Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, January 23, 1992 TAG: 9201240591
SECTION: EDITORIAL PAGE: A8 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Medium
GIVE CORPORATE REINVESTING A BREAK
SOME OF Lt. Gov. Donald Beyer's economic-recovery proposals for Virginia - cut a tax or two and come out ahead - sound suspiciously familiar. Remember the supply-siders of the early Reagan years, who theorized that general tax cuts would generate the revenues to fund an unprecedented military build-up? The result: unprecedented deficits and an albatross of federal debt with which the nation still struggles.But the tax proposals included in the Virginia economic-recovery commission's recommendations unveiled this week are not voodoo Reaganomics. The Beyer commission abandoned the idea of reducing the state income tax on capital gains. The remaining two tax breaks it recommends are limited, targeted and defensible as investment-boosting measures.
The best one - a corporate-reinvestment tax credit geared to small and medium-sized businesses - should be enacted. The General Assembly should reject, on the other hand, the idea of exempting from the personal income tax the first $250 on interest income.
Why the distinction?
Revenue from corporate income taxes is considerably less stable than from personal income taxes.
This is because corporate profits and losses vary far more widely from year to year than does personal income. Revenue stability is important because it means revenue predictability. For good budget planning, reducing the state's reliance on corporate income taxes is preferable to reducing reliance on the personal income tax.
The corporate credit is less of a gamble, because the up-front revenue loss likely would be less than with the proposed interest exemption.
Estimated loss in state revenues of the interest exemption is $42 million to $49 million for the biennium. Impact of the reinvestment credit on corporate-tax receipts - remember the volatility of corporate-tax receipts! - is harder to guess at: For the biennium, state tax officials have told Beyer, it could be anywhere from $9 million to $89 million.
The lieutenant governor is using $60 million as a best-guess estimate for the combined cost of the tax breaks over the biennium; if that's correct, revenue loss from the interest exemption would be about double that from the corporate reinvestment credit. Moreover, if the costs of the credit proved to be higher, it would mean that Virginia corporations indeed were reinvesting in equipment upgrades, plant expansions and the like.
The corporate credit would be a much more direct incentive for productivity-enhancing investment.
The proposed credit - of 10 percent of qualified investments, to a maximum of $3,750 in 1992; $7,500 in 1993; $15,000 in 1994; and $30,000 in 1995 - would be peanuts to corporate giants. But for small and even medium-sized firms, which traditionally lead the way in job creation, such numbers might in some cases spell the difference in deciding whether and how much to invest in their Virginia operations.
By contrast, the impact of the interest exemption in the personal income tax would be diffuse and second- or third-hand. Most of the savings on which interest is exempt likely would be saved anyway. Those savings might not be financing Virginia investments; to limit the exemption to interest on savings for Virginia investments would require impossibly complicated rules.
A corporate-reinvestment credit would build on Virginia's competitive strength as a place where corporate income taxes are relatively low - about 55 percent of the national average, by one measure.
Virginia has to compete with other states for business and industrial growth. That in part means providing excellent state services; new money for doing so, however, should come from excise, sales and personal income taxes rather than from corporate income taxes, a good part of which is passed on to consumers anyway.
To do away with corporate income taxes entirely, as some economists have called for, is impractical. But Virginia should keep its corporate income tax low, and give the investment-targeted tax credit a shot.