HJR 177 / SJR 101: Joint Subcommittee
Studying Benefits of Adopting a Single Sales Factor for Coporate Income
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
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
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.
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
- The single sales
factor is unfair tax policy for Virginia businesses with few or no out-of-state
- 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.
Institute for Fiscal Analysis is an independent, nonpartisan nonprofit
that provides information and analyses of state public policies.
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.
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.
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.
Goolsbee, University of Chicago, and Edward L. Maydew, University of North
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.
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.
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
- There are better
ways to fund economic development.
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
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
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."
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
Mr. Vassey concluded
- Doing nothing
may cost $396 million in state and local revenue by 2012.
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.
have demonstrated that they have invested in their workforce.
- Capital investment
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.
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
The Hon. Kathy Byron
Mark Vucci, Joan
Putney, DLS Staff
of Legislative Services > Legislative
Record > 2008
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