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Virginia Space Resupply Exemption Raises Policy, Legal Concerns

2 min readBy: Joseph Bishop-Henchman

The Harrisonburg (Virginia) Daily News reports on a bill signed earlier this month which exempts income earned from space launches or space resupply services from corporate and individual income taxes, so long as the services supply missions are launched from Virginia:

The legislation amends the state taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code so that, starting in 2009, no tax would be charged on revenue from commercial human spaceflight launch services and training, or space resupply services, provided those launches take place from a facility in the state.

The fiscal impact statement for the legislation notes that the impact of the tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. “is unknown, but likely minimal,”because of the lack of activity in this sector.

While there may be a lack of activity now, there could be a great deal of activity in the future. Promising tax-free takeoffs is one way to help promote such space ventures.

It doesn’t hurt to plan ahead. Besides, the name “Virginia Space Port” has a nice ring to it.

It’s not quite as crazy as it sounds, since Virginia operates (with Maryland) the Mid-Atlantic Regional Spaceport on a coastal island. And who’s to say that space travel isn’t the next big thing, with or without government support? Even put aside the fact that exempting certain industries from taxation distorts behavior, artificially drawing investment away from more productive areas to take advantage of tax incentives.

By granting the exemption only to in-state space missions, Virginia companies that resupply space missions launched from other locales will have to pay full taxes. That may violate the Commerce Clause of the U.S. Constitution, as the issue is similar to the one raised in the Kentucky v. Davis case (where Kentucky taxes interest earned on other states’ municipal bonds, but not on its own bonds). Here, Virginia companies are taxed if they supply out-of-state launches, but not if they supply in-state launches.

Rather than laying out a welcome mat—encouraging all space resupply activity within the state, regardless of where the launch is—Virginia has chosen to impose an exit toll, taxing out-of-state activity while exempting identical in-state activity. The purpose seems to be to shield Virginia from interstate tax competition, instead of engaging in the competitive neutrality envisioned by the Constitution.