RD371 - Trade and Transportation Incentives Economic: Development Incentives Evaluation Series – June 7, 2021


Executive Summary:

Virginia provides 11 incentives to promote economic activity by businesses in the rail, air, and water transportation industries and to promote international trade. Spending on these incentives totaled $49 million in FY19 and $409 million between FY10 and FY19. Most (88 percent) of this amount was for common carrier sales tax exemptions for the railroad, airline, and shipping industries. The railroad and airline common carrier exemptions are among the state’s 10 largest incentives.

WHAT WE FOUND

Common carrier exemptions are longstanding incentives designed to achieve multiple objectives

The common carrier exemptions for railroads, airlines, and ships and vessels are long-standing exemptions in Virginia, as well as most other states, and have tax and public policy objectives in addition to encouraging economic activity. These exemptions were adopted to support companies’ investments needed to transport passengers and cargo safely and to support their growth and development because these companies are important for interstate and foreign commerce. Because of these other objectives, the state could maintain the rail and ships and vessels common carrier exemptions even though they have little impact on overall rail or shipping activity in the state and generate low or negligible economic benefits. The state could consider eliminating the airline common carrier exemption because a critical component of the exemption—airline repair and maintenance—would still be exempt under the aircraft repair parts exemption.

Rolling stock exemption has not led to expansion of state rolling stock manufacturing industry and should be eliminated

The railroad rolling stock exemption was adopted to support the state’s railroad rolling stock manufacturing industry and one manufacturer specifically, FreightCar America. The exemption has not led to expansion of this industry in Virginia, and it generates negligible economic benefits per $1 million spent when compared with other incentives. FreightCar America closed in 2019, and there are no immediate prospects of recruiting a similar company, so the exemption is no longer relevant. Furthermore, anecdotal evidence suggests the exemption does not influence companies to move freight by rail instead of by truck because rail is already the most economical choice.

Aircraft parts, engines, and supplies exemption is fairly new but unlikely to significantly increase aircraft maintenance activity in Virginia

The aircraft parts, engines, and supplies exemption allows owners of private planes to purchase goods for airline repair and maintenance tax free. The exemption was adopted in 2017 to encourage expansion of the state’s aviation repair and maintenance industry, which is relatively small compared with other states. Stakeholders indicate that the aircraft repair industry has grown since the exemption became effective in 2018, but industry growth is difficult to corroborate using available data. Other factors are likely to influence aircraft repair facilities’ locations far more than the exemption, particularly because the exemption only indirectly benefits these facilities by allowing them to offer tax-exempt repair work to customers. This exemption will expire on July 1, 2022. The General Assembly could consider extending it to allow for a more thorough evaluation of the exemption and because the majority of other states have a similar exemption. If extended, changes could be made to improve the exemption.

Port incentives have mixed success in promoting port activity

Virginia’s port incentives have had mixed success in promoting port activity. Many factors influence port selection, diminishing the effect port incentives can have. The Port of Virginia Economic and Infrastructure Development Grant has little ability to sway companies using the port to locate and expand in Virginia, but projects receiving grants have collectively exceeded employment goals. The impact of the three port tax credits has been reduced, in part, because the credits are underutilized.

The port incentives have low-to-moderate economic benefits and moderate returns in state revenue when compared with other incentives. Even though economic benefits for the International Trade Facility Tax Credit and the Barge and Rail Usage Tax Credit are low, they are higher than the economic benefits of most other tax incentives because they target high-impact industries.

The economic benefits and returns in state revenue of port incentives would be higher if they better targeted exported goods and industries and regions less likely to use Virginia’s ports.

VALET and Trade Show Assistance Program participants report positive effects, and the programs have high economic benefits

Research on the effectiveness of trade assistance programs, in general, is mixed but suggests well-designed, targeted programs can be effective. Multiple national organizations have recognized VALET as a model export assistance program that other state and local governments should replicate. The program targets resources to carefully vetted small businesses with high export potential and provides in-depth technical assistance and training. VALET and Trade Show Assistance Program participants report the programs have led to increased international sales and better exposure to international customers. Both programs also have high economic benefits per $1 million spent and high returns in revenue per $1 spent when compared with other incentives.

WHAT WE RECOMMEND

Legislative action

• Eliminate the railroad rolling stock exemption.

• If the aircraft parts, engines, and supplies exemption is extended, better target it to repair activities that could be performed out-of-state and to business aircraft.

• Convert the Port Volume Increase Tax Credit to a grant to increase its usability.

• Better target the International Trade Facility Tax Credit, Port Volume Increase Tax Credit, and Port of Virginia Economic and Infrastructure Development Grant to export cargo to increase their economic benefits.

The complete list of recommendations and options is available on page v.