The obvious detriment to business growth, jobs and government revenues from high business taxes

from The Gray Area:

When politicians say that the cost of government requires everyone to pay more in taxes, taxes of all kinds, the opposition usually says that will negatively impact jobs and government revenue. Politicians say the rich and corporations need to pay their fair share. The opposition points to historical examples of lower taxes creating jobs and generating greater government revenues and the fact that the top earners already pay more than their fair share.

This debate is frustrating. It always sounds counter intuitive that lower tax rates result in more revenue, even though the facts are overwhelming in support of the concept.

For those who wonder about the real impact of taxes on business and job growth, you can find no better, simpler example than this one from Richmond Virginia. The same applies to bigger cities like Detroit where poor public policy drove business from the city in such volume that it left a ghost town.

If all this is true, think a little deeper. If just passing high taxes doesn’t work the way politicians want, what’s the next step for those politicians who want/need more government money? They must not allow businesses to make decisions to leave for a more competitive tax environment. Sounds like the reaction to corporate tax inversions, doesn’t it!

The situation and impact couldn’t be more obvious in Richmond. And neither is the total government control of business that is currently trending.

Michael C. Hild lives in Church Hill and wanted to keep his growing mortgage lending and servicing business in Richmond. But he considered the business tax too high.

The tax liability of operating in Richmond was nearly three times what it would be in Chesterfield and Henrico counties and much greater than it would be in Hanover County, which doesn’t charge any business tax.

“I was blown away by the discrepancy,” said Hild, chairman and CEO of Live Well Financial.

Hild said he was not looking for any favors, but he talked with city officials about how he wanted to stay in Richmond. “At the end of the day, I have shareholders and I couldn’t justify the extra expense.”

He could save millions of dollars and be able to hire more people if he moved his business outside the city limits.

The business, professional and occupational license tax — or BPOL — has been contentious for decades, with rates differing widely among localities across Virginia. For localities that charge the tax, it is a sacred source of revenue. Other localities charge little or no tax as a way to encourage businesses to locate there and bring jobs and other sources of revenue.

In Chesterfield and Henrico, the BPOL tax rate is 20 cents for every $100 of gross revenue in certain business sectors, according to a report by the BPOL Task Force, which studied Richmond’s corporate tax structure for the city’s Business, Professional and Occupational License Department.

In Richmond, it is 58 cents for every $100 of gross revenue — the highest rate permitted by law — for businesses classified in the financial, real estate and professional services sector.

A financial company in Richmond with $100 million in gross yearly revenue would pay $580,000 a year at the 58-cent rate, and a total of $4.06 million over seven years — the typical lease period. By comparison, that same company in Henrico (with the first $100,000 in revenue exempt from the tax) would pay $199,800 a year at the 20-cent rate, and $1,398,600 over seven years.

That’s a savings of $2,661,400 over a seven-year period if this company were to leave Richmond and move to Henrico.

“The city’s high taxes create an unfortunate disincentive to be located in Richmond,” said Hild, chairman of the BPOL Task Force.

“Businesses have left the city or chosen to expand in the counties partly because of BPOL inequality,” he said. “While Virginia is recognized as a business-friendly state, many states do not assess a gross receipts/BPOL tax. By making the city’s BPOL tax competitive with the counties, we can create a business environment that attracts and retains businesses.”

“With that being said … the trend is significant and sustained,” Hild said. “One only has to look at the massive commercial vacancies in downtown relative to the counties to corroborate this. It is painfully obvious to anyone looking at space in the Richmond metro area.”

The vacancy rate in the city’s central business district was 14.5 percent in the first quarter, compared with 10.6 percent in the Innsbrook section of western Henrico, according to CBRE-Richmond, a commercial real estate firm in Henrico. Available vacant space, which includes subleases and known space that will be vacated, is projected to climb to 19.3 percent in downtown Richmond by this summer.

“A vacancy rate in the single digits is a good, healthy number,” said Andrew Cook, research analyst with CBRE. “But you don’t want it to get too low or businesses stop looking.”

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