Guess what northeast state just eliminated its corporate income tax for manufacturers.
Would you believe New York?
The Empire State’s legislature eliminated its 5.9 percent corporate income tax on manufacturers late Tuesday night.
Why did New York do this? To better compete as a location for manufacturers and to help stem the erosion of manufacturing jobs in the state, according to published reports.
Other corporations in New York will continue to be subject to the corporate income tax. But this underscores the competitive environment that exists today for states vying to attract new business investment and to retain existing businesses.
New York, which lost 119,000 manufacturing jobs over the last eight years, according to federal data, has delivered a decisive competitive response.
In Maryland, which lost 33,000 manufacturing jobs during the same period, lawmakers are also beginning to feel some pressure to improve business-climate policies to better convert the state’s substantial strengths as a business location into private-sector job creation.
New York’s bold move adds to that pressure. Maryland gives manufacturers a corporate income tax break by affording them the option of basing their taxes only on sales, as opposed to a more complex formula required of other corporations in the state.
But now it’s even harder for our state to compete for job creation when a nearby state totally gets rid of its corporate tax on a key industry sector and its corporate tax rate on other sectors is two percentage points less than Maryland’s.
Economic development experts have noted that New York has been working on its business climate and has become a significant competitor in business location and retention.
Andrew Shapiro, managing director of national business location consultants Biggins Lacy Shapiro & Co. last January told members of the Greater Baltimore Committee’s private-sector commission on tax reform that New York is beginning to deploy aggressive tax-policy tactics to attract and retain business investment. Other New York tactics include the creation of tax-free zones to attract business investment, he reported.
It’s worth noting that the creation of reduced-tax zones is among the elements of an economic development agenda proposed by Senate President Mike Miller and House Speaker Michael Busch that has been moving through the Maryland General Assembly this session. Other elements of the agenda include easing Maryland’s estate tax burden, nurturing cyber security industry growth, and generating private funding for university research.
However, legislative leaders have declined to move any of 10 bills that proposed various reductions in Maryland’s corporate income tax. No one expected the corporate income tax bills to move this year, but New York’s action may ratchet up future pressure for a corporate income tax reduction.
Business leaders at the Greater Baltimore Committee contend that reforming Maryland’s tax structure should be the top priority for lawmakers seeking to improve our state’s ability to compete for business location and retention.
A new report by the Tax Foundation serves to reinforce that contention. It ranks Maryland as having the 7th highest overall state and local tax burden, as a percentage of income. The report calculates that Maryland per-capita state and local taxes amount to 10.6 percent of per-capita income in our state.
That’s second highest among six Mid-Atlantic states. Only New Jersey’s 12.3 percent tax burden exceeds Maryland’s in the Mid-Atlantic region, according to the report.
A significant reason for Maryland’s disappointing ranking appears to be the state’s “piggy-back” local income taxes, which are ingrained in Maryland’s tax system and are not likely to be significantly reduced any time soon.
Nevertheless, the Greater Baltimore Committee’s private-sector tax reform commission is working on recommendations for ways to make “revenue-neutral” structural reforms to our state’s tax system that would position Maryland to be more competitive for business growth.
The goal is to better match Maryland’s tax structure, more than 60 years-old, to the 21st-century economy and to raise sufficient future revenue for state government without continually having to adjust tax rates upward and damaging our state’s ability to compete for private-sector growth.
New York’s corporate tax reduction and the new Tax Foundation report are anecdotal examples. Maryland does not need to react every time a study is released. Admittedly, studies are often biased to reflect the author’s philosophical point of view. But they point to a compelling challenge that Maryland policy-makers in the next administration and in the next General Assembly term must directly confront if our state is to thrive in the post-recession economy.
Maryland needs to position itself to compete more aggressively for business growth and job creation. Other states are not standing still and the competition is intensifying.
Donald C. Fry is president and CEO of the Greater Baltimore Committee. He is a regular contributor to Center Maryland. This column originally appeared April 4 in Center Maryland.