Center Maryland: Tax policy challenges are key to business climate overhaul

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Editor’s note: The following commentary appeared on CenterMaryland.org on October 31.

By Donald C. Fry

After years of being buffeted by disappointing rankings on many national surveys, Maryland’s business climate is about to be overhauled.

That’s what candidates in next week’s election are telling us. Both major party candidates for governor – and many others running for seats in the General Assembly – say they will make strengthening our state’s competitiveness for business growth and job creation a top priority when they convene in Annapolis next January.

Specifically how Maryland’s business climate will be strengthened remains to be seen.

But ask business owners, managers and employees in our state and they quickly offer up a broad menu of potential action items. They include better customer service on the part of state agencies and their employees at all levels, better coordination and communication between state agencies, reduced regulations and reasonable, consistent enforcement of them, and better leveraging of state assets to nurture business growth. Improving the transportation infrastructure is also biggie, as is workforce development.

But the dominant issue that remains – the so-called “elephant in the room” in any discussion of Maryland’s business competitiveness – is tax policy.

Annual national business climate rankings bear this out.  Maryland’s overall rankings currently range from 18th (Forbes) to 41st (Chief Executive Magazine) with most falling somewhere in the middle, such as 27th on the recent Thumbtack small business survey.

Within the survey categories, Maryland usually ranks pretty high for its many positive assets including quality public schools, top-ranked universities, a skilled workforce and an abundance of technology resources. But consistently negative assessments of its tax structure prevent Maryland from achieving higher rankings for its business climate.

The truth is, our state’s tax structure is a primary drag on Maryland’s ability to compete for business growth. Maryland is perceived by too many in the nation’s business community as a “high tax” state.

That’s why last year participants in the GBC’s day-long Chesapeake Conference of CEOs identified tax reform as the top strategic priority, by far, for strengthening Maryland’s business climate.

What are Maryland’s major tax challenges? A private-sector commission comprised of tax and policy experts formed by the GBC to study tax issues has identified three key tax-related challenges to our state’s business competitiveness.

  • Corporate income tax rate.  Although Maryland’s corporate tax rate of 8.25 percent is lower than rates in Pennsylvania (9.99 percent), New Jersey (9 percent) and Delaware (8.7 percent), it is significantly higher than New York (7.1 percent), West Virginia (6.5 percent), Virginia (6 percent) and North Carolina (6 percent) – all of which are key business competitors to Maryland.

Maryland is the only state in the mid-Atlantic that has increased its corporate income tax rate since the recession began, while three other competing states – North Carolina, New York and West Virginia – have reduced their corporate tax rates, according to data from the Tax Foundation.

It is also interesting to note that, despite this high tax rate, less than 5 percent of Maryland’s general fund revenues are generated by the corporate income tax.

  • Personal income tax rates. Maryland’s personal income tax rates, when combined with local “piggy-back” tax rates, are burdensome to taxpayers. Maryland’s combined maximum state and local personal income tax rate of 8.95 percent ranks second highest among eight mid-Atlantic states, with New York’s maximum personal income tax rate being the highest at 12.695 percent and Virginia’s maximum rate being the lowest at 5.75 percent.
  • Pass-through entities. The 8.95 percent maximum combined personal income tax rate applied to “pass through” entities means that small business owners in Maryland who pay personal income taxes on earnings derived from those entities, such as LLCs and Subchapter S companies, often get taxed at an even higher rate than Maryland corporations.

Maryland’s “piggy-back” tax structure is at the genesis of both the personal income tax and “pass through entity” tax challenges.

Meanwhile, Maryland faces two other worrisome tax-related challenges on the revenue side.

First, the state’s debt service on capital projects currently exceeds the amount of state real estate taxes collected for the payment of it, resulting in lawmakers having to dedicate general funds to debt service.

General fund allocations to debt service are projected to increase from $233 million in the current fiscal year to more than $500 million per year in FY 2018 and beyond. The state’s recession-related budgeting tactic of converting short-term operating expenses into long-term borrowing has contributed to the growing debt service.

Second, sales tax revenue – the state’s second largest source of operating revenue, next to income taxes – has been notably sluggish during the last two fiscal years, growing only 0.7 percent in FY 13 and 1.9 percent in FY 14. Estimated sales tax revenue growth of 4.7 percent for the current fiscal year is better, but nowhere near the more than 7 percent annual sales tax revenue growth the state enjoyed before the recession.

Sluggish tax-related revenue growth serves to underscore the need to reform Maryland’s tax structure and to nurture a stronger business climate for business growth and job creation, which will ultimately yield healthier revenues to state government as well.

It’s worth noting that much of Maryland’s current tax structure is the result of lawmakers tactically “piling on” over the decades to a tax system that was enacted in the 1930s and 1940s.

Clearly, whoever gets elected next week will have their work cut out for them. Having pledged to make strengthening Maryland’s competitiveness for business growth and job creation a top priority, the victorious candidates will have to address these tax challenges head-on to effectively craft a fresh policy agenda for strengthening Maryland’s business climate.

Donald C. Fry is president and CEO of the Greater Baltimore Committee. He is a regular contributor to Center Maryland.    

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