Tuesday, June 24, 2008

BPOL Tax; Bad for Stafford County, Bad for Businesses, Bad for Tax Coffers

by Al King, Spotsy GOP Treasurer, as read in
The Free Lance-Star 06/24/08

BPOL Tax means Lower Value, Fewer Profits, Fewer Jobs

THE STAFFORD Board of Supervisors is considering adoption of a Business, Professional, and Occupational License (BPOL) tax. This is a tax on gross receipts with no deductions and must be paid even if the business is losing money. Certainly there are pros and cons with regard to any tax. Proponents view BPOL as an untapped source of revenue. Opponents regard it as unfair, since even the unprofitable must pay.

Often overlooked in the debate is the impact of the BPOL tax on the value of individual businesses within the county. The value of a business often has to be determined for gift and estate taxes, and for the potential sale of the business. Adoption of the proposed BPOL tax will immediately lower the value of every business currently located in Stafford County.

This lower value might be desirable when paying estate taxes, but certainly will be unwelcome by any current owner contemplating selling his or her business to a new owner. The reason is simple and clear.

The value of any business today is based on future cash flow and profits it will generate. If a BPOL tax is adopted in Stafford, the approximately $4 million-plus of anticipated total revenue must come out of the owners' profits. Common sense suggests that the selling prices of goods and services in Stafford have to be competitive with those in other nearby localities. So adoption of the BPOL tax will not permit business owners simply to raise prices to offset the new tax. Instead the tax payments will directly reduce net profits.

Since the value of a business is a multiple of anticipated profits, and just as night follows day, the values will drop upon imposition of the new tax. The proposed BPOL has five different rates applied to gross receipts, depending on the nature of the business.

Wholesalers will pay $.025 per $100 of gross income, while professional services (doctors, lawyers, and accountants) will have to pay $.18 per $100 of revenue.

Based on the total revenue assumption of $4 million of total collections in Stafford, the net worth of business owners, taken in total, will immediately go down some $18 million at the proposed tax level. But there's an even greater potential for loss of value. A majority of Stafford County's supervisors have indicated a willingness to adopt BPOL rates that are one-half of the maximum allowed by the commonwealth. Should they decide in the future to raise those rates to the maximum, total business valuation losses could rise to more than $37 million.

Now, Stafford County residents who are not business owners may not feel much sympathy for those who are. This, however, is very shortsighted. Small businesses generate the majority of new jobs throughout the country. Stafford has been particularly favored as a site for new businesses, and one reason is that--unlike its neighbors--the county so far has not had a BPOL tax. Were the tax to be adopted, there would be no reason for new businesses to locate in Stafford, to enjoy lower operating costs and, hence, higher business values. Instead, the tax benefit will have disappeared, with a concomitant decrease in the propensity of new businesses to locate there.

It should always be remembered that business decisions are based on the margin, not on averages. Right now, Stafford County enjoys a competitive advantage, and this has shown up in the number of relatively new businesses located there. Giving up this competitive advantage means that in Stafford's future there will be fewer new businesses, and fewer employment opportunities.

As a resident of Spotsylvania County, which does have a BPOL tax, in theory I should welcome the downgrading of Stafford to our level. But as a believer in competition, as long as Stafford does not have a BPOL tax this will continue to put pressure on the Spotsylvania Board of Supervisors to keep our taxes low. I would rather see Stafford maintain its competitive advantage because in the long run those of us in Spotsylvania will come out ahead.

-Al King lives in Spotsylvania County and has 40 years' experience as a business appraiser.


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