Center Maryland: Maryland business taxes and a tale of two states

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Editor’s note: This commentary was published on CenterMaryland.org on September 11, 2015.

By Donald C. Fry

The discussion over whether Maryland should trim corporate and personal income taxes as a step toward improving the business climate and spurring economic growth and job creation is back on the table these days.

Not everyone’s in favor of trimming such taxes. Some argue that it’s just another way to reward big corporations and won’t help Maryland residents. Others argue it would spur economic growth around the state and thus lift all boats.

There’s no question that it’s a balancing act when it comes to trimming personal and corporate income taxes. First, any such legislation would affect state revenues.

The Maryland Economic Development and Business Climate Commission, a 25-member panel created to explore ways to improve the state’s business climate, is wrestling with these same questions as it takes a hard look at how Maryland tax rates and policies might be adjusted as one way to improve the state’s business climate.

Earlier this week the commission—often called the Augustine Commission because it’s chaired by former Lockheed Martin CEO Norman Augustine—held a hearing at which I appeared to present research the Greater Baltimore Committee has done looking at how Maryland stacks up in terms of business and personal income taxes.

A stable, predictable and fair environment for business to compete in today’s economy is critical for Maryland. And so, tax reforms are worth a hard look as a way to improve the state’s economic landscape.

In our research the GBC found that a number of well known business news organizations, including Forbes and CNBC, haven’t ranked Maryland particularly high in the periodic “Best States for Business” lists they publish.

Such rankings should be taken with a grain of salt. Metrics used to come up with these lists can change year to year. In addition, each news organization has its own set of metrics. So a state may be listed high on one list but middle of the pack on another.

But such lists, especially when put out by news organizations with broadly recognized names, do fuel perception. And, as the old maxim goes, “perception is reality.”

On some of these “best business states” lists we found that neighboring states which Maryland competes with for business, like Virginia and North Carolina, often rank higher than the Free State. This creates a perception that they have better business climates.

Even more compelling is that in some of these states the corporate tax rates have been trending downward in recent years. But in Maryland they have trended upward.

And so it seems clear that to stay competitive in today’s environment there are steps Maryland should take when it comes to business taxation – especially if we can become more attractive than neighboring states.

One option would be to consider establishing a gradual reduction in the corporate income tax. It’s currently 8.25 percent – fourth highest among the peer group. This could help chip away at the perception that Maryland doesn’t have a welcoming climate for business.

A second step worth considering is to provide some relief through a tax structure that sets up credits or exemptions for what are known as “pass-through entities.”  These are typically small businesses – which when combined, provide large numbers of jobs statewide. Such relief could give these business owners reason to expand or add jobs.

In both cases, we should proceed – but proceed with caution.

To do otherwise could backfire. As I noted to the Augustine Commission, two states — Kansas and North Carolina — enacted major tax reforms in 2013. But the outcomes so far have been starkly different.

Kansas trimmed personal and other taxes, but didn’t reduce spending.  The reforms don’t seem to have resulted in a wave of new businesses to expand the tax base.

Instead, its bond rating got cut — a big deal for any state looking to raise money in the bond market.  Kansas also trimmed its state pension contribution, put on hold $300 million in road maintenance projects and schools closed early due to a lack of funding. Now Kansas legislators are revisiting tax rates and policies.

North Carolina, on the other hand, enacted major reforms to its tax rates and regulations and came out on the winning side.

In May, the state announced it expected to end the fiscal year with a $400 million surplus. The governor and state leaders credit economic growth and job creation spurred by the tax reforms as the reason for the surplus.

Our elected leaders at the state and local government levels should take steps to grow our state’s economy and create jobs. If the tax structure creates a competitive disadvantage it should be altered.

A competitive business environment that promotes job creation and a strong economy is good for all Marylanders.

But important lessons may be gleaned from Kansas and North Carolina as the Augustine Commission presses on with its important work of developing proposals to improve the overall Maryland business climate.

Donald C. Fry is president and CEO of the Greater Baltimore Committee. He is a regular contributor to Center Maryland.

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