Joint Subcommittee to Study and Revise Virginia's State Tax Code

HJR 60 (2002)
HJR 685/SJR 387 (2001)

August 6, 2001

At its August meeting, the joint subcommittee appointed to study and revise the state tax code pursuant to HJR 685 and SJR 387 received background information from staff concerning major local taxes.

Major Local Taxes

In total, there are 26 different taxes that may be imposed by local governments. In general, cities and towns have been granted greater authority to levy local taxes than counties have. City and towns have charter authority, which permits them to levy any tax not specifically prohibited by the General Assembly. On the other hand, counties may only levy those taxes specifically authorized by the General Assembly, and under the conditions prescribed by the General Assembly. These differences are readily apparent in the maximum tax that may be charged by local governments. For example, counties are subject to maximum tax rates for the local transient occupancy, meals, cigarette, and admissions taxes. No such limitations are placed upon cities and towns with respect to these taxes.

Approximately 84 percent of local tax revenue for all cities and approximately 91 percent of local tax revenue for all counties are produced by five taxes: the real property tax, personal property tax, sales and use tax, consumer utility taxes, and BPOL tax. Staff for the joint subcommittee provided detailed information on each of these taxes at the August meeting.

Real Property Tax

All counties and cities levy the real property tax. It is the leading source of local tax revenue and accounted for 47 percent of cities' local tax revenue and 55 percent of counties' local tax revenue in Fiscal Year 1999. As shown in the following table, effective tax rates (i.e., the actual tax rate levied on the value of property) vary widely across the Commonwealth.

Effective Tax Rates on Real Property, FY 1998
(Rate per $100 of "True" Value)

Real property tax rates are not capped under the Code of Virginia.

While local governments have much discretion in setting their real property tax rates, they must assess real estate at its fair market value for tax purposes (this is required by Article X, Section 2 of the Virginia constitution). Fair market value is determined by an appraisal process, the frequency of which is defined by the Code of Virginia. The Code requires that (i) cities with populations of 30,000 or above must re-assess at least every two years; (ii) all other cities may elect to reassess every four years; (iii) counties with populations above 50,000 are required to reassess at least every four years; and (iv) all other counties may elect to reassess every five or six years. As a result, actual assessment practices vary widely across localities.

The Department of Taxation annually reports a ratio comparing the assessed value of real property to the sales price paid for the property. These reports reveal that from 1994 through 1998 assessments by cities reflected about 90-92 percent of the actual sales price and assessments by counties reflected about 86-88 percent of the actual sales price.

The Virginia constitution provides several partial or full exemptions from local real estate taxes. As an example, local governments are authorized to partially exempt real estate that has undergone substantial renovation or real estate owned by persons 65 or older or permanently disabled. The General Assembly may also classify or designate as tax-exempt real estate any real property used by its owner for religious, charitable, patriotic, historical, benevolent, cultural, or public park and playground purposes. On average, 20.3 percent of all real property in cities and 12.6 percent of all real property in counties is tax-exempt.

Tangible Personal Property Tax

The personal property tax is the second largest source of local tax revenue, totaling over $1.4 billion in Fiscal Year 1999. It has comprised 14 to 15 percent of total local tax revenues since Fiscal Year 1994.

The personal property tax is levied on tangible personal property. Tangible personal property is property that, by its location and character, shows that the owner intends it to be movable, as opposed to property that is permanently affixed or attached to real estate. The owner of tangible personal property generally is the party liable for the personal property tax.

Motor vehicles, travel trailers, boats, and airplanes are taxable in the locality where the vehicle is normally garaged, docked or parked. All other tangible personal property is taxable in the locality in which it is physically located on the "tax day" (January 1 for most localities). Personal property tax rates also are not capped under the Code of Virginia.

The assessment of tangible personal property for tax purposes is based on two components: the rate classification and the determined value of the property. Currently, there are 31 separate rate classifications, 20 of which relate to different types of vehicles or drivers. Local governments are permitted to apply a lower personal property tax rate on the tangible personal property grouped in each classification.

Once the tangible personal property is classified, the value of the property for tax purposes must be established. The Commissioner of the Revenue or other local assessing officer is charged with establishing the value of tangible personal property, i.e., the tax base. Article X, Section 2 of the Virginia constitution requires that the value determined by the Commissioner of the Revenue reflect fair market value.

In the last five years, the most significant change to the personal property tax was the passage of the Personal Property Tax Relief Act of 1998. The Act provides that the Commonwealth will pay an increasing share of the local personal property tax on the first $20,000 of assessed value of qualifying vehicles. In general, qualifying vehicles are motor vehicles used for personal use. The Commonwealth's share is limited to the $20,000 of assessed value multiplied by the personal property tax rate in effect in the summer of 1997.

Sales and Use Tax

Virginia's cities and counties were authorized to levy a 1 percent sales and use tax in 1969, three years after the state retail sales and use tax was enacted. The tax is imposed on the sale of tangible personal property for consumption. The provision of services generally is not taxable in Virginia.

All counties and cities impose the local option sales and use tax. The tax is collected by merchants at the same time that the state retail sales and use tax is collected.

In Fiscal Year 1999, the local sales and use tax accounted for about 7.3 percent of all local tax revenue, making it the third highest source of local tax revenue. For cities, the sales and use tax accounted for 8.3 percent of local tax revenue in Fiscal Year 1999. For counties, the sales and use tax accounted for 6.8 percent of local tax revenue in Fiscal Year 1999.

Consumer Utility Taxes

Consumer utility taxes are imposed by counties, cities, and towns for use or consumption of utility services. Consumers of the utility service, including both individuals and businesses, are liable for the tax. Three different levies make up Virginia’s consumer utility taxes:

The amount of telephone and telegraph and heat and power taxes generally are based on user consumption (as of January 1, 2001, heat and power taxes were based on consumption). The E-911 tax generally is a flat dollar tax unrelated to actual consumption.

In Fiscal Year 1999, 38 cities and 84 counties levied and collected telephone and telegraph and heat and power taxes. In addition, 118 localities levied and collected E-911 taxes.

Local governments collected $465.1 million from consumer utility taxes in Fiscal Year 1999, making consumer utility taxes the fourth largest source of local tax revenues. E-911 tax collections accounted for $71.9 million of this total.

In general, consumer utility taxes on residential consumers may not exceed $3 per month (different rules apply for businesses). Localities with tax rates in excess of $3 per month as of July 1, 1972, however, are grandfathered to charge such higher rates.

As a result of deregulation of the electricity industry (1999) and the natural gas industry (2000), taxes on electricity and natural gas (heat and power taxes) are now based on consumption or usage (effective January 1, 2001). Thus, localities are required to convert to kilowatt-hour tax rates (electricity) and CCF tax rates (natural gas) and must set their new tax rates so as to initially maintain current annual revenues. In any event, the new kilowatt-hour tax rate and the CCF tax rate may not result in a tax greater than $3 dollar per month for residential consumers.

Business, Professional and Occupational License Tax (BPOL)

The BPOL tax is a privilege or license tax assessed by counties, cities, and towns upon Virginia businesses. Businesses cannot operate in Virginia without first obtaining a BPOL license. Fifty-four counties and all 40 cities impose the BPOL tax.

The BPOL tax generally is imposed on gross income or gross revenue, i.e., income before deductions. The tax is imposed on the gross income or revenue from each "line of business", as opposed to a tax on the business entity as a whole. There are 5 major "lines of business" or activities to which the BPOL tax applies. These "lines of business" and the applicable maximum tax rates are:

Approximately two-thirds (64.9%) of the 94 counties and cities that imposed the BPOL tax in Fiscal Year 1999 imposed the tax at rates below the maximum allowed under law.

In Fiscal Year 1999, local governments collected $385.1 million from BPOL taxes. BPOL taxes were the fifth largest source of local tax revenues, accounting for approximately 4.1% of local tax revenues.

Next Meeting

The next meeting of the joint subcommittee will be September 4 at 1:00 p.m. in the General Assembly Building. The joint subcommittee will hear a presentation on the findings and recommendations of the Commission on Virginia's State and Local Tax Structure for the 21st Century (House Document No. 22; 2001). Presentations will also be provided by the Virginia Municipal League and the Virginia Association of Counties (combined presentation) and the Virginia Chamber of Commerce. Later this fall on a date yet to be determined, interested parties will be able to present their comments and concerns regarding the joint subcommittee's work.

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