SD12 - The Needs of the Manufacturing Sector and the Future of Manufacturing in Virginia


Executive Summary:
JOINT SUBCOMMITTEE STUDYING MANUFACTURING NEEDS AND THE FUTURE OF MANUFACTURING IN VIRGINIA
January 10, 2006

The joint subcommittee was established by the 2004 Session of the General Assembly pursuant to Senate Joint Resolution 64, and was continued for a second year by the 2005 Session pursuant to SJR 361.

The joint subcommittee is charged with considering the needs of the Commonwealth's manufacturing sector by assessing its current state and to determine how its needs may be best addressed. In conducting its study, the joint subcommittee was directed to (i) assess the current state of the manufacturing sector of Virginia's economy; (ii) determine how the sector's needs may most speedily, efficiently, and cost-effectively be addressed; (iii) consider both local and state tax policies affecting the manufacturing sector and regulatory compliance and costs; and (iv) consider what role state and local governments should properly play in this endeavor.

Senator Frank Wagner has served as chairman and Delegate Bob Purkey as vice chairman. The members of the joint subcommittee also include Senator Martin Williams, Senator John Watkins, Delegate Samuel Nixon, Delegate Daniel Marshall, Delegate Chris Saxman, and Delegate Watkins Abbitt. Information about the activities of the joint subcommittee is available at its web site: http://dls.state.va.us/SJR361.htm.

The joint subcommittee met five times in the 2005-2006 interim. The first meeting was convened on April 5, 205, at Wyeth Pharmaceuticals' Darbytown Road facility near Richmond. The meeting focused on two primary topics: natural gas availability and the machinery and tools tax. The chairman observed that a successful future for manufacturing in Virginia will require increasing productivity, which in turn is dependent upon investment in equipment. The joint subcommittee agreed to examine the issue of the local variations in assessment procedures and ratios, and whether increasing standardization among local assessment practices is appropriate.

The second meeting was convened on June 7, 2005, at Barr Laboratories' Forest facility. The members continued their study of the machinery and tools tax, and received a report on prior studies and legislative attempts to revise the system. The joint subcommittee's interest in energy issues continued with presentations on landfill gas, the siting of liquefied natural gas (LNG) import terminals, and off-shore gas drilling provisions in pending federal energy legislation.

The joint subcommittee's third meeting was held on August 25, 2005, at the Volvo Truck plant in Dublin. While taxation issues continued to be the focus of the meeting, other topics addressed included economic development services, rail service, and motor freight transportation efficiency. With respect to taxes, Ernst & Young LLP presented its report, commissioned by the Virginia Manufacturers Association in 2004, comparing the tax burden imposed by state and local taxes on Virginia's manufacturers to the burden on other sectors of the Commonwealth's economy and to the manufacturing sectors of other states. The study found that manufacturers in the Commonwealth paid $1.2 billion in state and local taxes in fiscal year 2003. Of this sum, $755 million (63.7 percent) was property taxes, including taxes on real property, personal property, and machinery and tools. Ernst & Young also concluded that Virginia's manufacturing sector has the highest overall state and local business tax rate (3.8 percent) compared to the burden on other sectors.

The other major tax issue addressed at the meeting was Virginia's formula for apportioning the income of corporations that operate in multiple states. Until 2000, Virginia divided a corporation's income among the states in which a corporation conducted business according to a three-factor formula that gave equal weight to its property, payroll and sales in each of the states. In 2000, Virginia began giving double weight to the sales factor. If Virginia adopted a single (sales) factor formula, it would likely have a negative net impact on corporate income tax revenue. Based on a sample of 293 corporate tax returns for taxable year 2003, which accounted for 72 percent of Virginia's total corporate income tax receipts for that year, adopting a single (sales) factor formula would reduce tax revenue by $37.5 million. While 145 of the corporations of the sampled corporations would have paid less corporate income tax under this proposed formula, 114 would pay more and 34 would pay the same amount.

On November 30, 2005, the joint subcommittee met at the Kingsmill Resort in Williamsburg. After receiving reports on combined workers' compensation and employee health insurance "24-Hour" coverage and additional information on the apportionment of corporate income, the joint subcommittee reviewed several proposals for possible legislative action, including Senator Wagner's proposal for a state energy plan; industry's rights to own intellectual property developed via sponsored research at state universities; a uniform assessment methodology for the machinery and tools tax; the use of a single (sales) factor in apportioning corporate income; the elimination of the machinery and tools tax; revisions to the manufacturing sales tax exemptions and property tax assessment provisions to recognized integrated manufacturing processes; advocacy of federal Association Health Plans legislation; and making the joint subcommittee a permanent legislative commission.

The fifth meeting of the joint subcommittee was held in Richmond on January 10, 2006, to review possible legislative initiatives for the 2006 Session. The joint subcommittee considered and endorsed the following proposals:

• The Joint Commission on Technology and Science's proposed legislation revamping the rules regarding the ownership of intellectual property developed at state universities through privately-sponsored research.

• The Virginia Energy Plan proposal, which had been revised to incorporate many suggestions offered by interested persons as the measure was vetted by the Coal and Energy Commission's special subcommittee on energy policy, chaired by Senator Watkins.

• Requiring new machinery and tools to be assessed based on the owner's depreciated book value for federal income taxation purposes, with a requirement that the assessment of such property that is currently in use would be valued by a blending of the values under the old and new methods, phased in over five years.

• Classifying machinery and tools as intangible personal property, which has the effect of excluding it from local taxation.

• The Manufacturing Technology Act, which, among other things, expands the sales and use tax exemption for machinery, tools, and equipment to include those used in the integrated process of processing, manufacturing, refining, recycling, mining, or converting products for sale or resale.

• Making the joint subcommittee a permanent legislative commission.

The joint subcommittee plans to submit a formal report to the Governor and General Assembly following the 2006 Session.