Virginia Rejects Tax Formula that Would Have Tipped the Scales to Large Companies

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This week tax justice advocates in Virginia (including the Commonwealth Institute and the Virginia Organizing Project) defeated a bill that would have favored large companies with out-of-state business at the expense of smaller "mom and pop" establishments. House Bill 1514 had been approved by a daunting 94-0 vote in the House, but then the bill hit a massive road block in the Senate Finance Committee, which voted 9-7 to not take action on the bill this year and instead carry the bill over to next year.

This bill would have allowed manufacturers operating in the state to figure their tax bills using a Single Sales Factor (SSF) apportionment approach. Each state uses its own apportionment formula, which is basically a formula to separate each company's nationwide taxable business income into an "in-state" portion and an "out-of-state" portion. Often these formulas use three factors in determining tax liability: the percentage of the corporation's property, payroll, and sales that are in the state. Currently Virginia has a double-weighted sales tax formula that relies on all three of the factors mentioned, but doubles the sales factor in the calculation. The SSF approach would use only a sales component. The Commonwealth Institute published a brief describing the pitfalls of this approach.

Allowing manufacturers to have the option of using only a sales component has not proven to be an effective economic development tool in the eight states that had SSF in effect for at least six years. The brief explains that "smaller Virginia firms, which are not as likely to be taxable in other states, are not able to profit from this approach, while their significantly larger, multistate competitors are." Some have claimed that the SSF approach can lead to company relocation, but there is little evidence to back this. For example, in 2005 Michael Mazerov at the Center on Budget and Policy Priorities wrote a paper which found that the SSF "tax incentive have had little impact on Intel Corp's major plant location decisions."

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