Division of Legislative Services > Legislative Record > 2008

HJR 177 / SJR 101: Joint Subcommittee Studying Benefits of Adopting a Single Sales Factor for Coporate Income Tax Purposes

September 30, 2008

The joint subcommittee held its second meeting in Richmond. Co-chair Walter Stosch welcomed everyone.


Staff provided and reviewed a list of the states that have adopted the single sales factor formula and the year of adoption, beginning with those prior to 2001 (Illinois, Iowa, Massachusetts, Missouri, Nebraska, and Texas) and ending with the 2009 tax year (Colorado). Twenty-three states have adopted the single sales factor formula for implementation immediately or over a set number of years.

Mark Haskins and John Josephs, Department of Taxation
Mark Haskins provided the joint subcommittee members with a table showing a variety of tax incentives/benefits available to the manufacturing industry. These benefits are found in sales and use tax exemptions, local tax preferences (machinery and tools tax, intangible personal property tax, tangible personal property tax, BPOL tax), and conformity with the federal Internal Revenue Code. Mr. Haskins also distributed a chart showing the corporate income tax revenue collections for 1997 through 2007. The outstanding feature was the volatility of the tax with a 35.7% decrease in revenues for 2001 and a 44.9% increase in 2005. Finally, the apportionment of income from sales of services and intangibles by the cost of performance formula was discussed by Mr. Haskins. In Virginia, the formula is a single factor based on costs of performance in the state over costs of performance everywhere the company sells services. Virginia's apportionment method for sales of services and intangibles seems to be the way the majority of states calculate sales.

John Josephs gave an in-depth look at Virginia's apportionment formula, which is currently in the mainstream with other states. Changing it to a mandatory single sales factor formula will increase the tax liability for some corporations, decrease it for others and have little, if any, impact for most. Corporations having significant operations in Virginia that produce more than they sell in the state would see their corporate income taxes reduced. However, corporations with minor operations in Virginia that sell more than they produce here would owe more corporate income taxes. Those corporations with mostly equal operations and sales in Virginia would experience very little change in their taxes. If the single sales factor formula is enacted in Virginia for all corporations, there would be a significant corporate income tax revenue loss, according to the Tax Department. Based on 2006 tax returns, if all corporations used the single sales factor, the estimated loss would equal $47.4 million and if it were optional, it would rise to $122.7 million. There would be 136 winners, 132 losers, and 29 with no change in taxes owed. If only manufacturers were allowed to use the single sales factor, the estimated loss would equal $33.9 million and if it were optional, it would increase to $64.7 million. In this case, there would be more losers (40) than winners (37) and only four would have no change in taxes owed, if manufacturers were required to use the single sales factor apportionment formula.

Michael Cassidy, Commonwealth Institute for Fiscal Analysis
Michael Cassidy labeled the single sales factor as "an economic development tool that isn't." His main points were:

  • The single sales factor does not have a positive record as an effective economic development tool.
  • The single sales factor is unfair tax policy for Virginia businesses with few or no out-of-state sales.
  • The single sales factor is a no-strings-attached tax giveaway.
  • Virginia already ranks at the top as a business-friendly state.
  • If Virginia's manufacturers are paying less, residents will end up paying more.
  • The real cost of the single sales factor is unclear.

The Commonwealth Institute for Fiscal Analysis is an independent, nonpartisan nonprofit that provides information and analyses of state public policies.

Rob McClintock, VEDP
Workforce development is the number one priority of Virginia Economic Development Partnership (VEDP), according to its Director of Research, Mr. Rob McClintock. However, it is also important to keep businesses in Virginia and VEDP is always developing innovative methods to do that. When companies consider Virginia as a place to do business they consider several factors—workforce, markets, buildings and infrastructure, quality of life, and business climate. Virginia's business climate has been highly rated by a number of organizations including Forbes.com, CNBC, Pollina, and Tax Foundation.

In considering a tax policy change, such as the single sales factor, Mr. McClintock suggested a need for in-depth analysis of the change, do no harm, promote fairness, and improve the business climate. What will do the most good for the most businesses? All agreed that maintaining Virginia's competitive business environment is of utmost importance.

Emily Walker, Art Auerbach, Damon DeSue, and Teresa Jordan, VSCPA
The Virginia Society of Certified Public Accountants (VSCPA) strongly supported the legislation that created the joint subcommittee study to examine the single sales factor formula. The members recommended as part of the study methodology asking to whom should this apply; how would it be implemented; and what are additional changes that should be considered in this process.

As far as the single sales factor, VSCPA's position is neutral. The members think it is important to look at the impact of adopting the single sales factor and to be well-balanced in this examination. In examining economic development incentives, the impact on investment and on employment should be considered. As far as fiscal impacts on tax collections, net losses and gains need to be determined and the shift of tax collections from corporate to individual income tax, sales and use taxes and other taxes should be analyzed.

Other questions to consider are:

  • Will the single sales factor formula apply to all industries or only targeted industries?
  • Will it be phased in over several years or implemented immediately?
  • Will its application be optional or mandatory?

Finally, it should be determined who are the winners and who are the losers before the single sales factor formula is enacted in order to make an informed decision. In conclusion, the VSCPA representatives offered their continued assistance with the study.

October 21, 2008

The joint subcommittee held its third meeting in Richmond. Co-chair Delegate Kathy Byron stated that it is her intention to study the possibility of the Commonwealth adopting an optional single sales factor. A mandatory single sales factor will not be considered as it would result in some corporations paying less income tax and other corporations paying more income tax.


Staff reviewed some major studies that analyzed the potential economic impact from adopting a single sales factor.

Austan Goolsbee, University of Chicago, and Edward L. Maydew, University of North Carolina
Professor Goolsbee completed a study in November 2000 of the economic impact of implementing a single sales factor in the state of New York. The study concluded that implementation of a single sales factor should increase the number of manufacturing jobs in New York by about 3.5 percent or 32,000 jobs and should increase nonmanufacturing jobs by about 1.3 percent or 101,000 jobs. Personal income tax revenue from these new jobs was estimated at $184 million to $247 million per year. Any long-run increases in employment would occur gradually over a period of three years or more. These estimates were based on a statistical examination of the experiences of states that changed their apportionment formula for corporate income taxation during the 1980s and 1990s. Any decrease in corporate income tax revenues from adoption of a single sales factor would need to be weighed against the anticipated increase in personal income tax revenue. The study took into consideration other factors that can affect employment.

Kelly D. Edmiston, Georgia State University
Professor Edmiston analyzed the potential economic impact from implementing a single sales factor in Georgia. The study concluded that there would be a decline in Georgia corporate income tax revenues of $101.7 million in 2004 growing to $133.7 million in 2008. However, because a single sales factor apportionment formula eliminates that portion of the corporation income tax that is generated by a corporation's payroll and property, Professor Edmiston estimated that there would be a 6.9 percent increase in Georgia's multistate corporate payroll over a three-year period, which would level off at the end of the three years. The study projected that the increase in payroll paid by multistate corporations would increase Georgia's personal income tax collections by $32.4 million to $65.9 million in 2004 and by $118 million to $239.8 million in 2008. Thus, the increase in personal income tax collections would more than offset any decrease in corporation income tax revenues. The study was based upon actual Georgia corporation income tax returns filed from 1992 through 2000.

Michael Mazerov, Center on Budget and Policy Priorities
Michael Mazerov studied manufacturing employment in the United States between 1995 and 2004. He concluded that every state except North Dakota suffered a loss in manufacturing jobs. During the 2001 - 2004 period, five of the eight states that adopted a single sales factor had manufacturing job losses worse than the median average loss (¬8.2 percent in Louisiana) for the period. The manufacturing job loss in Connecticut was ¬9.6 percent; in Texas, ¬9.8 percent; in Illinois, ¬10.2 percent; in Maryland, ¬13.3 percent; and in Massachusetts,
¬14.8 percent. With regard to the remaining single sales factor states, Iowa (¬3.0 percent), Missouri (¬5.3 percent), and Nebraska (¬7.0 percent) had manufacturing job losses that were better than the median. During the 1995 - 2004 period, the top three states (North Dakota, Kansas, and Utah) and seven of the top 15 states with manufacturing job losses that were better than the median used equally weighted payroll, property, and sales factors in apportioning the income of multistate corporations.

Mr. Mazerov also studied facility or plant investments made between 1995 and 2004. Citing data from Site Selection Magazine, he determined that 71 facility or plant investments of at least $700 million were made during this period. Seven of the 10 single sales factor states did not land any of these investments after adoption of the single sales factor.

Mr. Mazerov concluded that the empirical evidence does not support the single sales factor as an effective incentive for job creation or job retention. The labor pool, transportation infrastructure, quality of education, and public safety have a greater impact than tax policy in attracting business investment, and reducing corporate income tax revenues could mean that less is spent on these items. He stated that even if a single sales factor attracts business investment, it would not be cost effective because reductions in corporate income taxes are not tied to job creation or capital investment.

Mr. Mazerov stated that the single sales factor apportionment formula does not reflect where corporations receive state services or where they earn income because it excludes the payroll and property factors that were endorsed under the Uniform Division of Income for Tax Purposes Act. Under an optional or election to use a single sales factor, there will be no additional corporate income tax paid by out-of-state multistate corporations to make up for any decrease in corporate income tax revenues. A single sales factor apportionment formula that can be elected by manufacturers is estimated to decrease corporate income tax revenues by $64.7 million annually, or 7.4 percent of 2007 corporate income tax revenues.

Mr. Mazerov stated that the single sales factor automatically reduces corporate income tax liability for corporations with a greater percentage of their sales outside of the Commonwealth, regardless of whether the corporation creates new jobs or makes a new capital investment. Under a single sales factor, corporations may reduce jobs and still receive tax savings. Mr. Mazerov testified that the fundamentals of business dictate where a business locates its operations. Using a single sales factor to influence location decisions is an inefficient use of state financial resources. Because Virginia does not have a throwback rule, sales to customers in states in which the corporation is not taxable will not be taxed by any state.

Mr. Mazerov advised that there is no correlation between the single sales factor and manufacturing jobs or capital investment. The vast majority of corporations are not taxable in other states and would not benefit from implementation of a single sales factor, therefore, there would be little incentive to invest. According to the Virginia Department of Taxation, two-thirds of all Virginia corporations are taxable only in Virginia.

Mr. Mazerov testified that combined state and local taxes are about two percent of a business' total expenses, with corporate income taxes accounting for less than 10 percent of this two percent total. Reducing this minor expense by implementing a single sales factor does not have a major impact on a corporation's profitability and will not have a major impact on location decisions. He stated that the absence of a single sales factor could be the tipping point in a business deciding not to invest in Virginia, but that the single sales factor is inefficient. Under California's dynamic revenue model, every $1 billion decrease in corporate income tax revenue would recoup $180 million in dynamic revenue gains after five years.

Mr. Mazerov stated that the Goolsbee/Maydew and Edmiston studies were predictions and not descriptive of actual results. Successive studies by Goolsbee and Maydew resulted in lower estimates for new jobs created under a single sales factor. Mr. Mazerov concluded that:

  • The single sales factor is unlikely to be effective or cost-effective in bringing about job creation or investment.
  • A single sales factor should not be enacted while Virginia is confronting a fiscal crisis.
  • There are better ways to fund economic development.

Dr. Fletcher Mangum, Mangum Economic Consulting, LLC
Manufacturing has a $172 billion economic impact in Virginia. In 2007, manufacturing provided 286,579 jobs in Virginia, which was eight percent of total employment. Virginia manufacturing jobs on average paid $48,516 per year in 2007, which was five percent above the statewide average. Manufacturing has a larger impact in the Shenandoah Valley, Western Virginia, New River/Mount Rogers, Region 2000, West Piedmont, South Central, and the Crater Area regions of the Commonwealth. A 2005 Ernst & Young study found that the effective state and local tax rate in Virginia on manufacturing is 2.2 times higher than on professional services; 1.9 times higher than on information, data, and computer services; 1.5 times higher than on agriculture and forestry; and 1.4 times higher than on retail. Between 1990 and 2007 Virginia manufacturing employment fell 32 percent, while between 2000 and 2007 Virginia manufacturing employment fell 22 percent.

Dr. Mangum testified that the single sales factor:

  • Removes the current disincentive on increasing Virginia employment and capital investment.
  • Encourages companies that have a disproportionately high economic impact on Virginia to locate in the Commonwealth.
  • Shifts some of the tax burden to businesses located outside the Commonwealth.
  • Keeps Virginia competitive with other states.

Dr. Mangum stated that between 2007 and 2008 10 states increased their sales factor weight and the number of states offering at least an optional single sales factor increased from 11 to 15.

Dr. Mangum concluded that the Goolsbee\Maydew single sales factor study in 2000 is the most comprehensive study to date of the single sales factor. It employed a 50-state analysis based on 20 years of data and used a multivariate regression analysis to control for the effect of other factors on employment. The study found that moving from a 50 percent to a 100 percent sales factor in New York increased manufacturing employment by 3.5 percent and nonmanufacturing employment by 1.3 percent within three years.

Based on current trends, Virginia manufacturing employment could decline from 286,579 jobs in 2007 to 241,173 jobs in 2012, or 45,406 jobs. A loss of these 45,406 jobs would result in a loss of $396 million in state tax revenue ($70 million in business taxes, $160 million in individual taxes, and $166 million in sales and use taxes). Applying the Goolsbee/Maydew estimate of a 3.5 percent increase in manufacturing jobs from the implementation of a single sales factor means that 8,441 of the 45,406 manufacturing jobs otherwise projected to be lost could be retained if the single sales factor was implemented in Virginia. Saving these 8,441 jobs would result in a positive revenue impact of $75 million annually ($13 million in business taxes, $30 million in individual taxes, and $32 million in sales and use taxes).

Brett A. Vassey, Virginia Manufacturers Association
The General Assembly found by statute that manufacturing facilities would enhance Virginia’s economic vitality. Mr. Vassey stated that in 2006 the Joint Legislative Audit and Review Commission (JLARC) found that the state and local tax burden on Virginia manufacturing is "higher than its proportional percentage of the State's economy in terms of employment, the number of firms, and total gross state product."

Virginia manufacturing supports 1,015,971 jobs (303,829 direct and 712,142 indirect jobs) and is responsible for $172 billion in annual economic output ($85.8 billion in direct output and $86.2 billion in additional output). Based on calendar year 2005 data, Virginia's manufacturing sector, its supporting industries, and its employees generate $6.3 billion in tax revenue each year ($3.5 billion in state tax revenue and $2.8 billion in local tax revenue). Manufacturing accounted for 9.3 percent or $34.2 billion of Virginia's $369.7 billion in gross domestic product in 2006.

Between 1990 and 2007, manufacturing jobs decreased by 118,944. Conversely, between 1990 and 2006, manufacturing wages increased by 82.1 percent. A JLARC survey in 2006 of Virginia manufacturers determined that workforce quality and availability followed by workforce costs and taxes were the most important determinants for investment decisions.

Since 2005, Virginia manufacturing job announcements are down 44 percent and capital investment announcements are down 49 percent. In a 2008 evaluation by the Ball State University, Virginia ranked fiftieth in growth in value-added manufacturing. Among competing Southern states, Virginia has the highest effective tax rate on manufacturers at 11.6 percent (Alabama, 8.5 percent; Georgia, 7.5 percent; Kentucky, 6.2 percent; North Carolina, 8.8 percent; and South Carolina, 10.4 percent). Each year manufacturing tax compliance costs in Virginia are $113 million to $201 million. Manufacturers pay 27 percent of local business taxes and 35 percent of total corporate income taxes.

Mr. Vassey told the joint subcommittee that 19 states have already adopted a single sales factor.

Mr. Vassey concluded that:

  • Doing nothing may cost $396 million in state and local revenue by 2012.
  • Manufacturing overall performance has declined in the last seven years.
  • Analysis of the single sales factor requires the consideration of the substantial impact that manufacturers have on both their suppliers and the Commonwealth.
  • Manufacturers have demonstrated that they have invested in their workforce.
  • Capital investment is slowing.

Rob Shinn, Capital Results
Rob Shinn stated that the trend in many states is toward adoption of a single sales factor for the apportionment of multistate corporation income. He stated that the single sales factor rewards corporations for making investments in Virginia. Mr. Shinn testified that the Goolsbee/Maydew studies were the most comprehensive and reliable because they controlled for many different variables that can impact employment. He concluded by mentioning that the single, biggest issue for the business of Barr Laboratories is the single sales factor.

Next Meeting

The fourth meeting is scheduled for November 17 at 10:00 a.m. The meeting agenda will be posted on the study's website prior to that meeting.

The Hon. Walter Stosch
The Hon. Kathy Byron

For information, contact:
Mark Vucci, Joan Putney, DLS Staff

Division of Legislative Services > Legislative Record > 2008

Privacy Statement | Legislative Services | General Assembly