Donald Fry: ‘Reform’ commission to mull tax increase for Maryland corporations

By Donald C. Fry

After two years of meetings, studies, presentations and discussions that culminated with a public hearing last Tuesday, it’s decision time for the Maryland Business Tax Reform Commission.

Members of the commission will meet on November 16 to begin deciding whether to make the first official recommendation to raise taxes following an election where most candidates for office in Maryland voiced a chorus of “no new taxes” pledges.

The commission could conceivably recommend that the state increase taxes on Maryland’s corporate community by adopting a so-called “combined reporting” tax policy. If enacted by state lawmakers, this policy could result in the state collecting between $95 million and $170 million more annually from businesses, according to pre-recession state calculations.

The Business Tax Reform Commission was created by the Maryland General Assembly in 2008 to “review and evaluate” the state’s existing business taxes and to make “specific recommendations for changes” to business tax policy. Lawmakers asked the commission to review combined reporting tax structures and the potential imposition of other business tax policies.

The commission is due to report to lawmakers in December.

Last Tuesday’s public hearing drew more than two hours of testimony from more than 30 people including representatives from Maryland corporations, business associations, tax policy advocates and labor unions.

Combined reporting takes into account, or “combines,” the entire earnings of companies with operations in many states and apportions a portion of those earnings to Maryland for tax purposes. Supporters contend that implementing combined reporting in Maryland would capture tax revenue that many multi-state companies avoid under the state’s existing tax laws. They point out that many other states have adopted combined reporting as a tax policy.

Opponents contend that combined reporting imposes a tax procedure upon businesses that will significantly increase tax complexity and business costs in Maryland and, among other things, make Maryland a less competitive state for business. Additionally, it is suggested that compliance enforcement will significantly increase state government costs. Opponents note that, while other states have adopted combined reporting, Maryland’s immediate neighboring states have not, though

Pennsylvania is currently having the same tax policy debate that Maryland is engaging in now.
However, neither Virginia nor Delaware imposes combined reporting on its corporations, nor do any of Maryland’s competitors in the southeast United States.

As a business advocate, former legislator and long-time observer of Maryland politics and government, I feel compelled to offer a few basic observations on the topic of combined reporting.

First, combined reporting trades simplicity for complexity. If you question this observation, simply read the nine-page explanation of combined reporting on the tax reform commission’s web site. This document is well-intentioned and tries hard to explain the more than a dozen significant options and nuances related to combined reporting.

But, unless you’re a tax attorney, it’s a difficult and confusing read. It’s the kind of convoluted “reform” that rarely passes any common sense test.

Second, proponents say they want combined reporting in the name of tax “fairness.” But their real purpose is simply to extract more revenue for government from a business sector that they don’t really value or appreciate.
If the recession has taught us anything, it’s that the private sector – not government – drives job creation in the state, and even revenue to government. But there are too many policy advocates who reflect a narrow priority – to collect more money for state government’s general operations by a means that they mistakenly believe comes from a source that doesn’t affect the average person.

Such people honestly believe that revenue from business is magic money – that increasing business costs doesn’t affect prices, salaries or jobs. They often operate under the assumption, which they sincerely embrace, that big corporations “can afford it.” Under the current challenging economic times, that assumption has to be seriously in doubt.

A policy shift such as this also brings about unintended consequences that often result in the state not benefitting to the degree that it anticipated while suffering another “hit” on its reputation as being open to business and job creation.
Some observers note that Maryland’s Business Tax Reform Commission’s vote on whether to increase corporate taxes may not now be the slam dunk that many originally thought when the commission was formed two years ago.

Now that the governor and other elected leaders are not beating the drum – at least not publicly – for tax increases for general state operations, there does not appear to be as much pressure on members of the commission to vote for a combined reporting corporate tax increase, say some Annapolis observers.

That may be true but, in Maryland, tax commissions are generally not created to punt on issues. The reality is that this commission was created in response to legislative proponents who wanted to increase corporate taxes and decrease corporate tax breaks. A combined reporting bill would draw vigorous opposition this year in the current economic climate, but it’s still something that may emerge from the commission.

Let’s hope that the commission gives full consideration to the direct and unintended consequences that could result from such a major tax policy change.

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