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Bad for business: Virginia’s tax structure, reliance on D.C. discourages growth

By   /   June 30, 2015  /   News  /   No Comments

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Bad for business: Virginia’s GDP growth for the last year was zero percent. Not the best for business rankings.

By Kathryn Watson | Watchdog.org, Virginia Bureau

ALEXANDRIA, Va.— In 2011, CNBC ranked Virginia first in the nation for business.

This year, plummeting for the fourth year in a row, Virginia was 12th. In the past year, the commonwealth had zero GDP growth — worse than 47 other states and neighboring District of Columbia.

It’s a consistent and concerning fall from grace that, experts say, has a lot to do with the commonwealth’s longtime reliance on the federal government for job creation and its discouraging business tax structure. The cost of doing business, infrastructure, cost of living and overall economy all dragged Virginia down in the rankings.

“We need to figure out what it is that’s standing in our way of growing the economy,” said Michael Thompson, president of the Thomas Jefferson Institute for Public Policy.

Fifteen years ago, Thompson said, experts were pushing for Virginia to rely less on the federal government for job creation. But nothing has really changed since, Thompson said. Sequestration is now forcing the commonwealth to come to grips with the reality that so much of its booming business has relied on the public sector.

“We are creating jobs, we’re just not creating the private-sector, non-defense jobs as fast as we are losing federal jobs,” said Barry DuVal, president of the Virginia Chamber of Commerce.

That gap, DuVal said, needs to be filled by encouraging the energy sector — aka things like the creation of the Atlantic Coast Pipeline, by making sure the commonwealth has technologically skilled workers to fill jobs that already exist and by increasing the commonwealth’s exports to nations abroad.

DuVal claims the pipeline project would bring, at least for a time, 17,000 jobs during construction, not to mention more taxes for localities for things like education — another important factor in CNBC’s rankings.

Already, 7,600 small businesses in Virginia are exporting their products, DuVal said, and he wants to see that number climb.

Focusing more on public-private partnerships, if done right, could also help the commonwealth in the infrastructure rankings, Thompson suggested.

The one area where Virginia is succeeding, DuVal pointed out, is having a business-friendly climate, as the rankings noted.

But perhaps the most important thing the commonwealth can do to improve its stance, DuVal and Thompson say, is to overhaul its tax structure.

While some states — such as neighboring North Carolina — are lowering the taxes of doing business, Virginia has kept the status quo.

Last year, the Tax Foundation gave the commonwealth a very middling ranking — 27th — for its business tax climate, largely due to relatively high individual income tax rates and unemployment tax rates. Compare that to North Carolina’s ranking of 16.

“We’ve got to be creative in making Virginia more competitive and growing our companies and looking at the tax structure to see how we make it more competitive,” Thompson said. “… It’s what you tax and how you tax sometimes, not so much how much you tax.”

When Gov. Terry McAuliffe was campaigning, he promised to eliminate or at least reduce the BPOL, Merchant’s Capital tax, and Machinery and Tool tax — taxes on a company’s entire revenue, whatever the source.

McAuliffe has yet to make good on that promise.

“If we’re one of only five or seven states in the country that has a gross receipts tax, doesn’t that maybe send a message that you’re doing something wrong?” Thompson said.

Virginia’s income tax, in which a small family on food stamps could still qualify for the highest tax bracket of 5.75 percent, needs serious reform, too, DuVal said.

“Not just businesses, but all Virginians could benefit from a new tax code,” DuVal said. “We also think that needs to happen at the national level.”

To boost personal wealth and the economy, other taxes like those on groceries — which disproportionately affect lower individuals and families — need to be eliminated, too, Thompson said.

“We have got to be competitive,” Thompson said.

Kathryn Watson is an investigative reporter for Watchdog.org’s Virginia Bureau, and can be found on Twitter @kathrynw5.