Donald Fry: Gauging the business contribution to state government funding

By Donald C. Fry

It’s early February and the state faces a budget deficit. In the Maryland General Assembly, for some lawmakers that means it’s time to propose more taxes on business.

This year is no different. Two tax proposals that would impact Maryland’s business environment emerged this week from the halls of the State House. Neither was unexpected. But they are worth comment in this year when the pledge from every candidate for office was “jobs, jobs, jobs,” a message I hope they remain committed to now that they are in office.

Last Wednesday, 18 state senators sponsored a bill aimed at increasing corporate tax revenue through instituting a combined reporting corporate income tax policy. That same day a state senator announced that she would seek to resurrect the just-expired “millionaire’s tax” that would re-impose a special tax rate on high-income earners that is 14 percent greater than the highest rate that the rest of Maryland taxpayers are subject to.

The supporters of these proposed tax increases say that they are aimed at businesses and individuals “who can afford it.” But to lawmakers and others who find themselves instinctively agreeing to the logic that extracting more revenue to operate state government from Maryland’s business sector and high-income taxpayers is sound and fair tax policy, I heartily recommend reading the 21-page report issued on December 15 by the Maryland Business Tax Reform Commission.

After spending more than two years studying Maryland’s business tax structure, the commission recommended that the state not implement a combined reporting corporate income tax policy. This was widely reported and is well-known to policy makers, including those who are proposing it anyway.

The commission found that implementing a combined reporting policy would be a complex change for both corporate taxpayers and state tax collectors that would likely result in increasing the volatility of revenues from corporate income tax, an already volatile revenue source. The commission also found that many corporate tax avoidance tactics combined reporting is intended to prevent have already been addressed in Maryland through other legislation.

But beyond explaining why commission members, by a vote of 13 to 4, recommended against adopting combined reporting, the commission’s report also offers an informative and straightforward discussion of businesses’ contribution to funding Maryland’s general operating expenses.

Here are a few compelling facts and observations gleaned from the report:

• Business share of state’s operating funding. Approximately $2.5 billion of the state’s $13 billion in revenues to the state’s General Fund in 2008 was derived directly from business taxpayers mostly through corporate income taxes, individual income taxes, sales taxes, and property taxes, along with other industry-specific taxes. That amounts to 19.2 percent of the state’s general operating revenues.

• Individual income taxes are often business taxes. While income tax is not generally thought of as a business tax, more than 20 percent of resident income tax returns report business income, including income from sole proprietorships, partnerships, limited liability corporations, and subchapter S corporations to name a few.

• Business activity is a disproportionate source of income for high earners. The 2.7 percent of Maryland taxpayers with federally-adjusted gross income of more than $500,000 accounts for almost half of the business income reported on individual income tax returns.

• Other tax revenue from businesses. An estimated 28 percent of sales tax revenue is derived directly from businesses. And commercial property accounts for roughly 18.3 percent of the statewide real property tax base.

These statistics serve to dispel contentions that businesses in general and high-income earners as a group somehow do not contribute enough to the state’s operational revenues. But beyond that, the report also offers interesting information on Maryland’s tax policies compared to neighboring states.

Among other things, without the “millionaire’s tax,” Maryland’s top state income tax rate of 5.5 percent is lower than all of its mid-Atlantic neighboring states except Pennsylvania. With the “millionaire’s tax,” Maryland’s top rate would exceed Pennsylvania’s and two more of our contiguous neighbors – Delaware and Virginia.

Of course, with or without the “millionaire’s tax,” Marylanders also must pay county piggyback income taxes, which increase the overall income tax bill. So why consider further hurting Maryland’s competitiveness with an added tax that targets a large segment of business taxpayers and job generators?

The report also shows that Maryland’s corporate income tax rate of 8.25 percent is relatively competitive with neighboring states. It’s higher than North Carolina’s and Virginia’s but lower than in Delaware, New Jersey, Pennsylvania, West Virginia and Washington, DC.

Why tamper with two competitive tax rates for the sake of increasing revenue for the state’s general operating expenses that, even including three recession years, will have increased more than 47 percent since 2001, according to state projections.

We’re coming out of a recession. Only a thriving and healthy private sector will drive the post-recession economy in Maryland that we all envision and will power future revenue growth for state government operations.

We must nurture job creation and business growth, not discourage it.

 

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