Vi rg i n i a S o c i et y o f C P A s ’
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VIRGINIA ECONOMIC EXPECTATIONS SURVEY Global trade and the economy
Trade tensions
New tariffs on Chinese goods could have big impact on consumers
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NOVEMBER 2018
Photo credit
■ SPECIAL REPORT:
VIRGINIA SOCIETY OF CPAs’
2019 VIRGINIA ECONOMIC EXPECTATIONS SURVEY
by Veronica Garabelli
S
arah Paxton, coowner of the LaDiff furniture store in downtown Richmond, is preparing for the worst.
Sarah Paxton expects her store to be impacted by tariffs on Chinese products.
Photo by Matthew R. O. Brown Photo credit
Earlier this year, the cost of furniture she imports rose because of 10 percent tariffs imposed by the U.S. on Chinese goods. For the most part, she and her vendors were able to absorb the extra cost rather than pass it on to customers. Now, she’s facing more cost increases because of 25 percent tariffs on Chinese goods going into effect Jan 1. Paxton and many other retailers won’t be able to shield customers entirely from the effects of those tariffs. That means they will have to raise prices or get their products from somewhere besides China. “That to me is the most important part to get across is that the consumer is the one paying this price increase,” says Paxton, who owns LaDiff with her husband, Andy Thornton. Paxton’s dilemma reflects one of the takeaways from the latest Virginia Society of CPAs' Economic Expectations report. VIRGINIA BUSINESS
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SPECIAL REPORT: Virginia Society of CPAs’ 2019 Virginia Economic Expectations survey “The question is whether the ongoing trade battles will either subside into negotiated settlement or erupt into a full trade war,” says Old Dominion University economist Robert M. McNab.
Many Virginia accountants are worried about the harm that tariffs will cause U.S. consumers and the economy. Almost 350 financial professionals responded to the survey last summer, offering insights about major issues that will affect Virginia businesses next year. Here are some of the highlights.
The economy and trade The survey respondents generally are optimistic about the future of the state and national economies. Nearly half believe the U.S. economy will remain strong next year. A majority also are bullish about Virginia’s economy. Many, however, also believe the health of
the state economy will be a major issue in next year’s election, in which legislators will be elected for all seats in the Virginia General Assembly. Old Dominion University economist Robert M. McNab thinks the national economy will grow in the first half of next year. The current expansion soon will set a record as the longest since the end of World War II. “The question is whether the ongoing trade battles will either subside into negotiated settlement or erupt into a full trade war,” he says. McNab says the state economy is improving but still lags behind the national economy. Virginians have earned more this year than they did last year and should pocket more money next year. Their improving paychecks are partly the result of federal tax reform passed last year by the Republican-controlled Congress. Projected increases in federal spending in fiscal year 2019 also should be good news for Virginia’s economy. That spending accounts for about one quarter of the state’s economic activity, and the
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A cargo ship is loaded at a Chinese port. U.S. tariffs on Chinese imports worry some Virginia retailers.
regional economies of Northern Virginia and Hampton Roads are even more dependent on the federal budget. “This is not to say there are not storm clouds on the horizon,” McNab says. “Virginia’s relationship with the federal government is a strength and weakness. When discretionary federal government spending increases, Virginia’s economy tends to benefit. Likewise, contractions or uncertainty in federal government expenditures create headwinds for the Virginia economy.” But McNab says the more immediate threat to the economy is the uncertainty being caused by trade tensions. A majority of accountants taking the survey agree that the nation’s aggressive trade position will have a negative impact on the economy. Still, more than 43 percent of respondents believe U.S. trade policies either will have a positive impact or won’t hurt the economy. Bill Becker doesn’t share that view. He says the U.S. trade relations with China are creating problems for his Chantillybased furniture company, BDI. The company sells to retailers, including LaDiff. It designs furniture in Northern Virginia but outsources production to manufacturers in China and other countries. Because of the tariffs, he has delayed hiring employees and expects his revenue to take a hit next year. “It’s a very bad strategy for dealing with issues that we have with China because, ultimately, this burden will fall on local retailers — in many cases small manufacturers and also the consumer,” says Becker. Imaginechina via AP Images
Nancy Thomas also is keeping a close eye on trade tensions with China. Her organization, the Retail Merchants Association (RMA), represents roughly 500 retailers in the Richmond area. She’s urging her members to get in touch with vendors to see what effect tariffs will have on products they import. So far, Thomas hasn’t fielded many questions about the trade situation, but she expects that to change as the end of the year approaches. “For the holiday season, most retailers won’t feel the worst of it because a lot of them may already have inventory in,” she says. “It’s the new year that’s going to bring some woes to people.” The ultimate impact of tariffs on retailing and other industries could depend on how U.S. trade talks with China shake out. An additional factor could be the renegotiated North American Free Trade Agreement (NAFTA), now known as the United States-MexicoCanada Agreement (USMCA), which still must be approved by the three nations. Rising cost of health care Another issue that raises big concerns for businesses and consumers is the rising cost of health care. Those costs consistently rank in the CPA survey as the most-pressing issue for Virginia. Nearly 34 percent of respondents picked health-care costs as the state’s biggest problem. RMA’s Thomas says providing adequate health care at an affordable cost continues to be a huge challenge for retailers. Many believe they have to provide
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SPECIAL REPORT: Virginia Society of CPAs’ 2019 Virginia Economic Expectations survey health-care benefits to retain employees in a tightening labor market. Employers have to determine how they’ll provide health insurance and what percentage of the cost they will be able to absorb. “What I have heard from most of our retailers is they continue to see increases in their [health-care] premium,” Thomas says. Barry DuVal, president and CEO of the Virginia Chamber of Commerce, also says ballooning health-care costs con-
tinue to be a problem for his 26,000 members. The chamber believes association health plans offer one solution. These plans allow small businesses to group DuVal together based on industry or location to lower costs in buying health insurance. President Trump expanded access to these plans earlier this year, allowing sole proprietors to qualify. Each state,
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NOVEMBER 2018
however, sets specific regulations for association health plans. In Virginia these plans still are subject to certain provisions in the Affordable Care Act (ACA) that drive up premiums. The chamber plans to again support legislation in next year’s Virginia General Assembly session to change the requirements for the plans so that they won’t be subject to those ACA provisions. However, critics say the plans curtail important protections. Gov. Ralph Northam vetoed two chamber-supported bills passed during the past legislative session, saying they would not include key consumer benefits. “Through this exemption, association plans are not required to provide comprehensive coverage and may not cover essential benefits like mental health treatment, substance abuse treatment, prescription drugs or maternity benefits,” Northam said in a statement earlier this year when he vetoed the bills. “Moreover, association plans will be able to discriminate against people by charging them more because of characteristics like gender and occupation. People with minimal current health-care needs are more likely to purchase these skimpy plans, leaving people with more significant health-care needs in the marketplace.” Virginia also filed a lawsuit in July against the expanded federal rule for association plans, saying the change would undermine the ACA. The commonwealth was joined in the lawsuit by 10 other states and the District of Columbia. Kenn Penn, president and CEO of ChamberSolutions, a chamber subsidiary, says the plans are meant to place associations on a level similar to large employers, which aren’t subject to certain ACA requirements but still cover thousands of Virginians at an affordable price. Uncertainty in dealing with healthcare costs or trade is bad for business and the economy, says ODU’s McNab. “We don’t know what’s emanating from D.C. on a regular basis, and businesses and markets love certainty,” he adds. “They love policy process that’s slow and transparent.” Businesses hope they will get more answers in the year ahead.
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SPECIAL REPORT: Virginia Society of CPAs’ 2019 Virginia Economic Expectations survey
Hampton Roads
We asked five Certified Public Accountants for their take on the state of their region. This is what they had to say. Answers have been edited for length and clarity.
How is the economy faring in your part of the state? Virginia Beach seems to be thriving. New businesses and development are popping up. We have noticed it is harder to find workers. What local industry do you think has potential for growth? I think the tourism industry in Virginia Beach still has room for growth. The addition of the new Sports Center being built in Virginia Beach will help with the seasonality aspect of the tourism market.
Lori Overholt, CPA President/chief financial officer VSA Resorts Virginia Beach
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How long have you been living in your region? What are your favorite parts about living and working in the region? I’ve lived in Coastal Virginia most of my life. The thing I love most about Virginia Beach is the people. Because of the military, people move here from all over the country, and it is very diverse. Also, having an ocean outside my office window is amazing.
What’s the biggest challenge to doing business in your area? The biggest challenges are traffic, affordable housing and workforce development. For our industry, the airport is a huge challenge in our area as there are few direct flights, and it is harder for people to get here. What impact do you think U.S. trade policy will have on business? Like any government policy, some businesses will benefit from the policy, and some will be hurt by it. Businesses will find a way to make it work. Photo by Mark Rhodes
SPECIAL REPORT: Virginia Society of CPAs’ 2019 Virginia Economic Expectations survey
Shenandoah Valley
How long have you been living in your region? What are your favorite parts about living and working in the region? I’ve lived in the Winchester area all my life (except for four years at Virginia Tech). It’s a great community and place to raise my kids. We are close enough to [Northern Virginia] to visit and benefit from the activities, restaurants, etc., that are part of the DC Metro area but far enough away to avoid the traffic and other issues. How is the economy faring in your part of the state? The local economy seems to be growing, and I am optimistic that the growth will continue. We have had large employers — Amazon, Procter & Gamble, Navy Federal Credit Union and others — make significant investments in this area, which have created jobs and opportunities. This has made Winchester and surrounding areas a desirable community to live, work and/or relocate to. What local industry do you think has potential for growth? Warehousing/distribution and manufacturing seem to be doing very well in this area. What’s the biggest challenge to doing business in your area? Finding and retaining qualified Photo by Norm Shafer
workers in all industries and professions.
Scott Moulden, CPA
How has the new tax law affected your clients? The tax bill and related tax cuts have been well received by businesses and individuals in our area. This will translate to businesses making capital investments and increasing salaries and wages.
Yount, Hyde & Barbour PC Winchester
President
What impact do you think U.S. trade policy will have on business? I’ll take a wait-and-see approach on this question. Some policies will have a short-term negative impact on some products and industries but may be beneficial in the long run. www.VirginiaBusiness.com
VIRGINIA BUSINESS
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SPECIAL REPORT: Virginia Society of CPAs’ 2019 Virginia Economic Expectations survey
Central Virginia
What local industry do you think has potential for growth? Most are doing well, so to single out one industry is challenging. However, we are seeing substantial new business opportunities in the services industry, which have lower barriers to entry in terms of capital or personnel costs, initially. What’s the biggest challenge to doing business in your area? People. Qualified employees continue to be a significant challenge for many businesses.
Gary Wallace, CPA Managing partner Keiter Richmond
How long have you been living in your region? What are your favorite parts about living and working in the region? My entire life. Fifty-five years. Richmond is a vibrant community and has been adaptive and progressive in recent years. We have great amenities, a cultural scene and a strong work environment. How is the economy faring in your part of the state? We are seeing significant growth in all sectors of the economy. It is highlighted by new business growth, as well as a strong real estate market in the commercial sector [in neighborhoods like] Scott’s Addition, Manchester and others.
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How has the new tax law affected your clients? Generally, a positive impact. It offered both initial tax relief for many corporations and also provided an economic sign of stability. What has yet to occur is the additional time to comply with the new provisions. What impact do you think U.S. trade policy will have on business? Some [industries] already are being affected, including our manufacturing and construction sectors. As to the overall economy, it raises questions and concerns regarding such additional costs of doing business and how businesses are able to pass on the additional costs of tariffs, etc. Photo by Shandell Taylor
SPECIAL REPORT: Virginia Society of CPAs’ 2019 Virginia Economic Expectations survey
Northern Virginia
How is the economy faring in Northern Virginia? Going great guns. Roads and stores are packed — everybody is buying, working, living. Financial optimism seems to abound — regardless of political persuasion. What local industry do you think has potential for growth? Construction. Not sure how much moving is going on. I don’t see as many “For Sale” signs as I used to, but Home Depot is absolutely packed every time I visit. So maybe everyone’s staying in place, putting on additions, whatever. Everyone seems to be spending money. What’s the biggest challenge to doing business in your area? Congestion. I usually work from home — so my commute is minimal — but when I go out on the weekends it’s almost as bad as Rush Hour out there. How has the new tax law affected your clients? Clients have definitely noticed the extra money in their pocket from the change in withholding tables. The jury’s out on whether those withholdings will affect these clients so much that they end up owing on their 2018 tax returns Photo by Stephen Gosling
Andrew Youhas, CPA, JD
next April. My advice has been to assume “same tax liability as last Managing principal, year” and to leave their quarterly founder and owner estimates alone. Youhas and Associates LLC Arlington What impact do you think U.S. trade policy will have on business? More limited than you’d think. I personally believe that tariffs — or rather, the threat of tariffs — is being used as a bargaining chip in efforts to get freer trade in the end. There might be pain to affected industries, and it might be substantial, but if all goes according to plan, that pain will be short-lived. Months or a year, not years. www.VirginiaBusiness.com
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SPECIAL REPORT: Virginia Society of CPAs’ 2019 Virginia Economic Expectations survey
Southwest Virginia What local industry do you think has potential for growth? The local tech industry is prepared to take off. There are a number of high-growth startups in the area, which are showing true promise and drawing talent to the area. A number of companies are looking to double and triple their workforce over the next year with high-paying skill career paths. The RoanokeBlacksburg Technology Council among other groups really has facilitated a culture of collaboration and innovation in the area.
John Reynolds, CPA Senior accountant, financial performance & analysis analyst Block.one LLC Blacksburg
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How long have you been living in your region? What are your favorite parts about the region? I have lived in Blacksburg since 2011. My favorite parts about living here are hiking to local sites (The Cascade Falls, McAfee Knob and Dragon’s Tooth); going to Virginia Tech sporting events and the large number of local restaurants in the area per capita. Working in this area is great, the commutes are reasonable with minimal traffic, and you get to interact with world-class professionals without all the stress of a big city.
What’s the biggest challenge to doing business in your area? Distance and the result on our ability to aggregate skilled workforces. This part of the state has significant geographical disconnect from many of the major metro centers. This distance means you truly need to grow and retain or recruit into the area quality talent. How is the economy faring in your part of the state? Moderately to reasonably well considering the headwinds we have historically seen in the deeper Southwest parts of the state. The energy and textile industries were large drivers of employment and have fallen off. In my local area the health-care, technology and educational sectors are big drivers of economic stability and growth moving forward. Photo by Don Petersen
SPECIAL REPORT: Virginia Society of CPAs’ 2019 Virginia Economic Expectations survey
The results Virginia Society of Certified Public Accountants’ (VSPCA) Economic Expectations report highlights several key issues impacting Virginia businesses, ranging from the economy to taxes and workforce. The sur-
Q1
Do you believe the U.S. economy is moving in a positive direction?
vey was sent to 9,875 VSCPA members in August. The survey had 345 respondents, yielding a 3.5 percent response rate. Half of the respondents work in public accounting. The rest work in corporate and other sectors.
Q4
Yes 72.17%
No 27.83%
A majority of people taking the survey (54 percent) represented businesses with more than 50 employees; 36 percent represented companies with two to 50 workers; and the rest had sole proprietorships.
Will the economic policies of the Trump administration have a positive, negative or neutral effect on the economy and business? Positive: 46.89% Negative: 36.34%
Q2
Describe your economic outlook on the national economy for 2019. Very pessimistic 2.93%
Neutral: 16.77%
Q5
Very optimistic 11.73%
U.S. trade policy will have the following effect on the economy Positive: 31.06%
Negative: 56.83%
Balanced 22.87% Somewhat optimistic 37.54%
Q3
Neutral: 12.11%
Q6
Somewhat pessimistic 24.93%
What impact will U.S. trade policy have on your clients?
Do you expect a recession in the next 12 months?
Yes 15.54%
No
58.36%
2.51%
12.23%
64.26%
20.06%
0.94%
Very positive
Positive
Neutral
Negative
Very negative
Not sure 26.10%
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SPECIAL REPORT: Virginia Society of CPAs’ 2019 Virginia Economic Expectations survey
Q11
Which issue, in your opinion, is the most pressing issue for Virginia?
Retirement systems 3.80%
Taxes 6.65%
Financial literacy 6.01%
factors that have the greatest impact in retaining or attracting new business to Virginia.
Availability of educated workforce 46.75% Pro-business climate 34.42% Education 13.29%
Infrastructure 18.67%
Federal budget cuts 8.86%
Health-care costs 33.86%
Q16 Please select the TOP TWO
Government regulation 8.86%
Geographic location / market proximity Quality of life Virginia tax structure Infrastructure Government tax incentives Right-to-work laws Political climate Lending sources
33.44% 24.35% 18.51% 18.18% 12.99% 5.19% 4.22% 1.95%
Q17 What would you cite as the top financial problem experienced by Virginia businesses?
Health-care costs Tax climate Lending environment / sources of capital Slow or no pay for services rendered Workers’ compensation costs Contract demands of labor unions
69.31% 10.56% 7.92% 6.27% 4.29% 1.65%
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NOVEMBER 2018
SPECIAL REPORT: Virginia Society of CPAs’ 2019 Virginia Economic Expectations survey
Q18 Which TOP TWO issues
need to be addressed in the 2019 session of the General Assembly?
Q21 In 2019 will your business or company...?
Health-care costs 84.16% Tax climate 56.44% Lending environment / sources of capital 17.49% Workers’ compensation costs 10.23% Contract demands of labor unions 7.59% Slow or no pay for services rendered 5.61%
Q19 What are the major issues
facing Virginia in the 2019 state election? Economy 47.85% Infrastructure
44.55%
Taxes
36.63%
Education
35.97%
Regulation
33.99%
40.77%
2.79%
5.57%
Expand
Relocate
Downsize
10.80%
Increase hiring
40.07%
None
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