Donald Fry: Tax structure, regulatory environment frame Maryland�s business cost challenges

By Donald C. Fry

What’s the biggest consideration in making decisions about where to locate a business operation?

“The cost of doing business,” was the consensus of more than 50 Maryland CEOs, entrepreneurs, and experts in business development and retention who participated last year in the Greater Baltimore Committee’s series of focus groups, from which the GBC compiled eight core pillars for economic growth and job creation.

While the cost to do business isn’t the only factor, it’s the elephant in the room for location decision makers, say experts.

A state’s individual income taxes, business taxes and property taxes and other taxes and fees, as well as regulations, and policy measures that impact business operations all contribute to overhead and directly relate to any business’ bottom line. Together, they are key factors in the perception of a state’s environment for business growth, participants in the GBC study universally agreed.

That’s why fundamental prerequisites relating to business costs comprise three of the eight core pillars for a competitive business environment.

Core pillar: Tax structure that is fair and competitive. Maryland’s tax policy must be perceived by business as being competitive and devoid of elements that unreasonably target specific businesses or business sectors.

Focus group participants agreed that no one can seriously argue that Maryland competes well when it comes to its tax structure. Maryland is consistently ranked in the bottom 10 in the U.S. for overall tax competitiveness. For example, the Tax Foundation’s 2011 State Business Tax Climate Index ranks Maryland the 44th for overall business tax competitiveness. This index compares the states in the areas of corporate taxes; individual income taxes, sales taxes, unemployment insurance taxes, and property taxes.

Not all of Maryland’s rankings for various taxes are abysmal. For example, Maryland ranks 11th best for sales taxes and 14th for corporate taxes. But our state ranks 49th for individual income taxes, 47th for unemployment insurance taxes and 40th for property taxes.

“Having a competitive tax burden would be an attribute. We need to be competitive, especially with the states within our geographical region,” said focus group participants. Among seven Mid-Atlantic competitors, Maryland ranks next to last for business tax climate, besting only New Jersey’s 48th ranking. Delaware (8th) and Virginia (12th) are the two highest ranked states in the Mid-Atlantic, followed by Pennsylvania (26th), West Virginia (37th) and North Carolina (41st).

Other tax measures to increase revenue to the state’s general fund enacted by the General Assembly in recent years, such as the so-called millionaire’s tax, an expired temporary tax that some lawmakers have attempted to resurrect; and the computer services tax, which was enacted in the 2007 special session but was repealed before it took effect, do not make business owners feel any more comfortable about our state’s climate for improving our tax structure.

GBC study participants agreed that Maryland need not be in the top 10 best states for taxes to attract business, but it should strive for a tax structure that is at least competitive and that delivers reasonably high value for tax dollars. Maryland tax policy should encourage, rather than discourage, business investment, economic growth and job creation.

Core pillar: Regulatory policies that are streamlined, stable and predictable. Maryland must project to businesses within and outside the state that its government regulatory policies are reasonable, relevant, free of surprises or redundancy, and considerate of businesses’ sense of urgency.

Effective policies and processes should reduce business costs, reduce time of permitting, and create a more predictable regulatory climate. “Time is money and money is jobs,” said one economic development director who participated in the GBC study.

Businesses thrive on consistency. They like to know what to expect. They do not thrive in an unpredictable policy environment. The state needs to develop a sense of urgency in dealing with business and work to continuously update the policies and processes that have an impact on economic growth and doing business in Maryland.

Local economic developers who participated in the GBC study cited frustration from business owners about how state regulatory agencies interact with them or address their needs. State agencies demonstrate little sense of urgency and have time-consuming and bureaucratic routine processes, business owners told them.

Many agency employees appear to take a “just say no” approach to business, one CEO complained to the GBC. “It’s safest for them. It’s their first instinct.”

Others voiced the impression that employees at state agencies adopt a view that anything a business needs is inherently bad in some way. Many suggested that, rather than adopting a gate-keeping approach, state agencies should work to reflect a more problem-solving orientation that facilitates the business development process rather than blocks it.

The state’s permitting processes should be re-evaluated, participants agreed. Existing processes were described by one economic development director as being too slow, redundant, and unpredictable. “If you get the permit, you don’t know if you will get blocked at another stage. When a business decides to expand, a permit could get held up at any stage of the process, or make it all the way through, but then get denied at the final step in the process.” Fast tracking and expediting processes are key steps to make it easier to do business in Maryland, study participants agreed.

To Governor Martin O’Malley’s credit, he has acted on this core pillar by recently launching a new tool for business owners and developers to streamline and expedite the review of state permits for projects in priority development areas. If effectively deployed, this initiative would be a beginning step in the right direction.

Some GBC study participants constructively suggested that Maryland’s State Stat track the time it takes to obtain permits from key state regulatory agencies. State Stat does not appear to currently track the timeliness of any permit approvals, according to a review of more than 260 online reports dating back to August 2009.

Sounds like a good idea worth implementing.

Core pillar: Competitive costs of doing business. Public policies must reflect a government predisposition to nurture business growth and to avoid arbitrarily or disproportionately imposing additional overhead upon the business sector.

In addition to the tax burden, “the cost of doing business in Maryland is high, especially when compared to other states within our region,” study participants agreed. Maryland is generally known for high costs of worker’s compensation, energy, insurance and labor, they said.

Public policy makers should seek to avoid enacting measures that arbitrarily impose unnecessary bureaucratic procedures or mandates that significantly increase the cost of doing business. Lawmakers should make a point of always weighing proposed legislative measures and unintended consequences against the impact on business growth and job creation.

“For every dollar put on business, that is one less dollar that business can give back to create jobs, invest in infrastructure and expand,” said one business leader.

Maryland’s economic future, and the fiscal health of its government, depends on how well our state nurtures job creation and works to attract private-sector business investment – from existing Maryland companies as well as from elsewhere – that will drive our post-recession economic growth.

As some GBC study participants pointed out, few companies will make a location decision based solely on Maryland’s poorly-ranked tax structure. That’s why strategic planning for our state’s future business growth should seek to creatively address Maryland’s multiple challenges relating to the cost of doing business.

Editor’s Note: This commentary is the third in a series discussing essential prerequisites for a competitive business environment.

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