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A liberal think tank says corporations aren’t paying their fair share into Virginia’s treasury.
"At last count, roughly two-thirds of corporations didn’t pay any income tax in Virginia despite this being a time of record high corporate profits," the Commonwealth Institute for Fiscal Analysis wrote in an April 30 blog. "That’s due in large part to the teams of accountants they deploy to exploit special tax breaks and reduce or eliminate what they owe."
Virginia’s corporate tax rate has been set at 6 percent since it was created in 1972. During the tax year that ended last June 30, it pumped $757.5 million into state coffers.
While that may sound like a big number, the corporate income tax is a distant third in making money for the state. The largest source of revenue comes from individual income taxes, which garnered $11.2 billion during fiscal 2014, followed by sales taxes, which brought in about $3.1 billion.
We wondered if it’s true that two-thirds of the corporations doing business in the commonwealth don’t pay income taxes.
Commonwealth Institute spokesman Patrick Getlein pointed us to figures compiled by the Virginia Department of Taxation for tax returns filed for 2012, the most recent year data are available. The report shows, on page 25, that of 66,862 corporate income tax filers in the state, 43,481 had no liability.
That means 65 percent of corporate filers didn’t put a penny of income tax into the state treasury, as the Commonwealth Institute said.
The Joint Legislative Audit and Review Commission came with similar figures in a 2010 report on Virginia’s corporate tax system that examined 2006 filings. It found that "nearly two-thirds of corporate filers appear to have no tax liability at all." Of 74,665 corporate filers that year, 46,406 didn’t owe any income tax.
All of these corporate tax figures come with caveats, however.
JLARC found that nearly 30 percent of the non-paying filers in 2006 -- 13,147 corporations -- didn’t owe income taxes because they had no financial activity in the state that year. Corporations that close in Virginia are still required to file tax statements for a period of years.
When "inactive" corporations were removed from the equation, JLARC found there were 33,259 "active" corporations that paid no income tax in 2006, or about 44 percent of all the businesses that filed.
Those companies may have been profitable from a business perspective, JLARC said, but were able to report a loss from a tax perspective by claiming deductions.
Neither JLARC nor the Department of Taxation has an updated estimate of the number of inactive corporations in Virginia.
Different types of corporations
Virginia only levies its corporate income tax on "C corporations" -- businesses in which the entity, not the owners, pay the taxes. The state doesn’t apply the tax to certain types of C corporations such as banks and insurance companies, but gets money from them in other ways. Banks, for example, pay a franchise tax and insurance companies pay a premiums tax.
Fewer than 10 percent of businesses in Virginia are C corporations, according to JLARC figures. The vast remainder are "pass-through" entities in which the business doesn’t pay taxes , the owners and shareholders do. This includes S corporations, partnerships, limited liability companies and sole proprietorships.
Biggest pay bulk
The lion’s share of corporate income taxes is paid are paid by a relatively small group of highly profitable multistate businesses, JLARC said. In 2006, nearly two-thirds of corporate tax revenues was generated by 200 large companies with annual incomes exceeding $10 million, the watchdog group found. On the other hand, 93 percent of corporate filers earned less than $100,000 and they paid only 5 percent of the tax’s total revenues.
Jared Walczak, a policy analyst at the D.C.-based Tax Foundation, a pro-business think tank, said we should keep in mind that corporations are subject to other levies beyond income taxes. For example, they can owe state sales taxes on items they buy for their business, and local taxes on their property and gross business receipts.
"Corporate tax income is only one part of the overall tax burden on business, and often a relatively modest share of corporate tax liability," said Walczak, a former aide to state Sen. Mark Obenshain, R-Harrisonburg.
A final note: We couldn’t find data breakdown showing the percent of corporations in each state that don’t pay income taxes. On a national level, the Government Accountability Office said in a 2008 report that 60-70 percent of U.S. corporations had no tax liability from 1998 through 2005.
The Commonwealth Institute said "At last count, roughly two-thirds of corporations didn’t pay any income tax."
It’s correct that two-thirds of corporate filers wound up owing zero income tax, according to the most recent report on the issue by the state Department of Taxation and another by JLARC. Many profitable companies can avoid the levy by claiming deductions.
But the institute leaves out information. Many corporations don’t pay because they’ve stopped operating in the state, yet are still required by law to file a return. JLARC, after weeding out those businesses in 2010, found that 44 percent of active corporations didn’t pay income tax.
We rate its claim Mostly True.
The Commonwealth Institute, "Livin’ on a prayer," April 30, 2015.
Email from Patrick Getlein, director of communications at the Commonwealth Institute for Fiscal Analysis, May 12, 2015.
Interview with Michael Cassidy, president and CEO of the Commonwealth Institute for Fiscal Analysis, May 22, 2015.
Emails from Joel Davison, spokesman for the Virginia Department of Taxation, May 13-22, 2015.
Email from Jared Walczak, policy analyst at the Tax Foundation, May 13, 2015.
Interview with Terry Rephann, regional economist at the Weldon Cooper Center at the University of Virginia, May 14, 2015.
Interview with Nick Harrison, partner at Dixon Hughes Goodman accounting firm in Henrico County, May 14, 2015.
Virginia Department of Taxation "Annual report fiscal year 2014," page 25.
Joint Legislative Audit and Review Commission, "Review of Virginia’s corporate income tax," November, 2010.
Virginia Department of Finance, "Joint money committee presentations," accessed May 13, 2015.
The Commonwealth Institute, "How would a corporate income tax cut hurt Virginia’s ability to invest in the future?" June 19, 2013.
The Small Business Administration, "S Corporation," accessed May 14, 2015.
The Small Business Administration, "6 things you need to know about your tax responsibilities as an LLC," Nov. 13, 2012.
The Small Business Administration, "Sole proprietorships," accessed May 19, 2015.
Small Business Administration, "Corporation (C Corporation)," accessed May 19, 2015.
PolitiFact Wisconsin, "One Wisconsin Now says two-thirds of Wisconsin corporations don’t pay state income taxes," May 11, 21011.
Email from Jake Lestock, policy associate with the National Conference of State Legislatures, May 18, 2015.
PolitiFact, "Sanders: One out of four corporations pay no taxes," Sept. 16, 2013.
Government Accountability Office, "Comparison of the reported tax liablities of foreign- and U.S.- controlled corporations," 1998-2005.
National Conference of State Legislatures, "Business income taxes," accessed May 19, 2015.
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