PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

STATE OF THE WEEK: Virginia is Long Overdue for a Tax Cut

By at 25 October, 2017, 3:19 pm

by Raymond J. Keating-

Small Business Policy Index 2017: Virginia ranked 17th among the 50 states.

SBE Council’s “Small Business Policy Index 2017” ranks the 50 states according to 55 different policy measures, including a wide array of tax, regulatory and government spending and performance measurements.

Small Business Tax Index 2017: Virginia ranked 22nd among the 50 states.

SBE Council’s “Small Business Tax Index 2017” ranks the states according to 26 different tax measures. Among the taxes included are income, capital gains, property, death, unemployment, and various consumption-based taxes, including state gas and diesel levies.

When it comes to its public policy environment for entrepreneurship, small business and investment, Virginia is a bit better than a middling state. As noted in its rankings on both SBE Council’s “Small Business Policy Index” and “Small Business Tax Index,” there’s certainly plenty of room for improvement – especially on the tax front.

The 100-Year Tax Cut Drought

Since 1919, according to a report from the Tax Foundation, Virginia residents have never received a cut in their personal income tax rate. That’s amazing and distressing. That’s almost one-hundred years!

In contrast, there have been tax rate increases, with the top tax rate going from 2 percent to 3 percent in 1926, to 5 percent in 1948, and to 5.75 percent in 1972. That 5.75 percent ties for 28th among the 50 states, as noted in SBE Council’s “Small Business Tax Index,” as well as 32nd in terms of the individual capital gains tax rate. Keep in mind that most small businesses pay the personal income tax, while the capital gains tax rate directly impacts returns on entrepreneurship and investment.

The Governor’s Race and the Tax Issue

Republican candidate for governor, Ed Gillespie, has proposed an across-the-board, 10 percent income tax cut, which would bring the top tax rate down from 5.75 percent to 5.15 percent. The reduction would be phased in over three years, and be subject to revenue triggers.

For good measure, the Gillespie plan would attempt to redress some egregious local taxes that inflict harm on small businesses and the state’s economy.

As stated in the plan: “The Business and Professional Occupancy License or BPOL Tax, the Machinery & Tools Tax, and the Merchants’ Capital Tax are vestiges of a prior era when Virginia’s economy was growing by leaps and bounds despite these impediments to business growth. Local governments, through no fault of their own, have come to rely on these job-killing, growth-stunting taxes. We need to work together to replace them with pro-growth alternatives.”

These taxes clearly work against investment by businesses and entrepreneurs. The BPOL is a gross receipts tax; the Machinery & Tool Tax is a tangible property tax; and the Merchants’ Capital Tax is an inventory levy. There is considerable complexity around each tax, in terms of which is imposed, filing, tracking, etc.

Under the Gillespie plan, they would be sunsetted within three years, and then local officials would either choose to re-impose them or come up with revenue-neutral alternatives, excluding a local income tax.

Getting Virginia to move ahead with tax relief would be a welcome change, and if implemented, a real plus for entrepreneurs, businesses, investors and workers in the state. Indeed, to say that the state is long overdue for some serious tax relief would be a gross understatement.

States are getting more competitive by reducing their taxes and aggressively making other improvements to the business policy environment.  On the policy front – and especially on taxes – Virginia is stuck. Eventually this will catch up to the state’s competitiveness and performance, and it already has: According to a 24/7 Wall Street report The States with the Best and Worst Economies, “The state’s annual compound GDP growth rate of just 0.7% since 2011 is less than half the 2.0% national rate.”

Reducing taxes is one key way Virginia can get back to stronger growth.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

 

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