Va. in lower half of ranking on tax climate for businesses

Posted: October 11, 2012

The Winchester Star

WINCHESTER — Although Virginia likes to claim it’s “open for business,” a study released Tuesday suggests that it could do better.

Virginia ranks 27th out of 50 in the nonpartisan Tax Foundation’s latest Business Tax Climate Index, dropping one spot from a year ago.

Patrick Barker, executive director of the Winchester-Frederick County Economic Development Commission (EDC), was surprised by the ranking.

As the EDC works to bring businesses to the city and county, Barker said businesses are attracted by the state’s stable 6 percent corporate tax rate — which is lower than neighbors North Carolina, Maryland and West Virginia.

While Virginia ranks highly for its corporate income and sales taxes, however, the state is not considered as tax friendly in other areas.

The 9th annual index — which ranks states’ sales, corporate income, property, personal income and unemployment insurance taxes — typically rewards states for low rates and simple tax structures that don’t play business favorites.

Virginia’s ranking was especially hurt by the structure of its personal income tax, according to Tax Foundation economist Scott Drenkard.

For one, the deductions and brackets don’t double for married people, meaning couples taking home two incomes could pay more than two singles.

The state’s personal income brackets also aren’t adjusted for inflation, so a person earning only $17,000 falls into the highest bracket rate of 5.75 percent.

Virginia’s personal income tax base causes an unnecessary drag on economic activity, according to the Tax Foundation report.

It means people have less money to spend, and business income is often filed as personal income rather than through the corporate code.

Virginia is ranked considerably higher for its sales tax.

For states with a sales tax — five states don’t have one — Virginia has the best score because it has a low rate (5 percent), is simple, and maintains low excise tax rates.

Joseph Henchman, vice president of legal and state projects at the Tax Foundation, criticized Virginia for tax credits and other incentives that are used as rewards for businesses, although it didn’t hurt the state’s ranking since most states offer them.

He said they give a leg up to well-connected businesses, putting others at a disadvantage and allowing businesses to pit states against one another.

“Let’s start calling them what they really are: direct transfers of funds to businesses,” he said.

Barker said incentives are an important part of bringing businesses to the Winchester area and keeping them here, but they aren’t as important as the workforce and the proximity to transportation hubs.

— Contact Conor Gallagher at cgallagher@winchesterstar.com