Division of Legislative Services > Legislative Record > 2005

SJR 361 - Joint Subcommittee Studying Manufacturing Needs and the Future of Manufacturing in Virginia

June 7, 2005

The second meeting of the Joint Subcommittee Studying Manufacturing Needs and the Future of
Manufacturing in Virginia was held at Barr Laboratories' Forest facility near Lynchburg.


Catherine Higgins of Barr Laboratories provided an overview of the company's operations. Recruitment and retention of qualified workers is critically important to pharmaceutical firms. Barr Laboratories invests over $10,000 per employee in recruitment and training during the first 45 days of
employment. Issues of concern to the human resources department include the increasing cost of health care benefits and possible amendments in the Family and Medical Leave Act.


Tax Laws to Benefit Manufacturers

Rocco Rositano, Senior Director of Taxation at Barr Laboratories, recommended that future tax
legislation foster an atmosphere that encourages the growth of manufacturing in Virginia. He suggested that states use their corporate income tax laws to benefit manufacturers. He praised the use of a single-factor formula to apportion a corporation's income among all states in which it does business, as preferable to formulas used in most states that include property and payroll, as well as sales components in their apportionment formulas. Mr. Rositano suggested that any decrease in corporate income taxes paid by in-state manufacturers is usually offset by increases in taxes paid by other corporations that do not maintain significant facilities in the state.

The use of incentives to attract and maintain manufacturers, including training grants, investment tax credits, and personal property tax abatements, was described as mutually beneficial to the states and corporations. Benefits to states include increased employment and tax base as a result of making the jurisdictions more attractive for corporations to locate or expand operations.
Mr. Rositano criticized state legislation that would narrow the sales and use tax exemption for purchases by manufacturers of inputs used in the manufacturing process. It was observed that property taxes account for approximately 47 percent of the total business tax burden in Virginia.

Machinery and Tools Tax

Staff summarized bills and legislative studies from the prior decade that pertain to the local machinery and tools tax. The bill that most directly addressed the issue of lack of uniformity of assessment ratios was House Bill 2502 (1999). The bill, which failed, would have established a state-wide uniform schedule for valuation of machinery and tools used in the coal mining industry based on a declining percentage of the original cost. Of the numerous studies that have examined Virginia's tax system, the most germane was the Tax Department's study pursuant to House Joint Resolution 527 (1993), which defined "manufacturer" as a business engaged in any of the activities listed in Standard Industrial Classification (SIC) codes 20 through 39 for all state and local taxes. The study report sets out the implications of adopting a uniform definition of a manufacturer. While using a SIC-based definition will increase uniformity in classification among all localities, other issues, such as whether equipment is "machinery and tools" used in manufacturing, will not be resolved by a uniform definition of "manufacturer." The study concludes that recommendation for or against adoption of an SIC-based classification is premature.

Another study that addressed machinery and tools tax issues was conducted pursuant to House Bill 2085 (1999). In addition to establishing an appeals process for local business taxes, including machinery and tools tax, the bill directed the Virginia Municipal League, Virginia Association of Counties, Commissioners of Revenue Association, Virginia Chamber of Commerce, and Virginia Manufacturers Association to propose recommendations to address uniform methods of valuation, rate classification, and associated local revenue impacts for local business taxes. The group reported to the House and Senate Finance Committees that "[a]fter careful thought and deliberation, it was determined that a statewide uniform method of valuation was not in anyone's best interest-neither the taxpayers' nor the localities'. Therefore, the interested parties' recommendation is to leave alone the current method of valuation with regard to local business taxes."


Federal Legislation

The joint subcommittee recognizes the negative effect that rising natural gas prices has had on
Virginia's manufacturers, as it is both an energy resource and a raw material used in the production of chemicals, fertilizer, and other goods.

Senator Wagner reported that the federal Energy Policy Act under debate in Congress does not
currently contain a provision allowing coastal states to opt out of the moratorium on new offshore oil and gas exploration and production. The Senate Energy and Natural Resources Committee reported a version of the bill on May 26, 2005, that provides for an inventory of Outer Continental Shelf oil and gas reserves. The bill, a version of which passed the House of Representatives, may be
further amended when it is debated on the Senate floor this month.

Landfill Gas Projects

William Brinker of North Carolina-based Enerdyne Power Systems gave members an overview of issues relating to landfill gas projects in Virginia. Using landfill gas offers an opportunity to avoid flaring or the release of odoriferous substance into the atmosphere. Users avoid burning fuels, such as coal, that create more environmental pollution, while saving money on fuel costs. However, because landfill gas has a lower percentage of methane than natural gas and thus lower BTU rating, it does not directly compete with conventional natural gas. There are 320 landfill gas projects nationwide. Currently, there are 10 landfill gas projects developed in Virginia, and there are over 30 landfills with development potential. Mr. Brinker noted that development of a landfill gas project is difficult and takes a long time, in part, because landfill gas developers do not have the right to exercise the power of eminent domain to acquire rights-of-way. Brinker suggested that landfill gas projects could be encouraged by creating income tax credits for industries that use landfill gas and by creating industry awareness of local landfill gas utilization opportunities.

Liquefied Natural Gas

Paul Ruppert of Dominion Resources addressed the siting of liquefied natural gas (LNG) import terminals. LNG is natural gas that is cooled to minus 263 degrees Fahrenheit, at which temperature the gas displaces 1/600th of its room temperature volume. In its condensed state, the gas can be transported economically by specially-designed vessels. Considerations for siting a marine terminal, where the LNG can be offloaded from vessels and vaporized, include a water depth of at least 40 feet, tanker access, proximity to the existing gas transmission pipeline grid, and sufficient acreage to ensure safety and security. The process for obtaining LNG terminal permits from federal, state and local governments, and completing a terminal may take five to six years. The version of the Federal Energy Bill that passed the House provides for federal preemption of the role of state regulators in siting LNG terminals.

Currently, there are four active marine import terminals in the United States. Approximately 30 terminal projects (including both on-shore and off-shore vaporizing facilities) have been proposed. It was suggested that the facilities with the best prospects for completion are those involving the expansion of an existing terminal, projects in the West Gulf Coast area, and projects in Mexico and Canada. Not all LNG sites are marine terminals; there are several LNG facilities in the United States, including three in Virginia, where gas is stored in a liquefied state to supplement storage capacity or distribution facilities.

None of the proposed LNG marine terminals are in Virginia. The absence of Virginia sites was attributed in part to the absence of large transmission pipelines that could transport gas from the coast to markets. This situation was contrasted to Dominion's Cove Point LNG facility in Maryland, which is located on the Chesapeake Bay in close proximity to major existing pipeline systems. Mr. Ruppert concluded that the potential exists for the development of LNG and pipeline facilities in Virginia and further investigation is needed.


The next meeting of the joint subcommittee is tentatively scheduled to be held on August 25, 2005, in Pulaski County. Apportionment for corporate income tax purposes and a multi-state comparison of the tax burden on the manufacturing sector will be addressed.

The Hon. Frank W. Wagner

For information, contact:
Franklin D. Munyan
DLS Staff Attorney



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