Haner Avatar
      Stephen Haner

      Of course the General Assembly could do something on the high sales taxes that hit new company investments, Dick. A proposal for some initial breaks on machinery investments was suggested and the localities went into hysterics. Whined like children on a playground.

      1. LarrytheG Avatar

        so…taxes on companies are sorta like VAT taxes, no?

        If you can tax data centers without running them off to other states…. why not?

        1. LarrytheG Avatar

          But just like individual tax payers:

          1. – the pay for the VALUE of their land
          2. – 1/2 or more of it pays for schools
          3. – the tax on businesses gets passed on to customers – in effect a VAT-like tax.

  4. DJRippert Avatar

    Once upon a time Virginia and North Carolina both faced a challenge – agriculture (especially tobacco), textiles and furniture jobs were drying up.

    North Carolina built Research Triangle Park.

    Virginia squandered the tobacco indemnification fund by paying out the money to the tobacco farmers, many of whom had left the state.

    Why is anyone surprised that North Carolina continues to succeed while Virginia flounders?

    1. LarrytheG Avatar

      Virginia has a higher per capita GDP than NC. what does that mean?

      1. Stephen Haner Avatar
        Stephen Haner

        Uncle Sam lives here and spends like a drunken sailor.

    2. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      I agree that, for the most part, the tobacco indemnification money has not been spent wisely in Virginia. I also agree that NC had some visionaries that created the Research Triangle Park. However, you seem to imply that the tobacco indemnification money helped with that. RTP was started in 1959, long before the tobacco settlement. In addition, NC had an advantage that Virginia does not have–three major universities in close proximity to each other and their willingness to collaborate.

      1. Stephen Haner Avatar
        Stephen Haner

        Agreed, RTP was a huge thriving asset long before the tobacco settlement. Virginia’s problem is, as I stated, a long reliance on the fact that Uncle Sam lives mainly in this state and spends like a drunken sailor….so why should it be creative? We’re set, right?

        It is not an accident that the effective tax rate is low on established manufacturing. It was my job for 12 years to protect that reality. But in focusing on tax issues since starting with the state chamber 20 years ago this spring I’ve seen up close that Virginia’s old leadership took our economy for granted and the new leadership just wants to squeeze it for mo’ money.

        1. LarrytheG Avatar

          Yes. That’s the short answer. In fact, on these very pages in BR, Conservatives have strenuously argued AGAINST incentives for businesses… then they turn around in another blog post and decry NC and other states attracting more business (often using incentives).

          very confused and/or contradictory thinking… 😉

          which is it? 😉

  5. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    I agree that, for the most part, the tobacco indemnification money has not been spent wisely in Virginia. I also agree that NC had some visionaries that created the Research Triangle Park. However, you seem to imply that the tobacco indemnification money helped with that. RTP was started in 1959, long before the tobacco settlement. In addition, NC had an advantage that Virginia does not have–three major universities in close proximity to each other and their willingness to collaborate.

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