6:00 AM EST, November 28, 2011
At an appearance before a business group in Howard County, state Sen. Edward Kasemeyer recently made a comment that he'd like to see Maryland's corporate tax rolled back from the current 8.25 percent by one-quarter of a percentage point per year for several years. Presumably, this is so it might be made more competitive with the 6 percent corporate tax rate of neighboring Virginia and below that of other neighboring states.
Mr. Kasemeyer's thoughts on this topic are not just some idle speculation by one Democratic state senator. As chairman of the Senate Budget and Taxation Committee — the post formerly held by the ethically challenged but legally not guilty Sen. Ulysses S. Currie — he has a larger voice in such policymaking than most in Annapolis.
Some Democrats may find it surprising that reducing the corporate tax would be a particularly high priority for one of their own. After all, the tax was raised during the last term by the legislature to make it on par with what high-income Maryland residents must pay in income taxes (when both state and local piggyback rates are combined). Isn't it fair to hold corporations to the same standard as the individuals and couples who live here?
But Mr. Kasemeyer makes an interesting point. Might Maryland attract more business investment with a lower tax rate? Frankly, we are skeptical. The choice to raise the tax rate hasn't markedly changed investment decisions of the past several years as far as we can tell, and — as we've noted often in the past — such choices are driven by a multitude of factors, small differences in corporate tax rates not necessarily being high on the list. Moreover, a tax cut for business would be tough for Maryland consumers to take at a time when they may be asked to pay higher gas taxes.
Nevertheless, a corporate tax cut might demonstrate Maryland is serious about attracting and retaining its employers. Better yet, there's a relatively simple avenue available to pay for any lost revenue to the state budget while simultaneously making business taxes more equitable and even giving a leg up to Maryland-based businesses.
Senator Kasemeyer and his fellow lawmakers need only vote to adopt combined reporting, a system of taxing business earnings that's used by a majority of states that tax corporate profits. It could earn the state millions of dollars in additional revenues by closing loopholes large companies use to shield their earnings from state taxes.
States like Maryland that don't have combined reporting inevitably confront a problem: What do you do when companies that have locations in many states "hide" their profits through accounting gimmicks? Often, it means profitable corporations pay little to no corporate tax. Under combined reporting, companies must more fully disclose their income — and calculate what is subject to the corporate tax based on a formula that considers sales, payroll and property.
Some companies would wind up paying more and others less. But it would certainly eliminate some of the aggressive accounting tactics that Maryland has been fighting on a case-by-case basis for years. The extra revenue could pay for a lowering of the tax rate and put Maryland small businesses on a level playing field with the Walmarts and Best Buys of the world.
Much of the business community hates the idea, and a commission charged with studying business taxes (its membership heavy with business owners and sympathetic lawmakers) recommended the General Assembly not adopt combined reporting in 2011, given the economic circumstances. The commission's 2010 report even suggested that combined reporting might cause tax revenue to fall, a dubious claim given the business community's strong objections to it (not to mention the contrary experience of other states that have adopted it).
Still, it should be noted that Senator Kasemeyer opposes combined reporting, and lawmakers are unlikely to adopt anything so controversial. One alternative way to finance a tax cut might be to broaden the sales tax to include services (and more goods). But efforts to do so inevitably have caused lawmakers to narrow the scope to only a few applications and then retreat altogether when the businesses (and their customers) that stood to pay complained vociferously.
So next time Senator Kasemeyer goes around promising tax cuts, he may want to explain how they'd be financed at a time when the state is facing a deficit of $1 billion or more in the next fiscal year. Combined reporting makes sense, but those who don't care for it had better offer something better than expecting Average Joe Taxpayer to shoulder a greater share of the tax burden.
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