In his remarks to the Greater Baltimore Committee's annual meeting Wednesday night, T. Rowe Price Chairman Brian C. Rogers noted a contradiction in how the world sees Maryland as a place to do business. On the one hand, it is universally recognized for its top-ranked school systems and universities, skilled workforce, research activity, potential for innovation, and great quality of life. On the other, it frequently winds up toward the bottom of rankings of business competitiveness — most recently, by CEO Magazine — largely because of our tax system and regulatory environment.
Mr. Rogers, who is also chairman of the GBC, had a simple prescription: "Making Maryland more competitive requires that our tax system become more competitive." The "Brian Rogers theory of taxation," such as it is, he said, is that we should be taxing more the things we want less of — cigarettes, alcohol and perhaps gasoline — and taxing less the things we want more of. What we want more of, he said, are jobs, and one way to encourage that is by lowering the corporate income tax rate, he said.
Putting aside the disconnect between job creation and corporate profits in recent years, it is certainly true that Maryland's corporate tax rate of 8.25 percent is higher than some surrounding states — notably Virginia, where the rate is 6 percent — and that we have often been on the losing end of companies' decisions on where to locate in the region. Mr. Rogers pointed to a recent decision by Raytheon to locate a cybersecurity facility in Northern Virginia despite Maryland's substantial assets in that industry.
But Mr. Rogers also noted that the key for Maryland's future prosperity isn't in luring big companies to the state — "Sorry, folks, Pfizer isn't going to move to Baltimore," he said — but in nurturing innovative start-up companies that will be the major employers of tomorrow.
There is a strategy the state could employ to lower the taxes on those sorts of firms without throwing the state's budget out of balance or shifting more of the tax burden from corporations to individuals. But it would require abandoning another tenet of the GBC agenda: opposition to combined reporting.
Earlier in the evening, GBC President Donald C. Fry listed the defeat of combined reporting legislation in this year's General Assembly session as one of the organization's key accomplishments. But the group's reasons for opposing it are shaky, and the GBC and other business organizations would do well to rally behind a proposal to adopt that method of calculating corporate income for tax purposes in exchange for a cut in the corporate tax rate.
Combined reporting seeks to more accurately calculate a corporation's economic activity in a state by considering all its related entities together rather than separately. In general, it makes it more difficult for a multi-state conglomerate to hide its profits in states with lower (or no) corporate income tax rates. It is a decades-old idea that is law in a majority of states (including some of those that are consistently ranked among the most business friendly).
Mr. Fry testified against a combined reporting bill in this year's General Assembly session, even though the legislation would have cut a variety of business fees in half. He said he based his opposition on a recommendation by the Maryland Business Tax Reform Commission that "enacting combined reporting was not advisable at this time." That's not exactly true; the commission report, issued in December 2010, found that enacting combined reporting was not advisable at that time, meaning the 2011 legislative session. Its reasoning was that the transition to combined reporting would be complicated for many businesses, the switch would create winners and losers, and the effect would be to introduce "uncertainty at a time when the economy is struggling to recover from the recent recession."
Maryland's economic health has, fortunately, improved since then. And while combined reporting isn't simple, neither is our current corporate tax system. Maryland has enacted its own laws in recent years to cut down on tax avoidance strategies. Wouldn't it be simpler if instead we adopted the Multistate Tax Commission's model combined reporting system? And the current tax system also creates winners and losers — the winners are those that can pay lawyers and accountants to shield their income from Maryland taxes, and the losers are those that can't.
Estimates vary on how much combined reporting would increase Maryland corporate tax receipts. Research by the comptroller's office suggests that it changes from year to year, but the Department of Legislative Services projects that it would net the state an extra $60 million or more a year. Based on those figures, Maryland could drop its corporate tax rate to about 7.6 percent without losing any revenue. The inconvenience of learning a new system would be temporary, but the lower rate would be forever. If the GBC and other business groups think the corporate tax rate is hurting competitiveness, that should be a trade they're willing to make.