Mythical Corp., a hypothetical manufacturing firm with assets of $8.5 million and net income of $200,000, decides to locate in the Washington area. In comparing possible sites, the corporate heads learn that the firm's total state and local tax liability could differ by as much as $100,000 a year depending on the jurisdiction they choose.
Based on estimated state and local tax liability, their best choice in the immediate Washington metropolitan area would be Montgomery County, where they could expect to pay around $79,100. Next door in the District, they would have a tax liability of more than $175,0009
Unicorn Inc., a hypotehtical research and development firm with $2.7 million in assets and $200,000 in net income, also wants to relocate in metropolitan Washington. aIts officials could figure on paying about $54,200 in state and local taxes if it moved into Alexandria -- about $40,000 less than it could expect in the District.
Business relocations in the Washington area form a pattern resembling iron shavings being pulled by magnets of varying strengths: Although firms are attracted to a site for a number of complex reasons, generous tax treatment has proved to be a magnet with strong pulling power.
Ralph Frey, vice president and general manager of C&P Telephone and current Greater Washington Board of Trade president, calls tax rates "important to very important" in site selection and says high District taxes clearly discourage businesses -- particularly the job-producing light industries needed most -- from coming to the city.
Figures compiled by the Board of Trade show that Maryland gives a clear tax advantage to manufacturing businesses, while Virginia provides the best tax climate for research and development firms and for regional headquarters for out-of-state corporations.
The District has the highest estimated taxes for all business categories studied, except retail corporations where it is second highest.
Donald Tolefson, Board of Trade president-elect, says that because of the District's relatively high tax burden, "chances are very slim" that a business coming into the area would choose the District as its home. By contrast, it would look to the suburbs and see a "fantastic environment" in terms of taxes, he says. Tolefson, of Arthur Andersen & Co., headed a tax task force for the District that issued its report earlier this year.
The widening gap in business taxes between the District and the surrounding suburbs make Tollefson, other D.C. business leaders and government officials fearful that the city -- already beset by severe financial troubles -- will suffer a serious business drain, which in turn would siphon jobs and erode a solid tax base for the future.
Tollefson says the task force found the District on the brink of corssing an important line in taxes: The city already had priced itself out of the market for attracting companies and was close to the point at which existing businesses would begin to flee what they considered a prohibitive tax burden. Since that report was written, the financially strapped District has increased its taxes on business.
Mayor Marion Barry had hoped to lower business taxes when he came into office, but the District's financial crunch pushed him into proposing a 16 percent boost in commercial property tax rates, a 9 percent increase in personal property tax rates on business equipment and a higher hotel tax. The City Council approved these tax hikes last month.
Tax rates in the surrounding jurisdictions, meanwhile have been stable.
Certified public accountants Millard T. Charlton and Co. computed and compiled the tax figures for the Board of Trade, based on data from local jurisdictions, comparing the tax treatment that six hypothetical businesses in Maryland, Virginia and the District would get county by county.
In addition to the manufacturing firm and research and development company from which the Mythical Corp. and Unicorn Inc. examples were drawn, the hypotehtical businesses included a wholesale corporation, a retail corporation, a lessor of commercial or industrial property and a nonsales regional headquarters of an out-of-state corporation -- all with $200,000 in net income.
The tax figures are based on 1979 tax rates. W. Dickerson Charlton, a Millard T. Charlton and Co. general partner who is in the process of updating the figures using 1980 rates, said the pattern is likely to remain more or less the same. But the gap between the District and the suburbs is apt to be even greater because of the recenly approved increases.
Baltimore, also included in the study, has even higher estimated taxes than the District for all but the manufacturing corporation, for which it is second highest. Several other counties not in the immediate surburban D.C. area also were included and genrally showed lower rates than those closer to the city.
For hypothetical manufacturing corporation, the highest tax liability found in a suburban Maryland jurisdiction -- in Prince George's County, at $87,400 -- is about the same as Virginia's lowest -- Loudoun County, at $87,200.Arlington is the second-highest in the area at $121,000, topped only by the District's $174,900. The major difference for the manufacturing corporation is that all of the Maryland jurisdictions exempt if from personal property taxation on manufacturing equipment. The District's figure is pushed up by an inventory tax that far outpaces those of the Maryland or Virginia jurisdicaitons.
Lower unemployment compensation taxes in Virginia were the main factor making that state -- with the exception of Arlington, which would present the second highest total tax bill -- clearly more advantageous to the hypothetical research and development firm and to the regional headquarters.
Tollefson says a business that chooses to locate in the District pays on the average 10 to 15 percent more in local taxes than it would in surrounding jurisdictions. But this figure obscures even greater differences for certain kinds of businesses, he adds.
For light manufacturing, for example, the tax premium a company would have to pay to locate in the District is 60 percent above Montgomery County and 41 percent above Fairfax County rates, Tollefson said. The light manufacturing category, including "clean" industries such as furniture, lamps or other consumer products, is sorely needed in the District to provide jobs for the huge pool of unskilled labor available, Tollefson argues.
He and other business leaders also see a kind of rich-get-richer-poor-get-poorer syndrome taking hold in the area. While outlying areas are expanding their tax bases with the new businesses they are attracting, the District will find itself squeezed more and more as it loses potential industries to the suburbs, they fear.
The great business catches for the area recently have gone to the suburbs, they fear.
The great business catches for the area recently have gone to the suburbs: Mobil's refining and marketing division in Fairfax; General Electric Information Systenssm DataCrown and Optim Electronics in Montgomery County; Time-Life Books in Alexandria.
The District has pulled in increasing numbers of associations (which by federal law do not pay income taxes) but overall has shown no growth and has lost a significant number of businesses to the suburbs.
Schwartz Bros., for example, recently made a move to Prince George's County from the District. AT&T shifted its regional office to Fairfax. M.S. Ginns, Hechinger's and Peoples Drug now have their corporate offices in Virginia or Maryland.
Tollefson says the tax trend actually is more important than the current tax gap between the jurisdictions. A business seeing the sharp tendency to increase in the District's tax history and the tendency to stable rates in the suburbs would be more influenced by that pattern than by what the current rates actually are, he argues.
He says he and other members of the tax task force have found a glimmer of hope in the mayor's announced intention not to propose any more business tax hikes during his term. But that is scant comfort when the surrounding areas are able to keep their rates so much lower.
Ed Meyers, deputy director of the D.C. Finance and Reveue Department, in a voice filled with frustration, acknowledges the need for taxes to be "low and stable" to attract and keep businesses. But he says Congress -- as part of the home rule chartger -- has given the District a mandate to be as self-sustaining as possible though, he argues, no high-denisity city can be truly self-sustaining.
By contrast, Fairfax City last April lowered its real estate tax by 10 cents, for a total drop of 40 cents over the last two years. Maryland recently approved legislation to help counties attract businesses by issuing tax-exempt bonds to finance development. If this trend continues, it could sustain the city's fears of falling farther behind in the drive for new, regenerating business.