Who's killing the golden goose?
Legislative panel scrutinizes the role of taxes in the loss of manufacturing jobs

by Robert Powell
Virginia Business
November 2005

Are taxes chasing manufacturers away from Virginia? A study commissioned by the Virginia Manufacturers Association (VMA) suggests that state and local taxes are making the state uncompetitive with several other Southern states in attracting new companies. Of particular concern are taxes on new machinery and tools. “Companies need to able to reinvest and retool, and they should not be penalized for it,” says Brett A. Vassey, the president of the VMA.

The study is among information that a legislative panel is sifting through as it wraps up two years of examining the business climate for manufacturing in Virginia. The Joint Subcommittee Studying Manufacturing Needs and the Future of Manufacturing in Virginia is scheduled to conclude its meetings by the end of this month and submit a summary of its findings to the General Assembly before the beginning of its 2006 session.

State Sen. Frank Wagner (R-Virginia Beach) says manufacturing must be encouraged in Virginia because the industry produces many of the state’s highest paying jobs. “We want to stem the tide and encourage manufacturers to choose Virginia,” he says.

In addition to taxes, the panel is looking at other issues affecting manufacturers, such as natural gas prices and intellectual property policies at state universities.

There is no doubt that the number of manufacturing jobs in the state is falling. Manufacturing employment dropped from its peak of 432,500 jobs in 1989 to 297,100 last July. More than 67,000 manufacturing jobs have vanished in just the past four years. Vassey says that decline normally would alarm public officials but it has been overshadowed in recent years by the state’s budget problems.

But the subcommittee reports that not all the news is bad. The average weekly earnings of production workers in Virginia has increased from $435 in 1992 (7 percent below the national average) to $622 in 2002 ($3 above the national average).

A 2001 study on the state’s technology-intensive manufacturers by Regional Technology Strategies Inc. says that one reason for the falling number of manufacturing employees is the increasing productivity. As manufacturers become more efficient, they need fewer employees to produce more goods.

The study commissioned by the Virginia Manufacturers Association, however, paints a more troubling picture. Completed in August by Ernst & Young, it compared the tax burden of Virginia manufacturers to that of companies operating in five other Southern states: Alabama, Georgia, Kentucky, North Carolina and South Carolina. “Those are the states we compete against for an expansion or the recruitment of a new facility,” Vassey says.

The study found that the effective property tax rate for businesses in Virginia (1.18 percent) was higher than all of the states except South Carolina (1.46 percent) The effective business property tax rate was calculated by dividing the revenue collected from real and personal property taxes by the real and personal property tax base in each state. The state with the lowest effective tax rate was Alabama (0.65 percent).

The study notes that property tax rates can have a big effect on the state’s competitiveness. “The state’s relatively high property tax rate is especially significant to manufacturers because property taxes account for 63 percent of manufacturers’ total Virginia business taxes,” the study says. That percentage represents $755 million of the $1.2 billion in taxes paid by manufacturers in fiscal year 2003.

Wagner says that the subcommittee may recommend setting some parameters on taxes on tools and machinery. The panel has found that assessment ratios used for these taxes vary across the state.

Wagner says that the panel doesn’t want to interfere with the revenue streams of local governments. But, he added, the state should establish some standard for valuations for machinery and tool taxes such as the Internal Revenue Service’s depreciation schedule. “We don’t want to choke the golden goose,” he says.