RICHMOND — Gov. Terry McAuliffe called Thursday for a reduction in Virginia’s corporate tax rate that he said would save businesses roughly $64 million over two years and put the state in a better position to attract new companies.
The governor proposed the tax cut and expansions for several tax credit programs weeks before he formally presents his two-year budget plan.
McAuliffe made the announcement at the Richmond Times-Dispatch building during AP Day at the Capital, an annual gathering of reporters, legislators and political analysts ahead of the legislative session.
The governor, who has made attracting new businesses a hallmark of his gubernatorial agenda, said reducing the corporate rate from 6 percent to 5.75 percent would strengthen Virginia’s ability to compete for economic development projects. He pointed specifically to North Carolina, where the corporate tax rate is scheduled to fall from 5 percent to 4 percent next month.
“Many of the projects I’m trying to bring to Virginia, the door goes right up,” McAuliffe said. “The first question is: ‘What is your tax rate?’”
McAuliffe, scheduled to present his budget on Dec. 17, would not say how he intends to pay for the tax cut. He called the state budget “very healthy,” pointing to the $553 million budget surplus announced in July.
The governor could attempt to gain leverage in an ongoing fight with tax-averse Republicans in the General Assembly by linking the cut to his efforts to expand Medicaid under the Affordable Care Act.
In a statement shortly after the governor’s announcement, Republicans said it would be “unwise for the governor to predicate new spending or initiatives based on so-called savings from Medicaid expansion.”
“The House position on that issue is very clear,” said Del. Chris Jones, R-Suffolk, who chairs the House Appropriations Committee. “The governor and the legislature have worked productively on the budget in the past when we have set Medicaid expansion aside, and it is my hope we can continue to do that.”
Jones said it was too early to comment on the tax proposal.
“Everything within the budget is a puzzle piece, and until we have all the pieces, there is not much to say,” Jones said.
Expanding Medicaid to provide health coverage to up to 400,000 low-income Virginians is projected to save the state more than $150 million initially by bringing in more federal dollars. Republicans have argued that expansion would put severe long-term strain on the state budget.
Under the governor’s proposal, the lower tax rate would go into effect at the beginning of 2017.
McAuliffe also called for more tax credits to strengthen research and development. He proposed a new, $15 million tax credit program for large companies with more than $5 million in annual research spending.
He also called for raising the caps on other tax credits, bumping the R&D tax credit cap from $6 million to $7 million and the angel investor tax credit cap from $5 million to $9 million.
McAuliffe also said he wants to cut in half the number of businesses that pay accelerated sales tax, which he called “a lot of hocus pocus” that simply moves money around in the state’s books.
The governor’s announcement was warmly received by business groups, including the Virginia Chamber of Commerce.
“The Virginia Chamber supports a comprehensive review and overhaul of Virginia’s tax structure to promote long-term economic growth that includes a reduction in the corporate income tax rate,” said Barry DuVal, the chamber’s president and CEO.
The National Federation of Small Businesses praised the rollback of accelerated sales taxes, but said small businesses won’t get much relief from the tax cut because most pay at the individual tax rate, not the corporate rate.
Left-leaning groups such as Progress Virginia and The Commonwealth Institute for Fiscal Analysis voiced disappointment, arguing that the state shouldn’t cut corporate taxes when schools are strapped for resources and college tuition is going up.
“Handing out tax breaks to corporations while families are struggling to make ends meet is not the right priority,” said Anna Scholl, executive director of Progress Virginia.
In addition to economic development, McAuliffe has said his budget will focus heavily on K-12 education and military veterans.