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McDonnell proposes to reinstate business tax break

Rosalind Helderman

Gov. Bob McDonnell is proposing that the General Assembly retain a tax credit for Virginia manufacturers, a $10 million budget tweak that will please anti-tax activists and potentially spur economic development.

Among the major employers who would qualify for the tax break is Northrop Grumman, which is weighing whether to move its corporate headquarters from California to Virginia or Maryland.

McDonnell has until midnight to propose amendments to the state's two-year budget for consideration by the legislature at a one-day session next week. So far, he's announced only changes that will cost money; he will have to propose commensurate cuts as well.

State manufacturers and others had been pushing hard for this tax change.

The issue is a bit complicated. Here's how it works:

In 2004, Congress adopted a federal tax deduction for certain companies that choose to keep production in the United States. Many states chose to follow Congress' lead and offer a similar break on state taxes for companies that qualified.

In Virginia, the General Assembly agreed that it would phase in the new deduction. First, businesses would get a deduction on their state taxes amounting to 3 percent of the federal tax break. Then 6 percent. Next year, the state tax break was scheduled to increase to 9 percent of the federal tax break.

But as state budgets have eroded, 20 states have agreed to decouple from the federal tax break. Before he left office, Gov. Tim Kaine (D) proposed boosting state revenue by doing away altogether with the state tax deduction for qualifying businesses.

The General Assembly agreed that, instead of allowing the tax break to increase to 9 percent of the federal tax deduction, it would freeze it at 6 percent in the first year of the budget and then reduce it to 3 percent in the second year. As a result, some businesses would see their taxes go up and the state would save money.

McDonnell (R) now proposes retaining the tax break at 6 percent for both years, costing the state $10 million in lost revenue in the second year of the budget but reducing taxes for some manufacturers.

"This is a pro-job creation amendment that will help keep employers in the Commonwealth, encourage businesses to locate in Virginia and give us a further advantage over other states," McDonnell said in a statement.

One state that does not have the tax break: Maryland. That's significant, because major corporate employer Northrop Grumman would probably get a hefty break on its state corporate income tax through this deduction, sweetening the pot as Virginia works to lure the company's headquarters.

Various groups that oppose taxes have been lobbying McDonnell on the issue. Ben Marchi, director of the state chapter of Americans for Prosperity, said that if McDonnell had not acted, it would "undoubtedly have resulted in a tax increase."

"This is great news for an administration that pledged not to increase taxes," he said.

Will the General Assembly accept the change? That will probably depend on where McDonnell proposes to find the $10 million to pay for it. More on that when we have more information.

By Rosalind Helderman  |  April 13, 2010; 1:05 PM ET
Categories:  General Assembly 2010 , House of Delegates , Robert F. McDonnell , Rosalind Helderman , State Senate  
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