Report: Virginia tax structure prioritizes existing businesses above startups

(The Center Square) – Mature businesses in Virginia do not have excessive tax rates, but newer businesses carry a tougher tax burden, according to the State Tax Costs of Doing Business report released by the Tax Foundation.

When compared with the 49 other states and the District of Columbia, Virginia has the eighth-lowest tax rate for mature corporate headquarters, averaging around 12.1%. The commonwealth’s ranking for new firms, on the other hand, ranked 21st in the country at 15%.

“Virginia will do individual incentives for individual companies, as it did for Amazon, but in general has shown little interest in using the tax code to attract new companies or expansions,” Stephen Haner, a senior fellow for state and local tax policy at the free-market Thomas Jefferson Institute, told The Center Square.

“The Tax Foundation has provided some hard evidence that our tax code itself is a barrier to growth,” Haner said.

The report also found not all industries are treated equally. It found that property taxes on equipment increase the tax liability on capital-intensive businesses and the tax structure for the service industry increases the tax burden because taxable income is based on where the service is performed, rather than where the benefit is received.

“This means that Virginia’s corporate tax base is much broader for service industry firms than most of its peers, and that service industry firms operating out of Virginia often have the same income apportioned to two states for tax purposes – first to Virginia, based on where the service is performed, and second where the client is, based on another state’s policy of apportioning income where the benefit is received,” Jared Walczak, the vice president of state projects at the Tax Foundation and one of the report’s authors, told The Center Square.

For research and development firms, the commonwealth ranks 27th for mature firms with a 12.4% tax rate, but 40th for new firms with a 19.8% tax rate. In the technology industry, mature firms are taxed at 11.8%, which is 23rd in the nation, but new firms are taxed at 22.8%, which is 40th in the nation.

In the fields in which the commonwealth has lower tax rates, newer firms still have more tax liabilities than mature firms. Virginia ranked third for mature labor-intensive manufacturers with a 6% tax rate and 12th for new firms in the industry with a 7.6% tax rate. For capital-intensive manufacturers, Virginia ranked seventh for mature firms at 6.8% and 15th for new firms at 9%.

For distribution centers, the state ranked 10th for mature firms at 23.7% and 20th for new firms at 29.2%. For shared service centers, Virginia ranked 11th for mature firms at 18.4% and 23rd for new firms at 24.1%.

Virginia performs around the middle of the pack for its professional and occupational licensing taxes. However, these taxes are more consistent across industries when this isn’t the case in most states.

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