Tax Exemption May Aid Businesses, Stress Localities

By Mason Brown
Capital News Service

Richmond, Va. – Virginia’s machinery and tools tax, which some businesses see as a burden but local governments view as a critical revenue source, would be slashed under legislation before the General Assembly.

Two bills, still in committee, would alter the way Virginia classifies and taxes machinery used in manufacturing, mining, water well drilling, processing, broadcasting, dairy, dry cleaning and laundry businesses. Such machinery currently is subject only to local taxation – by counties, cities and town.

House Bill 512, proposed by Delegate Harry Purkey, and Senate Bill 549, by Sen. Frank Wagner, would eliminate the first three years of the taxation on the equipment. The tax wouldn’t begin until the fourth year – in the hope of encouraging businesses to come and stay in Virginia.

Both Purkey and Wagner are Republicans from Virginia Beach. Their legislation seeks to entice businesses to the state. Purkey said this incentive is necessary for Virginia to maintain a competitive business climate.

However, localities see the bill as a threat to their revenues. Debra Reason, master commissioner of revenue in Hopewell, said the bills would do more harm than good to the city.

“We feel like we have done what we can on the local level. I would like to see this stay on a local level,” Reason said.

She said Hopewell has its own incentive program to help businesses that purchase new machinery or expand. Reason said she believes the program does “just fine by the plants in Hopewell.”

Hopewell’s incentive program benefits businesses only in the city’s “enterprise zone.” Six businesses in Hopewell do not qualify for the incentive because they are outside the zone.

Legislators like Purkey maintain that localities are being shortsighted about economic development.

Purkey said he believes the machinery and tools tax is harsh on businesses and keeps Virginia from being an attractive market for prospective employers. He said employers in the state may be inclined to leave because of the tax.

“It’s a job killer, non-competitive and dissuades innovation,” Purkey said.

He disputed concerns raised by localities that rely on the tax as a major source of revenue.

“The arguments against it are hogwash. You can’t modernize with the market unless you update and modernize technologically,” Purkey said. “When [local governments] use the tax as a crutch to lean, it acts as an unfair, non-competitive tax. If jobs don’t come, what will [local governments] do?”

Dean Lynch, deputy executive of the Virginia Association of Counties, disagrees. He said that the tax is a vital source of revenue for localities and that eliminating it could cause local budget problems.

“The revenue is used for schools, parks, police, fire squads, among other things,” Lynch said. “If you lose the revenue, what do you raise to make up for it?”

In a newsletter to its members, the Virginia Association of Counties said a three-year exemption would cost localities about $45 million in revenues. Localities are worried that the funds would be hard to make up, especially in a declining real estate market.

Lynch said Wagner has been working with the association, but they have not been able to find middle ground.

Purkey said he thinks local officials, especially in rural areas, are worried because they fear they would have to downsize and consolidate agencies. He said the issue is “jobs, not government.”

“If you don’t allow this, jobs will leave to other states that have better business incentives,” Purkey said.

The bills will face their first hurdle during the coming week. The Senate Finance Committee plans to consider SB 549 on Tuesday. HB 512 is in a subcommittee of the House Finance Committee.

The machinery and tools tax isn’t the only levy some lawmakers have targeted. Last week, the House approved a bill that would freeze localities’ Business, Professional and Occupational Licenses tax rates at their 2011 levels.