JLARC CIT and State Spending Review

• JLARC’s study found that Virginia’s corporate income tax system is consistent with other states and does not appear to hamper economic development efforts, though it is significant in later stages of expansion/location decisions.  JLARC suggested several targeted changes that could improve the system and address some concerns that have been raised.  Nathalie Molliet-Ribet, JLARC Project Leader, emphasized that most of these suggestions are options for the General Assembly to consider, not necessarily JLARC recommendations.
• CIT represents only about 5% of the overall tax burden for Virginia businesses.  Corporate reps. say BPL/machinery/sales and use taxes affect them greatly.  The results of a 2009 survey on factors that are important in corporate decisions show that the CIT rate is not considered as important as labor costs and infrastructure.
• The majority of questions from the Commission focused on tax credits.  JLARC laid out several options for consideration concerning tax credits, including increasing the value of economic development credits, offering R&D and/or Investment credits, making credits refundable, eliminating underutilized credits, replacing economic development credits with grants, and evaluating the effectiveness of credits.
• Top 2 tax credits claimed in 2009 were Coalfield Employment Enhancement ($31.2 million) and Major Business Facility Job ($8.5 million).  Commission members were interested in obtaining more information about how Virginia is benefitting from these and other tax credits.
• Options for enhancing Single Sales Factor methodology were also discussed.  Molliet-Ribet noted that most manufacturers have said they would be unlikely to use SSF because of the penalties that Virginia will impose if companies’ employment levels decline.
• JLARC found that Virginia providers of services and intangible assets may be inequitably taxed compared to producers of tangible goods and out-of-state corporations.  Molliet-Ribet discussed trends toward market-based sourcing, which 12 states have recently adopted, and strongly recommended that Virginia consider adopting this model, in addition to ending protections for out-of-state corporations.
• JLARC found that major CIT system restructuring may not be warranted, though “small corporations appear to bear a heavy tax compliance burden.”  One option would be to offer small corporations a CIT exemption.  Molliet-Ribet pointed out the potential difficulties in following through with this option, however, including creating a potential disadvantage for the corporation to expand.  Members were interested in ways to simplify the process for small corporations to file, and Molliet-Ribet agreed that there could likely be ways to accomplish that, though the Commonwealth would still have to define “small”. 
• The study also found that eliminating the CIT would result in only modest employment and gross state product gains compared to lost state tax revenue over the first 5 years ($3.3 billion). 

• Virginia’s total operating budget increased 59% over the last decade.  However, when population growth and inflation are taken into consideration, the overall budget grew 19%, and the General Fund actually declined 10%, while Non-General Funds increased 51%. 
• Walter Smiley, JLARC Project Leader, explained that the growth in Medicaid was largely a result of the FAMIS program and an increase in the numbers of individuals eligible for Medicaid over the last several years as a result of the economy.   

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