Business and the governor's race

Though the three Democrats and three Republicans considered the top contenders to replace Gov. Martin O'Malley disagree about plenty, they are unanimous in their opinion about one thing: Maryland's business climate needs improving. Del. Heather Mizeur, the most liberal candidate in the race, got into the act this week with a plan to cut income taxes for the vast majority of Marylanders and to provide corporate tax credits for small businesses, among other proposals. Even Lt. Gov. Anthony Brown has implicitly acknowledged that business has not had a sufficient voice in the administration of which he has been a part; he recently launched a statewide listening tour to hear from business owners and seek ways to make the state more business friendly. But what exactly the candidates have in mind when they pledge to improve the business climate varies widely.

On the Republican side, the contest between Harford County Executive David Craig, Del. Ron George and businessman Charles Lollar is largely over which taxes to cut, how much and how fast. Mr. George, who features a link on his website listing 74 taxes and fees Mr. O'Malley increased (he counts rather liberally), wants to cut the corporate income tax from 8.25 percent to 5.75 percent and cut the top personal income tax rate from 5.75 percent to 5 percent. Mr. Lollar says he would reverse the O'Malley sales tax increase (dropping the rate back to 5 percent) and eliminate the estate tax. Both Messrs. George and Lollar would repeal the state-mandated stormwater fee (which they call the "rain tax") and reverse this year's gas tax increase. Mr. Craig has made a blanket pledge to "reduce or eliminate any tax or fee that is impeding job growth," which includes all the items mentioned above and then some. None of the Republicans specify how they would make up for the lost revenue or which specific programs they would cut to compensate.

All three Democrats acknowledge that Maryland's taxes need reform to improve our business competitiveness, but their zeal to cut taxes is certainly less fervent. Ms. Mizeur has provided the most detailed proposal on taxes so far and it is decidedly nuanced. She would raise marginal tax rates on income over $150,000 (or $225,000 for joint filers) to finance cuts for those who make less. And she would enact "combined reporting" — a corporate tax system designed to prevent multi-state companies from shifting income to states with lower or no corporate taxes — and use the proceeds to finance credits for small businesses. Attorney General Douglas F. Gansler would cut the corporate income tax rate to 6 percent and would raise the threshold for inheritance taxes from $1 million to $5 million. He, like Mr. Craig, has promised tax breaks for pension income. Mr. Brown has said the least about taxes so far but has pledged to reform the tax code.

More broadly, though, the difference between the candidates is that the Republicans all argue to one degree or another that Maryland has gone severely off track and needs a fundamental shift in its governance. The Democrats do not. The GOP candidates' argument is that Maryland will become more competitive if the cost and role of government is reduced. They are right to be asking whether the state's tax and regulatory structures are hurting the economy, but the idea that the state should drop its philosophy of investing in high-quality education, infrastructure, health care and other amenities is not only unrealistic, it would play against Maryland's greatest assets.

It's worth noting that taxes went up during the O'Malley administration largely for two reasons. The first round, in 2007, was designed to pay for the massive commitment to K-12 education the state made by adopting the so-called Thornton school funding plan in 2002. Subsequent increases allowed the state to maintain that commitment, and to all but eliminate college tuition increases, even as the nation endured its worst recession in decades. Despite those efforts, the state's projected revenues still fall short of projected expenditures by about $400 million next year. The second major reason the state raised taxes was the Maryland's backlog of transportation needs. That led to this year's gas tax hike, which was a long-held priority of the business community. If the economy continues to improve, some tax cutting may be feasible during the next governor's term, but reversing the O'Malley legacy on taxes also means reversing his legacy on education and undoing perhaps his only accomplishment that was roundly cheered by business groups.

That's not to say that the Democrats have all the right answers. Though some of her proposals on taxes and encouraging the high-tech economy are intriguing, for example, Ms. Mizeur's pledges to more than double the minimum wage by 2022, mandate paid sick leave for all workers and allow local jurisdictions to levy a 1-cent surcharge on the sales tax to fund school construction could prove too big a shock to the economy. Moreover, raising income taxes on high earners should be approached with caution because it would also ensnare many small businesses that file under the personal rather than corporate income tax system. Mr. Gansler's ideas so far have been focused on reviving the manufacturing sector — certainly a worthy and necessary goal but one that is insufficient in an age when services dominate the economy. Mr. Brown's attention to the issue of business competitiveness is welcome, and he has set an appropriately balanced tone, but he hasn't offered many specific proposals yet.

Despite the doomsday talk from some candidates about Maryland hemorrhaging jobs across its borders, the state is in better shape than most when it comes to recovering from the recession. But the sequester and government shutdown underscored just how big a threat the instability in the federal government is to Maryland. As the candidates flesh out their ideas in the coming months, voters need to look for someone who can address what is holding back the state's economy without jeopardizing what gives it strength.

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