A rebounding economy means more customers, higher sales and new jobs.
It also means higher taxes.
State and local tax bills for companies across the country grew modestly last year as the economic recovery accelerated, according to new research released last week, and Washington-area firms were no exception. District, Maryland and Virginia businesses collectively paid $27.6 billion to state and local coffers in fiscal 2013, an increase of 3.8 percent over the $26.6 billion collected in 2012.
Businesses’ state and local tax burdens last year expanded by 4.3 percent, to $671 billion, compared with 3.9 percent the year before, and it was the third consecutive year of growth after back-to-back years of shrinking bills in 2009 and 2010.
State taxes rose at a faster clip, 4.3 percent, than local levies, 3.9 percent, according to the study, which was conducted by professional services firm Ernst & Young and the Center on State Taxation, a tax policy group.
More than half of the District’s tax revenue, 56 percent, comes from business taxes, while 36 percent of Maryland’s revenue comes from firms. Virginia, at 28 percent, generates the least amount of tax revenue, proportionately, from business.
Much of the growth in tax revenue is being driven by a rebound in companies’ real estate values, researchers say, which pushed property taxes up 3.7 percent this year after three consecutive years of sub-1 percent growth.
While a large share of those gains came from big states such as California, New York and Texas, it appears to be the same story in the Washington area as well.
Companies in the District, Maryland and Virginia collectively forked over $10 billion in state and local property taxes last year, up from $9.6 billion in 2012 — year-over-year growth of 4.2 percent. But the apparent bounceback in property values isn’t doing nearly as much to inflate state and local tax revenues in Maryland, where property taxes amount to barely more than a fifth of companies’ tax bills.
Virginia and D.C. firms pay nearly half of their state and local tax bills in the form of property taxes.
“What’s happening in Maryland is that so much of their property, especially the tax base surrounding the D.C. area, is owned either by the government or by nonprofits, which don’t pay property taxes,” said Douglas Lindholm, executive director of the Center on State Taxation. “So Maryland is forced to rely much more heavily on, for example, its income taxes to pay for the same services you have in other states.”
The recent rebound in business tax revenue cannot all be attributed to the recovering real estate market. Business incomes also appear to be on the mend, according to the data. Companies in the region reported state corporate income taxes of $2.3 billion, up from $2.1 billion in 2012. Maryland collected $1 billion in corporate income tax revenue, the most in the region.
While trending in the same direction, the local tax burden on businesses isn’t growing at the same pace in all three places. The District’s rate of growth was level with the national average, at 4.3 percent, while Maryland’s growth was substantially faster at 4.9 percent. Only Virginia posted a below-average tax bill bump of 4.1 percent.
Virginia has the lowest corporate income tax by far of the three jurisdictions (all of which have flat corporate rates) at 6 percent. Maryland’s corporate rate is 8.25 percent, while the District’s stands at a relatively high 9.975 percent.
A similar study by the U.S. Chamber of Commerce earlier this year showed that Virginia had lower state and local business taxes and an overall better business tax climate than Maryland. The District wasn’t evaluated in the study.
Despite its advantage, Virginia is facing competitive pressure from its neighbor to the south. North Carolina recently signed legislation lowering its corporate rate this year from 6.9 percent to 6 percent, in line with Virginia, and the rate will drop to 5 percent next year. If the state continues to meet revenue goals in the coming year, the law could push the state’s business income tax rate as low as 3 percent by 2017.
Meanwhile, small businesses in the Washington region seem to be faring better and thus paying more state and local taxes, according to the recent study. Business taxes paid as personal income taxes by small business owners — the pass-through structure by which most small firms are organized — in the District, Maryland and Virginia surged 20 percent last year to $2.4 billion, a much faster rate of growth than overall business taxes.
Researchers say that trend and the increase in business taxes nationwide are likely to continue this year, with overall sales tax revenue for state and local governments up 6.2 percent in the first three quarters of 2014 compared with the same period last year. However, the Washington area may lag behind as the slowdown in federal spending takes its toll on the region’s labor market.