2016 Legislative W R A P U P R E P O R T

Virginia Manufacturers Association2108 W. Laburnum Ave., Suite 230

Richmond, VA 23227804-643-7489 (p)804-780-3853 (f )

www.vamanufacturers.com

Key Legislation: http://vamanufacturers.com/advocacy/key-virginia-legislation

Table of Contents

Welcome to the VMA Legislative Wrap-Up Report. This report is produced annually to detail the highlights of each Virginia legislative session from the VMA’s perspective. The Table of Contents is a quick reference to key sections of the report.

2 Statistical Overview This is intended to give the reader a concise understanding of the legislative session from the

“30,000 foot” point of view. This section details the mechanical and statistical elements of the legislative session such as how many bills were introduced and passed this session.

3 VMA Priority Bills This is the proactive section of the report where details of each bill the VMA requested to be

introduced or was part of a coalition or commission that requested the bill to be introduced are found. These were the top priorities of the association during this General Assembly session.

7 Select Defensive Bills ThissectionidentifiesonlyselectbillsthatrequiredsignificantVMAactioninordertosupport,

amend, neutralize, or stop from negatively impacting the manufacturing sector or VMA’s legislative agenda.

13 Virginia’s State Budget Priorities ThissectionisintendedtogivemembersaquickreferenceontheCommonwealth’sfinancial

health, spending priorities and how they impact industrial businesses.

17 Summary This is a brief narrative of the 2016 Virginia Legislative Session in order to provide members

some understanding of the context and color of this year’s legislative session.

NEW SECTION

Did you know the Virginia General Assembly is the oldest continuous law-making body in the New World? It was established on July 30, 1619.

Did you know that nine “American” Presidents were born in Virginia? There were eight United States Presidents: George Washington, Thomas Jeffer-son, James Madison, James Monroe, William Harrison, John Tyler, Zachary Taylor, and Woodrow Wilson. There was also one Republic of Texas President, Sam Houston. All are honored in the Virginia State Capitol.?

1

Statistical Overview

This year 55% of the record breaking 3,286 bills introduced in the 2016 regular session by members of the General Assembly passed. This is effectively the same pass rate as in 2015. It should also be noted that 2,776 bills were introduced in 2015; 2,888 in 2014 and 2,575 in 2013.

The chart below is a historical view of VMA legislative session activity.

Year Bills Managed

Priority Bills*

Legislative Bulletin & Alerts

Government Affairs Council Meetings

Frequency Staff Testified Before

Committees

2003 105 14 7 7 31

2004 160 17 29 7 46

2005 65 12 26 7 46

2006 114 14 31 7 37

2007 125 8 21 8 43

2008 122 11 18 8 32

2009 243 8 20 8 36

2010 346 12 36 9 43

2011 133 14 25 7 22

2012 548 16 32 8 30

2013 422 18 21 7 27

2014 379 16 18 9 28

2015 932 27 12 7 15

2016 534 26 18 7 36

2

Statistical Overview

VMA has also categorized the bills managed during this session into 18 policy areas in order to highlight the issues that required the greatest attention:

Legislation Category 2015 Bills 2016 Bills

ABC 52 19

Budget 10 9

Constitutional 58 22

Economic Development 55 34

Education/Workforce Training 315 54

Employment/Workforce 53 3

Energy Regulation 112 38

Environmental 185 67

General Government 6 27

Health Insurance 46 25

Labor-Management 1 35

Procurement 46 23

Product Liability 0 6

Professional/Occupational Licensing 2 1

Taxation 194 94

Transportation 53 53

Unemployment 13 5

Workers Compensation 15 19

3

2016 Legislative Scorecard for VMA Priority Bills

The VMA produced an 85% success rate with this year’s 26 priority bills.

Economic Development

Patron Bill Description Result Comments

Landes HB 858 Virginia International Trade Corporation Win

Reforms economic development to assist MFG expand exports 50% ($8

billion) by 2025

Byron HJ 7

Virginia Economic Development Partnership

Authority; JLARC to review Authority

Win Begins comprehensive state economic development restructuring

Environmental Regulation

Patron Bill Description Result Comments

Cox HB 448

Nutrient offset credits; allows new and expanding

wastewater discharge facilities to acquire

Win Willcreatethefirst20-yearnutrientcredit trading product

Dance SB 314Nutrient offset credits; new and expanding wastewater

discharge facilities to acquireWin Willcreatethefirst20-yearnutrient

credit trading product

Stuart SB 529 Menhaden; increases total allowable landings Win

Assures health of environment andfutureoflastfishoil/fertilizer

factory in VA

85% of the priority bills had Republican patrons and 15% had Democratic patrons.

Priority bills represent legislation that has been introduced on VMA’s behalf or a coalition to which it belongs. These bills directly relate to VMA legislative priorities that have been developed by members, member committees and the Board of Directors. They are supported by the VMA’s Virginia Industrial Innovation Strategy and the VMA 2016 Legislative Agenda.

For a detailed review of VMA Priority Bills, go to http://vamanufacturers.com/advocacy/key-virginia-legislation/. To see how each Legislator voted on VMA Priority Bills ortofindoutmoreinformationaboutindustry-specificlegislation, please contact VMA Member Services at thefuture@vamanufacturers.com. Note: The VMA and its affiliate organizations also work on industry-specific legislation in the policy areas of alcoholic beverage control, tobacco and firearms.

Bill key Win - passed the General Assembly Loss - failed the General Assembly

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2016 Legislative Scorecard for VMA Priority Bills

General Government

Patron Bill Description Result Comments

Wagner SB746 Recovery of attorney fees from agency Win

In a civil case brought under the Administrative Process Act, where a person is contesting a gov. agency

action, reasonable costs and attorney fees ($25K) are allowed if the person substantially prevails on the merits of the case and the agency action

was “in violation of law” or was for an “improper purpose”; Intent is to level theplayingfieldbetweenbusiness

and overzealous regulators

Wagner SR 29State Corporation

Commission; nomination for election of member

Win Reappointment of SCC Judge Mark Christie to another 6-year term

Taxation

Patron Bill Description Result Comments

Byron HB 80Propertycertifiedastax

exempt; effective date of tax exemption

Win

Part of a multi-year effort to reform pollution control equipment tax

exemption; Holds state and local government accountable for January

1 being tax date for purposes of certifying pollution control equipment

taxexemptionandclarifies“inservice” standard

Yancey HB 186 Port-related tax credits; extends expiration date Win

Extends the $3,500 per FTE or 2% of capital investment tax credit for port

related trade activity to 12/1/22

LeMunyon HB 214 Tax reform, state and local; joint committee to study Loss

Would have started the machinery and tools, BPOL and merchants

capital tax repeal/tax modernization process

Ware HB 402Commonwealth’s tax code; conformity with federal law,

emergencyWin

Allowsforthefull9%ofqualifiedincome for IRC Section 199 Domestic

Production Deduction against state income tax – estimated $30 million

annualbenefittoindustry

5

2016 Legislative Scorecard for VMA Priority Bills

Taxation, cont.

Patron Bill Description Result Comments

Hugo HB 884 Research and development expenses tax credits Win

This bill changes the existing Research and Development

Expenses Tax Credit and creates a new one. Existing refundable

credit changes include: 1) Increase annual cap from $6 to $7 million; 2) Increase amount of credits; 3) Allow asimplifiedmethodinlieuofthecurrent statutory method of credit

calculation; 4) Extend the sunset to 12/1/22; and 5) Prohibit a taxpayer withVirginiaqualifiedresearchanddevelopment expenses in excess of $5 million from claiming the credit.

The new Major Research and Development Expenses Tax Credit

requires that the amount of the credit equal to 10 percent of the difference between:1)theVirginiaqualified

research and development expenses paid or incurred by the taxpayer

during the taxable year; 2) 50 percent oftheaverageVirginiaqualified

research and development expenses paid or incurred by the taxpayer for the three taxable years immediately preceding the taxable year for which the credit is being determined; and 3) Paid only to taxpayers with Virginia qualifiedresearchanddevelopment

expenses in excess of $5 million for a taxable year. The credit is

modeled after the Federal Alternative SimplifiedCredit(ASC).Thetotal

credits available for both programs will be $42 million over the biennium

McDougle SB 58Research and development expenses;modifiesthe

existing tax creditsWin See HB 884

Howell SB 161 Research and development; modifiesexpensetaxcredits Win Incorporated into SB 58

Hanger SB 545Commonwealth’s tax code; conformity with federal law;

emergencyWin

Allowsforthefull9%ofqualifiedincome for IRC Section 199 Domestic

Production Deduction against state income tax– estimated $30 million

annualbenefittoindustry

Norment SB 563

Sales & Use Tax; exemption for materials and equipment used to drill natural gas and

oil; sunset provision

Win Extends state sales tax exemption

on materials and equipment used to extract oil and natural gas to 12/1/22

6

2016 Legislative Scorecard for VMA Priority Bills

Workforce Development & Education

Patron Bill Description Result Comments

Byron HB 66

NEW Economy Workforce Industry Credential

Assistance Training Grants; grants for earning training

credentials

Win

First “pay-for-performance” industry credential grant program of its kind in US. $3,000 per student per credential

- $12.5 million fund. First industry credential fund in Virginia

Byron HB 279

Teacher licensure; Virginia career and technical

education (CTE) adjunct faculty licenses

Win

Creates new part-time, adjunct faculty license for K-12 CTE

instructors. Will allow more industry experts and retirees to teach

Yancey HB 508Worker retraining and

career pathway tax credit; modificationofcredit

Loss

Wouldhavemodifiedtheexistingworker retraining tax credit to allow manufacturers up to a $2,000 tax credit for hosting an “orientation,

instruction, and training program to students in grades 6-12”

James HB 793 Academic credit; industry credentials Win

Rolled into HB66. Requires community colleges to provide academic credit for industry-

recognized credentials

Greason HB 895High school graduation; Board of Education to develop requirements

Win

Redesign of high school and diplomas to include establishing

multiple paths toward college and career readiness for students to follow including internships, externships, and credentialing

by 7/1/18

Murphy HB 1036Longitudinal data system; SCHEV to develop and

maintain, reportLoss

Intended to expand the Virginia Longitudinal Database System’s

access to educational, health, social service, and employment outcome datainordertoimprovetheefficacy

of state services and decision making; $715K put into state budget

for continued operations instead

Jones HB 1068Advanced Shipbuilding

Production Facility Grant Program

Win

$46 million incentive to build new nuclear warships for the US Navy if a company invests $750 million in

capital and hires 1,000 workers for a metal casting facility

Miller SB 336High school graduation; Board of Education to develop requirements

Win See HB 895

Ruff SB 576Community College

Workforce Training Grant Program; established

Win See HB 66

Sturtevant SB 636State Council of Higher

Education; longitudinal data system; report

Loss See HB 1036

7

2016 Legislative Scorecard for VMA Defensive Bills

The VMA was 98% successful with these bills this session.

Economic Development

Patron Bill Description Result Comments

Cox HB 834Virginia Growth and

Opportunity Act – a.k.a., “GO Virginia”

In Progress

Creates a statewide political board to approve the funding of 11 regional political Boards/entities through the newly created “GO Virginia” fund;

State political Board will fund regional collaboration in economic development

& workforce training; $35.9 million fund will pay for operations/capacity building of new & existing regional

entities; Funds will also be distributed to entities regionally by population

($12.4 million) as well as competitively; Board is supposed to protect against

gov. duplication of workforce and other existing programs

Hugo HB 846

Virginia Collaborative Economic Development Act; established, sunset provision

– a.k.a., “GO Virginia”

In Progress

Incentivizes cooperation among localities by distributing $20 million in

economic development funds primarily to serve large corporate projects (200

new FTEs and $25 million capital investment) through regional entities as approved by the VEDP and the Secretary of Commerce & Trade

Wagner SB 748

Economic Development Infrastructure Act of 2016; acquisition of utility right of

way

Win

Amended to assure that bill does not interfere with existing statute and SCC authority governing electric utility right of way acquisition cost recovery; Amended to assure that onlydirectbeneficiariesofthisspecial right-of- way acquisition program pay the costs – no cost

shifting to other ratepayers

There were 58 select defensive bills this session as compared to 43 select defensive bills in 2015 and 8 in 2014.

66% of the select defensive bills had Republican patrons and 33% had Democratic patrons.

This section provides details on only select defensive bills thatrequiredsignificantamendmentoroppositioninorder

to reduce the impact on Virginia industry or VMA’s own legislative agenda.

You can see a detailed review of VMA Defensive Bills online. To see how each Legislator voted on VMA Defensive Bills, please contact VMA Member Services at thefuture@vamanufacturers.com for more information.

Bill key Win - bill was amended, continued to 2017, defeated by this General Assembly or vetoed by the Governor Loss - passed over the VMA’s objections and without amendment In Progress - bills still under consideration for amendment or veto by the Governor

8

2016 Legislative Scorecard for VMA Defensive Bills

Energy

Patron Bill Description Result Comments

Villanueva HB 351Virginia Alternative Energy and Coastal Protection Act;

createdWin Left in committee

Ware HB 352 Electric utilities; energy efficiencyprograms Win Continued to 2017

Sullivan HB 575 Energyefficiencyprograms;total resource cost test Win Continued to 2017

Sullivan HB 576Electric and natural gas utilities;energyefficiencygoals established, report

Win Continued to 2017

Minchew HB 908Electrical transmission lines; SCC to consider impact on

historic resourcesWin Continued to 2017

Kilgore HB 1053Investor-owned electric utilities;energyefficiency

performance incentiveWin

Amended into a Section 1 bill requesting the SCC to develop

uniform protocols for measuring, verifying, validating, and reporting theimpactsofenergyefficiency

measures implemented by investor-owned electric utilities by 12/1/16

Minchew HB 1286Distributed and renewable

generation of electric energy; net energy metering

Win Continued to 2017

Alexander SB 395Investor-owned electric utilities;energyefficiency

performance incentiveWin See HB 1053

Wagner SB 744Electric utilities; recovery

of cost of line extensions to serve mega sites

Win Stricken by patron

McEachin SB 761 Electric utilities; mandatory renewable portfolio standard Win Passedbyindefinitely

9

Environmental

Patron Bill Description Result Comments

O’Quinn HB 2

Clean Power Plan (CPP); state implementation plan (SIP), General Assembly

Approval

Win

Governor vetoed; Bill establishes a precedent whereby the majority party

in either Chamber may essentially veto a state implementation plan and risk a mandatory EPA federal implementation plan; Bill is also moot now that the US Supreme Court has stayed the CPP

SIP

Landes HJ 120Biosolids and industrial

residuals in Virginia; JLARC to study

Win

Amended to require the analysis of scientificliteratureonthehealtheffects

of biosolids (treated sewage sludge) and industrial residuals (wastes

resulting from industrial processes) by 12/30/17; May help repel attacks

on banning land applied biosolids and residuals

Knight HB 150

Menhadenfishery;VMRCto adopt regulations to

implement Interstate Fishery Management Plan

Win Left in committee

Knight HB 151 Pursenets;prohibitsfishingformenhaden in certain waters Win Left in committee

Helsel HB 288Disposable plastic shopping bags; local option to prohibit

distribution Win Left in committee

Chafin SB 21Clean Power Plan; state

implementation plan; General Assembly approval

Win Governor vetoed; see HB 2

Cosgrove SB 98 Management of menhaden Win Passedbyindefinitely

DeSteph SB 219 Pursenetfishingprohibited Win Passedbyindefinitely

McEachin SB 227Environmental Quality;

Department of, toxic waste site inventory

Win Left in committee

Miller SB 231 Virginia Indoor Clean Air Act; e-cigarettes Win Passedbyindefinitely

Hanger SB 292 Sediment reduction credits Win

Bill amended to allow MS4 permittees to acquire and use sediment credits for purposes of compliance with any waste load allocations established by total maximum daily loads for the Chesapeake Bay or its tidal

tributaries;Addsregulatoryflexibilityand reduces costs

Wagner SB 468Local stormwater utility; waiver of charges where

stormwater retained on siteIn Progress

Bill amended to provide for a large exemption against local stormwater

management fees; Local government is concerned that cost-shifting will

improperly occur between business and residential properties

2016 Legislative Scorecard for VMA Defensive Bills

10

2016 Legislative Scorecard for VMA Defensive Bills

Environmental, cont.

Patron Bill Description Result Comments

Obenshain SB 482Clean Power Plan; state

implementation plan; General Assembly approval

Win Incorporated into SB 21

McEachin SB 571 Commonwealth Resilience Fund; established Win Failed to report

Lewis SB 720

Environmental cleanup programs; localities may by ordinance establish; fee on

plastic bags

Win Failed to report

General Government

Patron Bill Description Result Comments

Pogge HB 334Virginia Freedom of

Information Act; proceeding for enforcement

LossAttempt to hold government

accountable for regulatory actions taken without public notice

Hugo HB 1113 Prescription drugs; price transparency Win Continued to 2017

Hanger SB 487 Prescription drugs; price transparency Win Continued to 2017

Norment SB 738Lobbyist reporting and

ConflictsofInterestsActs;definitionofagift

Win

Bill amended to create greater clarity on reporting rules and easier compliance for registered lobbyists, appointees and legislators; State & local government lobbyists are still

largely exempt

11

Taxation

Patron Bill Description Result Comments

Campbell HB 85 Cigarettes; levying of taxes by counties Win Tabled

Cole HB 92 Local taxes; interest on refunds Win Failed to report

Krizek HB 627 Vapor products; establishing state and local taxes Win Stricken

Hope HB 830Cigarettes and other tobacco products; increases state tax

rateWin Tabled

Davis HB 966Income tax, corporate;

apportionment of income to Virginia

Win Tabled

Davis HB 969

Virginia Retail Sales and Use Tax; conforms the

Commonwealth’s sales and use tax laws

Win Continued to 2017

Head HB 469 Local taxes; rate of interest on certain funds Win Tabled

Cole HB 1144 Local taxes; interest on refunds Win Left in committee

Petersen SB 114 Plastic bags; tax imposed in Chesapeake Bay Watershed Win Passedbyindefinitely

Favola SB 155Cigarette taxes; increase

tax in Fairfax and Arlington Counties

Win Passedbyindefinitely

Petersen SB 244 Fuels tax, local; authorizes localities to impose Win Passedbyindefinitely

Surovell SB 532

Paper and plastic bags; authorizes localities in Planning District 8 by

ordinance to impose a tax

Win Passedbyindefinitely

Workers Compensation

Patron Bill Description Result Comments

Habeeb HB 44

Workers’ Compensation; injuries or deaths presumed

to be in course of employment

Win

Bill amended to codify the common law death presumption only; Bill

now only extends to limited cases where the claimant is unconscious

when found and never regains consciousness before dying in a different location from where the

accident occurred (e.g., in an ambulance)

2016 Legislative Scorecard for VMA Defensive Bills

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Workforce Development & Education

Patron Bill Description Result Comments

Simon HB 7Sick leave; certain private

employers to provide employeeswithpaidbenefits

Win Tabled

Greason HB 255Health insurance; coverage

for mental health and substance abuse disorders

Win Left in committee

James HB 411Unemployment

compensation; part-time employment

Win Stricken

James HB 792Virginia Pathway to Middle Class: Noncredit Workforce Credentials Act; established

Win Tabled

Marshall HB 805

Virginia High-Demand Occupation Forecast Advisory Committee; established, report

Win Tabled

Levine HB 995

Minimum wage; establishes a procedure by which a local

alternative wage may be imposed

Win Left in committee

Levine HB 999

Family and Medical Insurance Leave Program;

review of eligibility and benefitpayments

Win Tabled

Greason HB 1206Comprehensive community

colleges; Noncredit Workforce Credentials Act

Win Left in committee; Coordinated with HB 66

Jones HB 1343 Virginia Research Investment Committee & Fund In Progress

Bill amended to create a fund for and political committee oversight

of university applications for special funds to promote research,

development, and commercialization

Ruff SB 575Comprehensive community

colleges; noncredit workforce credentials

Win Stricken; Coordinated with HB 66

Ruff HB 637

Virginia High-Demand Occupation Forecast

Advisory Committee; annual high-demand occupations

forecast

Win Stricken; Coordinated with HB 66

Dance SB 442 Healthbenefitplans;prescription drugs; tiers Win Continued to 2017

Norment SB 449 Virginia Growth and Opportunity Act Win See HB 834

2016 Legislative Scorecard for VMA Defensive Bills

13

Patron Bill Description Comments

Jones SB29 & HB 29

Budget Bill – Amending Chapter 665 of the 2015 Acts of Assembly

Removed market-based sourcing reporting mandate

Jones SB30 & HB 30

Budget Bill – Appropriations of the Budget submitted by the Governor; Approved by the General Assembly

Expands international trade services to SMEs; Maintains IRC Section 199 DPD; Funds select economic development incentives; Removes market-based sourcing reporting mandate;

Adds $715K for VLDS support (see HB 1036); Adds $12.5 million for NEW grant; Sunsets all tax credits & exemptions in 2022; Fully

funds WQIF for wastewater and stormwater infrastructure; Funds nutrient trading program expansion; and Expands JLARC authority into

select private corporate records

2016 State Budget Bills NEW SECTION

Virginiahasreachedamajorfinancialmilestone–itsbienniumoperatingbudgetjustexceeded $100 billion.

It’s also important to note that the General Fund, made up of individual income (27%), sales & use (7%), corporate (2%), and other taxes (4%) is now only about 40% of the state’s overall budget. The rest of the budget revenue is derived from Federal Sources (23%), and fees and licenses.

Virginia produces a biennium budget (2-year budget) that has to be approved by the Virginia General Assembly. Technically, the Governor, the Secretary of Finance and the Virginia Department of Planning and Budget develop a combined capital and operating budget that is submitted separately as a House and Senate bill by the Chairmen of the House Appropriations Committee and Senate Finance Committee. The rest of the legislative session these two committees, and their respective members and staff, work on amendments to the Governor’s introduced budget bill thatreflecttheirbody’sspendingpriorities.Oncethosepriorities are established and voted on by each body, budget conferees representing the House and Senate negotiate to reach consensus on a single set of

amendments to the Governor’s introduced budget that both bodies will agree to support. This laborious process resultsinthefinancialexpressionofthepoliticalprioritiesof the Executive and Legislative branches.

The initial biennium budget, adopted two years ago, that ends June 30, 2016 was $95 billion (see chart below). The newly adopted FY17-18 biennium budget is $105 billion. It’s even more interesting to note that the initial budget adopted 10 years ago (FY04-06) was only $58 billion (68% smaller) and accounted for nearly 5,000 fewer state employees1. Further, according to the US Census Bureau and the UVa Weldon Cooper Center, Virginia’s population only grew an estimated 11% during this time period - 7.6 million to 8.4 million.

Budget Facts & Process

1 Sources: VA Department of Planning & Budget, Initial Budget for the 2014-2016 Biennium, 2014; Virginia Legislative Information Services, Conference Report to HB30, 2016

14

2016 State Budget Bills

(Source: VA Department of Planning & Budget, FY15-16 State Operating Budget)

Education and health/human resources have been Virginia’s largest expenditures by far over the last decade. Education spending grew from $23 billion to $34 billion (estimated 48% growth in spending) and health/human resources grew by 69% ($16 billion to $27 billion in spending). By comparison, Virginia’s spending on commerce and trade, where economic development programs reside, grew by 24% ($1.7 billion to $2.1 billion in spending). The point of this exercise is to demonstrate how fast education and health/human resource spending is consuming General Fund resources and how few dollars remain for economic development and other priorities.

However, one of the greatest challenges for the legislature is resisting the temptation to legislate through these budget bills. Legislating through a budget bill is effectively

circumventing the typical General Assembly committee process. It results in less debate and opportunity for amendment, thus, it perpetuates criticism of the legislative process as lacking transparency and accountability – literally one paragraph inserted into the budget bill could alter dozens of meaningful statutes in the Code of Virginia. Itshouldalsobenotedthatbusinessoftenbenefitsfrom legislating through the budget, so it is a perennial legislative issue that requires vigilance and restraint.

For example, this year language was inserted into the budget bills that would have mandated certain corporationstoduplicatetheirincometaxfilingusingtheirstandard methodology and market-based sourcing for their income. Ultimately that language was removed from all bills after intense lobbying by the VMA and others. Languagewasalsoinsertedintothefinalbudgetbills

Secretarial Area Title

Ch.3 FY 2015 Total Dollars

Ch.3 FY 2016 Total Dollars TOTAL Percentage Ch.3 FY 2015

Total PositionsCh.3 FY 2016

Total Positions

Education $17,017,835,473 $17,174,332,919 $34,192,168,392 36% 57,301.99 57,444.99

Health and Human Resources $13,208,768,227 $13,466,095,283 $26,674,863,510 28% 15,765.25 15,765.25

Transportation $5,760,950,549 $6,176,071,259 $11,937,021,808 13% 9,784.00 9,784.00

Public Safety and Homeland Security $2,708,055,683 $2,734,773,515 $5,442,829,198 6% 20,104.00 20,136.00

Finance $2,696,758,209 $2,499,720,384 $5,196,478,593 5% 1,299.00 1,299.00

Administration $2,259,904 ,475 $2,264,802,655 $4 ,524,707,130 5% 835.50 835.50

Commerce and Trade $1,048,332,059 $1,074,004,531 $2,122,336,590 2% 1,683.50 1,683.50

Independent Agencies $729,735,493 $833,519,768 $1,563,255,261 2% 1,701.00 1,701.00

Judicial $470,532,626 $469,769,166 $940,301,792 1% 3,364.71 3,364.71

Technology $393,527,811 $411,040,444 $804,568,255 1% 286.00 289.00

Natural Resources $403,143,752 $367,300,511 $770,444.263 1% 2,180.00 2,180.00

Agriculture and Forestry $95,471,198 $96,366,085 $191,837,283 0% 826.00 827.00

Legislative S79.547,386 $77,297,842 $156,845,228 0% 609.00 611.00

ExecutiveOffices $62,461,904 $62,398,095 $124,859,999 0% 511.00 509.00

Veterans and Defense Alfairs $62,943,183 $59,554,590 $122,497,773 0% 685.00 685.00

Central Appropriations $15,195,349 ($203,163,322) ($187,967.973) 0% 0.00 0.00

$47,013,163,377 $47,563,883,725 $94,577,047,102 116,935.95 117,114.95

15

2016 State Budget Billsto restrict the authority of the CTB, VDOT, NVTA, and HRTAC to impose tolls on certain roads: 1) No tolls on any non-limited access highways without approval from the General Assembly; 2) No tolls on any existing lanes opentoalltraffic24/7withoutGeneralAssemblyapproval;and 3) Relinquishment of the federal pilot tolling slot for I-95 South of Fredericksburg. This is consistent with the successful legislation to restrict tolling on I-81 and I-95 that the VMA helped lead in 2003-2005. The budget also incorporated language to reject project earmarks for either highway or transit projects with the exception of the previously announced agreement on I-66 inside the beltway coordinated between the Administration and the legislature. Unfortunately, legislating through the budget isn’t always this positive.

This session language was inserted into HB30 and SB30 to sunset all existing tax credits and exemptions on June 30, 2022. The language stipulates that future General Assemblies shall sunset new tax credits and exemptions by the same date. Further, the budget bill directs the Virginia Department of Taxation to report on the revenue impact of all tax credits and exemptions, but not the correspondingeconomicbenefits,byNovember1,2020.This essentially means that exemptions on everything from aircraft to manufacturing inputs to pollution control equipment will cease by June 30, 2022. This was a heavy-handed way of corralling hundreds of millions in General Funds for some unknown purpose during the last budget cycle of the next Governor. We have speculated it is for future tax reform negotiations or, perhaps, some unanticipated spending needs. Regardless, this maneuver has inserted speculation and uncertainty into Virginia’s tax system – a situation the Commonwealth cannot afford when its tax competitiveness ranking doesn’t even break the top 25 states today.

Even more concerning is the language in this year’s budgets to provide a proxy for the Virginia General Assembly, the Joint Legislative Audit & Review Commission (JLARC), with the authority to “access information and records of private entities, where private entities are obligated to provide such information and records to other public bodies pursuant to law or contract for the purpose of carrying out such duties.” This is vaguely crafted language to effectively grant the Virginia General Assembly itself, through JLARC and its contractors, access to a company’s private tax records. This is an unprecedented intrusion into private business. The purpose of this expansion of power is described below:

…review and evaluation to be conducted by the Commission shall include, but are not limited to, the following: (i) spending on and performance of individual economic development incentives, including grants, tax preferences, and other assistance; (ii) economic benefits to Virginia of total spending on economic development initiatives at least biennially; (iii) effectiveness, value to taxpayers, and economic benefits to Virginia of individual economic development initiatives on a cycle approved by the Commission; and (iv) design, oversight, and accountability of economic development entities, initiatives, and policies as needed.

Although the Virginia state budget process is exceedingly challenging and transparency has improved substantially over the last few years, the business community must be more actively engaged in the entire process or risk further “legislating through the budget” and the erosion of General Fund resources.

16

Traditionally, Virginia recovers from a recession faster than is typical for the country as a whole. The last recession changed that and we have now fallen below the national average. In the most recent quarter for which data are available, Virginia’s Gross State Product (GSP) increased at an annual rate of only 1.2 percent. To put that number in perspective, only eleven of the 50 states did worse than that, and 38 did better. Much of this is driven by our heavy dependence on federal government expenditures and the negative impact that the 2013 federal sequester had on those expenditures. The ultimate solution to that problem is to realign Virginia’s economy away from an over-dependence on the federal government and toward a more robust private sector and we applaud Governor McAuliffe’s efforts toward that goal.

Further, between 2004 and 2014, private GSP, the value of all goods and services produced in Virginia by the private sector, rose from $330.4 billion to $462.9 billion, a 40 percent increase. Over the same period, the operating budget for Virginia state government rose 68 percent. That means that state government spending grew by more than one and a half times the economy’s capacity to cover those expenses. That is not a sustainable trajectory.

For example, between 2004 and 2014 Virginia’s operating budget for higher education only rose from $3.6 to $7.5 billion, a 110 percent increase. Over this same period, total enrollment in Virginia’s public colleges and

universities increased by only 16 percent. Although higher education is critical to Virginia’s economic future, the dynamics of higher education are changing rapidly and we must evaluate the real issues of affordability, productivity and value.

A state budget that is growing one and a half times faster than our economy may simply become too large and too complicated to manage effectively. The bottom line for Virginia’s budget is that it is increasingly complicated and may strain the capabilities of our current legislative structure. In the years ahead, the Virginia General Assembly is going to have to carefully consider whether or not its current budget process provides the necessary inputs to assure the Commonwealth is planning and passing policies that contemplate economic activity beyond a limited two-year cycle. Perhaps an oversimplifiedanalysisoftherapidlyincreasingeducationand healthcare/human resource spending alone is not the best case for change; but there is no doubt that their growth is outpacing population growth, economic growth and revenue growth. It is also indisputable that this spending leaves fewer resources every budget cycle for other priorities. This has resulted in increased scrutiny and ever-growing bureaucratic compliance regulations for small-scale economic incentives by comparison to competing states and countries. It has also created a scenario where politicians are less comfortable taking risks on large-scale initiatives, such as wholesale tax reforms, that could spur exponential economic growth. Regardless of the focus, spending or revenue, the Commonwealth cannot accept the position of having the second slowest growth in the southeast region at 1.2%2 in 2015 (only behind West Virginia). To sustain itself as a vibrant place to live, work and play – Virginia needs the Gross State Product (GSP) to grow at least as fast as the southeast regional average (2% in 20153).

Budget Commentary

2016 State Budget Bills

2 http://bea.gov/newsreleases/regional/gdp_state/2016/_images/qgsp0316.png3 Ibid

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SummaryThis General Assembly session was one of the best in the last six years. Despite a large turnover in key leadership positions and many newly elected members, the session ran relatively smoothly and ended a day early. The VMA 2016 Legislative Agenda focused on the following priorities:

• Close the Skills and Career Planning Gaps by 2020

• Stop Taxing Technology

• Expand MFG Exports 50% by 2025 and Restructure Economic Development

• Keep Energy Costs Affordable & Reliable

• Invest in Productive Infrastructure

• Maintain Regulatory Balance

The VMA depends upon legislators understanding the unique needs of industrial businesses. We further depend upon them to support public policies aimed at assuring Virginia is globally competitive, not just as good as a borderstate.TheVMAalsopridesitselfonfiscalrestraintand prioritizes public policies that enable the private sector to grow without expanding state government to do so. This hasbecomeexceedinglydifficultinrecentyearsduetobudget constraints and the Commonwealth’s economic diversificationchallenges.

This year the Virginia General Assembly welcomed 11 new members of the House (4 Republicans/7 Democrats) and seven new members of the Senate (5 Republicans/2 Democrats). According to the Virginia Public Access

Project,thelengthofserviceprofileoftheVirginiaGeneralAssembly is now as follows:

• 4 years or less (55 members / 39.29%)

• 5-12 years (49 members / 35.00%)

• 13-20 years (17 members / 12.14%)

• More than 20 years (19 members / 13.57%)

Since the Virginia General Assembly manages legislation through a committee structure and the leadership of those committees is based upon a seniority system, there was a tremendous amount of movement in committee leadership this session. This creates some anxiety for all involved, but the new leaders were up to the challenge and individuals such as Delegate Danny Marshall (House Agriculture, Chesapeake & Natural Resources Committee) and Senator Richard Stuart (Senate Agriculture, Conservation & Natural Resources Committee) particularly distinguished themselves by establishing a firmcommitmenttoenvironmentalandregulatorybalance.Still, the VMA has a great deal of work ahead in order to educate all new members about the opportunities ahead for Virginia industry.

Speaking of opportunities, this session the VMA initiated thefirstphaseofitslegislativestrategytoreformandalign economic development programs (just as we have done with Virginia’s workforce development system) with the goal of increasing business formation, expanding international trade and substantially improving existing industry expansion resources. This strategy will take several years and build upon the evaluation of the JLARC Commission analysis started by priority bill HJ7. However, immediate changes will begin to help expand international trade services (import and export) to Virginia industry. VMA priority bill HB858 creates the Virginia International Trade Corporation that will help Virginia businesses expandgloballyand,specifically,assistVirginiamanufacturers with their own goal of expanding exports by 50% ($8 billion) by 2025. We owe a great debt to Delegate Steve Landes, Governor Terry McAuliffe, and Secretary of Commerce & Trade Maurice Jones for their leadership inhelpingustocreatethefirstorganizationofitskindfor

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SummaryVirginia businesses. We are also thankful to the members of our World Trade Coalition and House Appropriations Chairman Chris Jones for their support in making this a reality. The Virginia International Trade Corporation will lead all other states in international trade services and JLARC will set the stage for modernizing economic development in general.

Over the last six years we have helped create the Virginia Board of Workforce Development and reform its statutory authority to align the disparate programs and nearly $341 million in funding sources to maximize credential attainment and build an employer-centric system focused on outcomes. Last year we helped create a $1 million pilot project fund for industry credential attainment through the Virginia Community College System (VCCS) and serve as a catalyst for a fundamental policy shift in aligning higher education funding for industry credential scholarships, faculty and sustainable equipment. This year weweresuccessfulinresolvingtheprincipaldeficiencyin Virginia’s workforce development system – statewide funding for industry credential attainment – by creating the New Economy Workforce (NEW) Industry Credential Assistance Training grant (HB66) “NEW grant”. The NEW grantwillcover2/3ofthetrainingandcertificationcostsup to $3,000 per industry-recognized credential with a $12.5 million initial fund. It is the most aggressive pay-for-performance industry credential training program of its kind in the U.S. and will likely become a national model.

The NEW grant would not have been possible without the leadership of Delegate Kathy Byron – she has worked tirelessly as a workforce development reformer to help us reach this summit and we are immensely grateful. We also have to recognize the support of her colleagues in the House Appropriations Committee and Senate Finance Committee, the support of Senator Frank Ruff, VCCS Chancellor Glenn DuBois and the Virginia Community College System, and Governor Terry McAuliffe and his Administration. The stars truly aligned on this issue for thefirsttimeinVirginiahistoryanditwilltransformhighereducation and help close the workforce skills gaps by 2020.

The VMA set a goal a decade ago, supported by research conducted by Ernst & Young and validated by

the JLARC, to reform and reduce the taxation of Virginia manufacturers by $200 million annually. The VMA and the Center for Innovative Technology (CIT) also published research 13 years ago demonstrating that “technology intensive manufacturers” conducted substantial applied research through their facilities and listed a robust research and development (R&D) tax credit as a top driver in their expansion and relocation decisions. The business coalition to which the VMA belonged this session, and was ably led by the Raytheon Company, finallycreatedameaningfulR&Dtaxcreditthatwillincentivize both small and large businesses to do their R&D in the Commonwealth (priority bills HB884/SB58/SB161). However, Virginia still has some ground to cover on this issue because other southern states, such as Louisiana, provide up to a 40% tax credit with no cap and no minimum requirement.

TheVMAalsocontinuestorefinetheCertifiedPollutionControl Equipment Tax Exemption statute that we successfully advocated for in 2011. This year’s priority bill,HB80,assuresthatwhenthecertifiedpollutioncontrol equipment or facility is put into service, its tax exemption starts the following tax day, January 1, not when the Virginia Department of Environmental Quality or the Virginia Department of Mines Minerals and Energy approves the exemption application. This is a major victory to assure that local governments do not game the system anddemandpaymentofafullyearoftaxoncertifiedpollution control equipment if the application approval arrives after January 1 for equipment and facilities put into service during the previous tax year.

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SummaryOne of the most important tax policies that the VMA secured and has protected for the last four years is the IRC Section 199 Domestic Production Deduction where afull9%ofqualifiedincomeagainstone’sstateincometax liability is deductible. This is an estimated $30 million annualbenefittoindustryanditis,again,protectedthroughprioritybillsHB402&SB545.Thistaxbenefitisprovided as part of Virginia’s selective conformity with the Internal Revenue Code – it does not conform to all provisions of Federal tax law (e.g., bonus depreciation).

Although the tax report is positive and we have been incredibly successful in our tax modernization efforts, Virginia has no ability to conduct dynamic revenue analysis of major tax or other policy proposals. So all legislative tax reform proposals, for example, are only scored as costing state or local government without anycorrespondingbenefittorevenues.Thisisabarrier to the reforms necessary to move Virginia into an environment where wholesale tax reforms can be modeledfortheircosts(shortandlong-term)andbenefitsto the new Virginia economy. As such, we have come to the conclusion that the General Assembly will have to require the Virginia Department of Taxation to generate dynamic economic impact assessments for key economic development and tax legislation proposals.

One of the key reasons that dynamic revenue analysis is essential is that the General Assembly has empowered a new JLARC unit to begin evaluating the economic impact of existing tax credits, exemptions and economic development programs. Since this is a legislative commission, it’s essential that the executive branch keep the legislative branch in check by arming the Virginia Department of Taxation with dynamic forecasting tools. Another key reason for modernizing Virginia’s economic analytical capabilities is to help validate public policies that will reduce the dependency of local governments on revenue sources that are impeding business expansion and formation – the Machinery and Tools Tax and the BPOL Tax. Further, it is critical for members to appreciate that the principal barrier to industry’s top legislative priorities is local government. We are making headway with many local governments, but it has now reached a

critical point for Virginia’s legislature and Executive Branch to learn from Virginia’s meteoric fall from its “best place for business” rankings and move with enthusiasm to make comprehensive reforms that will broadly contribute to Virginia achieving a 2% growth in Gross State Product – not just pick winners and losers through specialized legislation and discretionary government grants.

This session defensive bills grew 35 percent. Although the VMA neutralized 98% of the select defensive bills, the association will have to expand its government affairs program in the coming year to effectively manage the workload. Due to currents swirling this session, it is clear that the VMA is going to have to establish some legislative expertise in the areas of cybersecurity, UAVs and international trade. In fact, the VMA Board and Government Affairs Council are already beginning to prepare for next session and look forward to our ongoing work with Virginia Secretary of Technology Karen Jackson and Virginia Secretary of Commerce & Trade Maurice Jones.

Speaking of studies, the VMA will be involved in a record number of government affairs studies and projects with government agencies over the next eight months:

1. Aerospace & Spaceflight Industry Study – Joint Commission on Tech & Science (JCOTS)• Purpose: Assist JCOTS evaluate the economic

impactoftheaerospaceandspaceflightindustryon the Commonwealth and MFG sector.

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Summary2. Cybersecurity & Critical Infrastructure – VA

Secretary of Technology• Purpose: Develop legislation & regulations to

protect property owners from cybercrimes in cases involving critical infrastructure, data center attacks and MFG disruption. VMA will work directly with the Secretary of Technology. The goal is to make Virginia a “cybersecurity haven” for business.

3. Drone Monitoring Regulations – VA Secretary of Technology• Purpose: Develop legislation & regulations to

protect property owners from airspace trespass by UAVs. VMA will work directly with the Secretary of Technology.

4. Eastern Virginia Groundwater Management Advisory Committee – DEQ• Purpose: Evaluate sustainability of surface

and ground water permitting and make recommendations on alternative technologies, permit limitations, economic development preservation and funding sources.

5. Economic Development Evaluation – JLARC• Purpose: This VMA priority bill from the 2016

legislative session will have the state’s internal management auditor, JLARC, evaluate the effectivenessofthestate’sflagshipeconomicdevelopment agency, VEDP, as well as all other economic development. This has not been done since 1995 and may lead to reforms that will help VA regain ground in national competitiveness.

6. GO Virginia – VA General Assembly• Purpose: Assist with the organization of the

statewide Board to assure that regional programs are effective and not subject to duplication of existing programs or services.

7. Groundwater – JLARC• Purpose: Assess the sustainability of surface and

ground water and examine the effectiveness of the state’s planning and permitting programs (HJR 623 - 2015 Session).

8. MFG Cost of Regulatory Compliance – JLARC• Purpose: Update a 10 year-old report to determine

the Federal, State and Local regulatory costs burdening Virginia manufacturers. This will be the firstlongitudinalreportofitskindinVAandpossiblythe U.S. Created by a VMA priority bill in the 2015 legislative session. The report is due in 2016.

9. Nutrient Trading – VA Nutrient Trading Exchange & DEQ• Purpose: Develop the rules and regulations for

implementing the provisions of priority bills HB448/SB314.

10. Toxic Chemical Inventory – VA DEQ• Purposes: Assist DEQ develop a methodology

andidentificationoftoxicchemicalsstoredaswellas effective storage regulation near sources of drinking water. Created by SB811 (2015 legislative session).

11. Virginia International Trade Corporation – VA Secretary of Commerce & Trade• Purpose: Establish business plan, goals and Board

of the newly created organization.

In closing, the next year is going to bring some substantial new government affairs challenges. Whether they are regulatory reforms, driving down Virginia industry’s effective tax rate, assuring that workforce training reforms and funds are effectively implemented, expanding international trade and modernizing economic development to work for existing industry, keeping energy affordable and reliable, or tackling the new frontier of UAVs and cybersecurity threats, the VMA has been Industry’s Advocate™ since 1922 and we will be ready to meet these challenges.

To contribute to the VMA’s Virginia Industrial Innovation Strategy or participate in its government affairs program, go to http://vamanufacturers.com/advocacy/resolutions-public-policies/ or contact Member Services at thefuture@vamanufacturers.com.

2016 Legislative Wrap Up ReportVirginia Manufacturers Association

2108 W. Laburnum Ave., Suite 230 • Richmond, VA 23227804-643-7489 (p) • 804-780-3853 (f )

www.vamanufacturers.com

Since 1922, we have exclusively served as Industry’s Advocate™ and our mission is

to create the best business environment in the United States for world-class advanced technology businesses to manufacture and headquarter their businesses for maximum

productivity and profitability.