In shaky economic times, Virginia doling out tax breaks

By Fredrick Kunkle
Sunday, March 13, 2011; C01

For four years, the Virginia General Assembly has scrimped, scrounged and borrowed to pay for schools, highways, police, and public programs that care for the mentally ill, the disabled and the poor.

But even though the shaky economy has slashed at least $6 billion from Virginia's treasury, lawmakers have continued doling out millions of dollars in tax breaks to promote "green jobs," benefit wineries and help businesses relocate. Among them was this year's renewal of a $45 million-a-year provision for Virginia's two most powerful electric utilities and the coal mines that supply them.

The bill gives Virginia electric utilities that burn Virginia-mined coal more time to redeem or refund the tax credit. In practice, the tax credits, which are worth $3 per ton of coal, pertain almost exclusively to Dominion Virginia Power and Appalachian Power and the Virginian coal producers that supply them.

The bill's sponsor, Sen. William C. Wampler Jr. (R-Bristol), who represents a district in southwest Virginia's coalfields, said that the measure, which has been on the books since 1999, is necessary to protect thousands of mining jobs as Virginia's coal reserves shrink and the competition from other coal-producing states intensifies.

"Keep in mind that the idea of the credit is to keep Virginia coal competitive," Wampler said. "If you were to say, 'No, we're not going to have this tax credit,' you could argue that over time, you would drive Virginia's coal industry out of business."

But critics say the measure, known as the Coal Employment and Production Incentive Tax Credit, is corporate welfare. Together with an existing and related tax break for companies that extract the most hard-to-get coal and natural gas, the credits amount to at least $93.3 million a year for utilities and coal-mining concerns - or about $17,000 for each existing mining job. These two industries also cycle millions of dollars right back into the legislature through campaign donations.

"Virginia's tax credits reflect the spending habits of Washington, D.C., and the economic planning of the old Soviet Union," commented Del. Albert C. Pollard Jr. (D-Northumberland), who warned about the overweening powers of corporate lobbyists during a farewell speech on the floor of the House of Delegates after announcing his retirement. "It's not even helping the miners - it's helping the companies."

'Benefit to consumers'

Unused tax credits can be refunded, sold or shared with the coal producers; they can also be applied against any state tax, according to Virginia's Taxation Department. Pollard said the provision appears to allow utilities and coal producers to retroactively benefit from unused tax credits since 2006 and carry them forward beyond 2016.

"Not only is there a $45 million giveaway, you're giving it away for back tax credits," Pollard said. He credits the existence of the tax break to the powerful influence wielded in Richmond by the energy and natural resource industries.

Dominion, which reported annual net income of $2.8 billion last year, is Virginia's most generous political contributor, having donated $676,794 in the current election cycle, according to the nonprofit Virginia Public Access Project. The Richmond-based utility gave $216,294 to Virginia legislative candidates, while Alpha Natural Resources donated $164,664 and Appalachian Power gave $85,400. Wampler received $42,500 from energy and natural resources industries, including $25,000 from Alpha Natural Resources.

But C. Ryan Frazier, a spokesman for Dominion, said the credits in no way fatten Dominion's bottom line. The utility, which is closely regulated by the State Corporation Commission, factors the tax credits into the purchase of fuel as part of its rate calculations. Any benefit is, therefore, passed on to consumers, Frazier said. Taken together, the tax credits simply allow the utilities and coal producers to defray the higher cost of coal in Virginia relative to Kentucky or West Virginia, he said.

"We cannot make a profit off the Coal Employment and Production Incentive Tax Credit," Frazier said. "It's a benefit to coal producers. It can be a benefit to consumers."

Appalachian Power, which is a unit of American Electric Power, has not been able to claim the credits because of losses in recent years, spokesman Todd Burns said. Alpha Natural Resources, which is based in Abingdon and is one of the nation's largest coal producers, did not return a call requesting comment.

The provision flew through the legislature with little debate. The Senate approved it 39 to 0; the House voted in favor 78 to 19.

Maintaining an edge

But Virginia's coal and energy businesses were not the only beneficiaries from tax breaks. This year alone, the Virginia General Assembly adopted 17 measures granting new tax breaks worth at least $30 million a year, according to the Commonwealth Institute, a nonprofit group that analyzes state fiscal matters.

"We're handing out tax credits like lollipops for Suzy this time," said House Minority Leader Del. Ward L. Armstrong (D-Henry).

Supporters say such tax breaks are necessary to maintain Virginia's high rankings as a business-friendly state. Although its sales tax and corporate tax rates are lower than Maryland's or North Carolina's, the commonwealth still faces keen competition, some from as far away as China.

To keep its edge, the state uses a variety of tax credits, loans and incentives from sources including the Governor's Opportunity Fund, which doubled in fiscal 2011. Supporters say such goodies have lured such corporate titans as Northrop Grumman, the aerospace defense contractor that moved its headquarters to Fairfax County last year, thanks in part to at least $13 million in state incentives.

Lawmakers also use tax breaks to shape desired policies. There are incentives such as the Green Job Creation Tax Credit, the Recycling Equipment Tax Credit and the Major Business Facility Tax Credit for relocating or expanding in the commonwealth. Other measures benefit wineries, commercial spaceflight and moviemaking.

Luring jobs, businesses

W. Thomas Hudson, president of the Virginia Coal Association, said the tax credits for Virginia's electric utilities and coal producers date to the late 1980s, when coal production plummeted, mines closed and the number of jobless miners nearly doubled. So the industry turned to Richmond for help.

Today, the two coal-related tax credits keep more than Virginia's 5,500 miners working, and each of those jobs, which are among the highest-paying in the region, create four times more, Hudson said.

He said some tax-credit proceeds also go to the Virginia Coalfield Economic Development Authority, which helps lure new businesses involved in data-processing, software and other high-tech enterprises.

"I know people may argue against the tax credit, but it certainly has helped the area to avoid being an economic wasteland," Hudson said.

But critics say the General Assembly has been so busy giving away tax breaks, tucking them here and there in the most arcane patches of the state code, that lawmakers are not even sure of their total cost or effectiveness. Many seem to run on autopilot.

"They are spending by another name," said Michael J. Cassidy, president of the Commonwealth Institute. "You're baking it into the tax code."

In 2009, the Commonwealth Institute identified more than 60 tax exemptions, exclusions, deferrals, credits or preferred tax rates.

These tax breaks, which the institute calls "tax expenditures," cost Virginia taxpayers at least $2.5 billion a year, an increase of about 40 percent over four years.

The Senate Finance Committee, reporting on economic development incentives in November, found that annual funding for economic development had more than doubled in the current fiscal year. Its report also noted that there was very limited research into their cost-effectiveness.

To address such concerns, Sen. Janet D. Howell (D-Fairfax) has introduced legislation in the past two legislative sessions asking the Joint Legislative Audit and Review Commission to analyze the effectiveness of tax breaks and economic development grants.

This year, the Senate Finance Committee also adopted new rules to give tax-credit legislation more scrutiny. Beginning next year, the committee will consider such bills only during longer sessions when drafting the two-year budget, not during in-between years with shorter sessions when the budget is only revised.

The tax credits would also no longer be refundable or transferrable, and they would expire after five years.

But Pollard said this year's legislative record shows that those steps are not enough.

"Virginia has a more rigorous process for getting new license plates approved than we do for getting new tax credits approved," he said.

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