Maryland “Business Tax Climate” Suffers Dramatically
Comments by Minority Leader Allan Kittleman to the Maryland Economic Development Association
January 15, 2009
The mantra of Democrats in Annapolis this week is that we live in “difficult times” due to the “national economic crisis.”
While the state has felt significant impacts from the recent economic decline, national problems are not the root of Maryland’s budget crisis. The budget analysis from the non-partisan Department of Legislative Services (DLS) prepared one year ago, prior to the stock market decline, forecasted a continuing significant structural budget deficit for Maryland in the future years.
The underlying cause shown in the DLS analysis is that Maryland does have a spending problem. The national economic decline only exacerbates the overall condition of Maryland’s budget.
Unfortunately, from the perspective of economic development, budget actions taken by the Governor and the legislature over the past two years have jeopardized our ability to recruit new businesses and attract jobs. These actions could also put in jeopardy our state’s triple-A bond rating.
During the Special Session in the fall of 2007, Republicans argued that Governor O’Malley’s tax hikes would have long-range economic consequences to economic development in Maryland. By the end of the one-month session, the legislature had approved increases in corporate taxes, sales taxes, automobile excise taxes, cigarette taxes, “controlling interest” real estate transfer taxes and personal incomes taxes on the state’s highest wage earners. It doesn’t take a rocket scientist to predict that these historic tax increases would inflict broad-ranging repercussions on Maryland’s economy and our business competitiveness.
Maryland’s business competitiveness rankings have shown dramatic declines as published in updated national reports.
The nonpartisan Tax Foundation just released its 2009 State Business Tax Climate Index. It includes a highlighted sidebar on Maryland, which reads as follows:
“Maryland ranks 45th overall, a drastic drop from its 24th rank last year. Maryland lawmakers achieved this remarkable feat by raising most of the state’s major taxes for FY 2009. . . Maryland now has by far the worst personal income tax in the country, with a significantly lower score than second-place California.”
How did this happen? One problem is that Maryland legislators tend to track tax burden by looking at taxes per capita income. In fact the DLS produced Issue Papers – 2009 Legislative Session publication states that “total state and local government spending and revenues in Maryland are not high compared to other state. Maryland ranks generally in the middle of all states in total state and local government revenues and spending measured on a per capita basis and near the lowest in revenues and spending as a percentage of total income of residents.
This is exactly the argument that was raised by the Administration and by those legislators supporting major tax increases in the 2007 Special Session.
But taxes per capita is not what business leader examine to gauge prospective locations for expansion. Instead, the top marginal rates are the key for evaluating potential tax burdens on management and employees.
Businesses looking to relocate to Maryland – or even businesses considering whether to stay in Maryland – study state-by-state comparisons of the top marginal rates for corporate income taxes and for state and local personal income taxes.
In this arena, Maryland does not fare well. New data is available from an analysis prepared by the Maryland Public Policy Institute titled Improving Maryland’s Economic Competitiveness.
Maryland’s top marginal corporate income tax rate used to be right at the U.S. average of 7%. But after the special session, Maryland’s rate jumped to 8.25% - very uncompetitive when compared with our neighboring state’s rate of 6% in Virginia.
We fare even worse in the top state and local marginal personal income tax rate – where Maryland is fourth worst in the country.
Where does this leave us in the world of economic development? Obviously, Maryland will only become competitive after we repeal the special session tax increases. Unfortunately, no one is talking about that at this stage – but tax relief for Maryland’s citizens and businesses needs to be part of the long-range program for re-structuring Maryland’s budget.