Economic Incentives or Constraints?

An old saying is the only certainties in life are death and taxes. Current tax codes with their special circumstances and infinite variables almost make the grave seem the better of the two.

Most Americans today don’t realize federal income taxes were initially only temporary and were first collected during the Civil War. After 1913 and the ratification of the 16th Amendment to the U.S. Constitution, federal taxes were paid just one time a year. With World War II and the need for steady funding, these taxes began to be collected by employers during each pay cycle. 

The United States tax code is today one of the most cumbersome and convoluted documents in existence, and has ten times as many words in it than does the Christian Bible. Many believe it is even harder to interpret.

Over the years an exempt tax status was granted, beginning with states and churches. States are sovereign and therefore exempt from paying federal taxes, and it makes no sense for them to tax basic services provided to citizens. Churches were granted exemptions not so much because of the separation of church and state, rather because of the charitable support religious organizations provided. These humanitarian efforts benefitted the wider society by helping the weak get stronger, filling gaps the government couldn’t or wouldn’t address. Subsequently, other groups working for benevolent causes were granted tax-exempt status. Non-profit organizations today are not automatically exempted from paying federal and/or state taxes, which remains a special status controlled by the Internal Revenue Service (IRS).

Along with the power to tax, our government was also granted the power of eminent domain. The most common purpose for this is to provide for public utilities, highways and railroads. The power of condemnation is limited by the 5th Amendment, yet recent Supreme Court rulings have redefined the interpretation of “public good” and so this topic may be subject to more legal challenges in the future. In the early 1800s, in an effort to populate newly acquired land with American citizens and immigrants, a limited power of eminent domain was extended by state charter to privately owned railroad corporations.

Which brings up the question: Is the basis for special rules still valid?

Reading regional headlines, one sees where Botetourt County and The Glebe are in a legal battle over taxes. The retirement facility is operated by Virginia Baptist Homes, which was granted non-profit status during the 1970s for other enterprizes. The county is arguing the owners are operating a business. When a non-profit offers services at a fee, should they receive a blanket tax exempt status even when competing in an open market?

Looking locally, one reads where the Montgomery County Board of Supervisors is fighting the Commonwealth of Virginia and Norfolk Southern Railroad about the placement of an Intermodal Rail Facility. Should the State have the power to trump local land uses, and should private corporations continue to have condemnation powers?

Another local issue is when institutions receiving state funding enter the open market. Should revenue generating operations automatically receive tax exempt status from the State even when unrelated to the mission of that institution? The reference here would be relative to Virginia Tech and Radford University which do not collect meals, sales or lodging taxes when selling to customers (faculty, staff, students or visitors), and have the primary function of providing an education to tuition paying students.

Another regional issue is where Carilion Health Systems, Virginia Tech and the City of Roanoke are principals for a planned medical college. While the hospital is a not-for-profit organization (similar yet distinct from non-profits), it agreed to pay real estate taxes on land and buildings obtained for this project. Now, Virginia Tech has said it will construct and own the buildings, and so legal questions about tax liabilities are popping up and may impact Roanoke City's tax base.  

Progressive or flat taxes are entirely different subjects. The questions here are simple: When are special tax provisions or legal powers appropriate? If there were viable societal reasons for these provisions in the past, do they remain valid today? How do we know where the line is, and when these unusual privileges constrain competition and damage local, regional or national economies?  

These questions may seem a moot point to some readers, while others are reading this and saying “Exactly!”

The answers – and keeping the playing field level and fair – are not simple.