Howell proposal targets BPOL, other taxes

BY CHELYEN DAVIS

RICHMOND—Business and local government groups may spend the next year studying a tax reform idea that could end in the state taxing services.

House of Delegates Speaker Bill Howell, R–Stafford, has proposed a resolution calling for a study of tax reform ideas, with a goal of eliminating several unpopular local-level business taxes and encouraging business and job growth.

The resolution is passing easily through the House now, and then will go to the Senate.

It calls for the Virginia Association of Counties and the Virginia Municipal League—which represent the counties and cities, respectively, in Virginia—to join with the Virginia Small Business Commission and Virginia Manufacturing Development Commission to “evaluate and develop a plan for implementing tax restructuring to eliminate the BPOL, Machinery and Tool and Merchants’ Capital Taxes.”

Those three taxes are levied at the local level and are disliked by businesses. The BPOL tax is particularly unpopular because it’s usually a tax on gross receipts, meaning businesses pay it even if they lose money for the year.

But the study also has a broader scope; Howell’s resolution directs the group to look at broadening and lowering the state sales tax and eliminating lower income tax brackets.

The resolution, and the study aims, are based on a report last April from the Thomas Jefferson Institute for Public Policy.

That report said Virginia could lower its sales tax rate and eliminate some taxes—like BPOL—if it broadened the sales tax to apply to many services.

Currently Virginia, like many states, doesn’t tax most services, a decision made in the 1960s. At that time most states did not tax services, and services were a small part of the overall economy.

Now services are two-thirds of the economy and growing, according to a 2011 study by the Joint Legislative Audit Review Commission.

The JLARC study said that Virginia exempts 150 of 168 typical services—including amusement parks, haircuts, legal services, advertising and consulting services, and more—from sales tax.

If Virginia taxed those services, it would bring in about $3.5 billion in additional sales-tax revenue, according to the JLARC report.

The Thomas Jefferson Institute study looked at ways the state could tax additional services and reduce other taxes in “revenue-neutral” ways, so that localities wouldn’t lose tax revenue through the reforms.

If the state eliminated the BPOL, merchant’s capital and machinery and tools taxes, and applied the sales tax to all services except those in the health and medical field, the institute study said the sales tax could be reduced to 3.9 percent. The study predicted that in that scenario, private employment might create more than 12,000 additional jobs, with investment and real disposable income increases in the tens of millions of dollars.

The report predicted similarly large job growth, income growth and investment growth in scenarios where the business and sales tax changes occur and income-tax rates are cut.

Howell’s resolution directs the new study to examine the Institute’s report and consider its recommendations.

Representatives of VACo and VML said local governments aren’t opposed to the idea of tax reform.

VACo executive director Jim Campbell said his group is “delighted.”

“We had for a number of years been asking for a comprehensive look at the resources we have available to local governments,” Campbell said.

He said localities assess the BPOL and other taxes because they have few options—counties especially are limited to only the taxing authority the state gives them, and the tax structure is still based on physical property taxes.

Neal Menkes at VML was more cautiously supportive, saying that while localities need more flexibility and diversity in taxation, taxes aren’t the only thing that make the local and state economies competitive.

“We’re OK with modernizing in local tax structures, which are heavily weighted right now to property,” Menkes said. “We view this thing holistically, that taxes are an important component but not the only component.”

He pointed out that by the time this study is done and a tax reform bill might come before the legislature, a new governor will be in office.

Howell’s resolution calls for the study group to have a recommendation ready by mid-December of this year.

It’s not clear how any proposal to reduce the state sales tax might work with proposals in this session from the governor and others to increase the sales tax to help pay for transportation needs.

Chelyen Davis: 540/368-5028

cdavis@freelancestar.com

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