Donald Fry: Rankings and taxes raise issue of state’s business climate … again

 

By Donald C. Fry

An old topic – Maryland’s business competitiveness – gained new relevance this month because of two events.

First, Chief Executive magazine ranked Maryland No. 40 in its 2012 “Best and Worst States for Business” list published on May 2. Second, the Maryland General Assembly met in special session to pass an income tax increase affecting a significant portion of taxpayers.

The CEO magazine ranking, down three places from our state’s 2011 ranking on the same list, caught the attention of the Greater Baltimore Committee’s new chairman, Brian C. Rogers, who made it a key issue in his address to more than 850 members and guests who attended the GBC’s annual meeting on May 15.

“We can do a lot better than No. 40,” said Rogers, who is also chairman and chief investment officer for T. Rowe Price Group. “What we must do is foster an environment conducive to innovation, entrepreneurship and new business formation.

“Our best opportunities for improving competitiveness are to support local businesses and to nurture new ones.”

While economic development conversations often revolve around luring “big fish” corporations to Maryland, our state should focus intently on “growing our own,” Rogers said. Maryland should be “stocking the pond with our own minnows and watching them grow.”

The CEO magazine profile of Maryland typifies business community perceptions of our state’s challenges by casting taxes and regulations as a primary drag on the state’s ranking. It gives Maryland four out of five stars for workforce quality and living environment, but awards only two stars for tax and regulatory policy.

Four competing mid-Atlantic states were ranked higher than Maryland by the magazine, including two that ranked in the top 10 – North Carolina (No. 3) and Virginia (No. 6). Delaware ranks No. 14 and West Virginia ranks No. 34. Mid-Atlantic states ranking below Maryland are Pennsylvania (No. 43) and New Jersey (No. 45).

The rankings were compiled prior to the special session’s tax increase in our state, but the magazine appears to have anticipated it. “Development trend indicator: negative,” the profile says of Maryland. “Income tax increases on ‘middle class’ nick and frustrate business owners.”

Lawmakers who supported the income tax increase imply it does not target Maryland’s middle class because it affects only 14 percent of the state’s taxpayers and does not affect anyone earning less than $100,000. But that implication constitutes a somewhat disingenuous rationalization.

By setting the tax increase threshold at $150,000 for joint filers, the measure most certainly impacts many in this state who earn less than $100,000 per year – specifically individuals in two-earner families with jobs that pay less than $100,000 each, but together total more than $150,000. There are many such households around our state, particularly in Central Maryland.

But beyond this disturbing realization is the fact that in targeting the brunt of an income tax increase on Marylanders making, individually or jointly, between $100,000 and $350,000, this measure will impact many small business owners, the same population segment that state leaders say they are counting on to drive Maryland’s future economic growth. Don’t take my word for it, ask the General Assembly’s own fiscal analysts, who reported SB 1302, the recently-passed tax bill, could have “meaningful” impact on small businesses.

“Small businesses that are partnerships, S corporations, limited liability companies and sole proprietorships would be meaningfully impacted by the bill,” state analysts wrote in the fiscal note to the legislation. “Any of these small businesses with higher amounts of taxable income would be negatively impacted through increased income tax liabilities.”

It is fair to point out Maryland’s rankings as a high-tax state in CEO magazine and elsewhere are countered by others who gauge Maryland’s tax structure much less harshly. Though our state and local taxes are high in absolute terms, when compared to total income, Maryland’s tax ranking is much better, note some who compare our state’s taxes to other states.

For example, the Tax Policy Center of the Urban Institute and Brookings Institution issued findings in December 2011 stating revenue raised by state and local governments comprises 13.1 percent of personal income in Maryland, ranking the state second-lowest in state and local government revenue as a percent of personal income, based on 2009 data.

I’m not sure how comforting that is to Marylanders. I don’t think the general public – and definitely not the business community – look at taxes in that fashion. Instead, they look at taxes compared to other states’ tax rates.

Greater Baltimore Committee leaders cite a “fair and competitive” tax structure as one of eight core pillars for economic growth and job creation compiled in the GBC’s report “Gaining a Competitive Edge.”

Rogers frames the question many ask: “If Maryland is No. 1 in terms of median household income, ranks highly in household net worth and we have relatively high tax rates, how can there not be enough revenue to fund the needs of the state?”

Finding the answer to that fundamental question could be a key to improving Maryland’s competitiveness. What is needed is a way to identify the true consensus priorities of Maryland citizens and how much they are willing to pay for them.

Unfortunately, so far that exercise has been easier said than done.

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