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A call for Maryland tax reform

BusinessFinanceBusiness EnterprisesCorporate OfficersExecutive Branch

Only two words come to mind in response to the latest missive from the Greater Baltimore Committee wherein 52 CEOs say Maryland's highest priority for economic growth and job creation ought to be reforming the state's tax structure to make it more competitive: Good idea.

That the region's business leaders think the state's tax structure is hurting the "business climate" is none too shocking. We have yet to visit the state where business leaders never grouse about taxes and the vicissitudes of government — state, federal and local.

And while there are times when "business climate" gripes about tax rates are just another way of saying "lower our taxes" regardless of the effect on vital services to those who don't make CEO wages, this doesn't appear to be one of those occasions. The GBC's 38-page report, drawn from a recent CEO summit, doesn't bang any partisan drum.

Rather, what Maryland's top business leaders have to say is entirely reasonable and, frankly, pretty important to the state's future. They want a private-sector commission formed to study the state's finances and make recommendations to "achieve a more competitive tax structure and improved state spending efficiency that complement today's economy and business growth sectors."

Indeed, the CEOs further state that they would be entirely happy with a revenue-neutral approach to tax reform — although they would also like to see "strengthened efficiency" in state government spending. In other words, let's not waste tax dollars. Another good idea.

This sort of top-to-bottom assessment takes place all the time in private sector companies and probably ought to happen more often in the public sector, too. We strongly suspect the General Assembly will take this idea to heart — although whether it will eventually act on any of the group's recommendations remains to be seen.

Here's the problem. It isn't as if lawmakers and governors sit around in Annapolis content with a tax structure that discourages business growth. Far from it. But when ideas for a more competitive system come up, they often prove too difficult to handle politically.

Here's one example. Maryland's economy is changing from one where goods are produced to one where services are sold. This is not exactly a new trend, but the state's tax structure has yet to catch up with that reality. Six years ago when Gov. Martin O'Malley took some modest steps in that direction — proposing to spread the sales tax to a handful of services — he was met with protests and poorly-considered alternatives like the since-repealed "tech tax" on computer services.

Tax legal services? Expect a furor. Tax dry cleaners or health clubs? The protesters will be out in numbers. How much easier it is to stick with what the state has done for generations even as it means a 20th century approach to a 21st century economy.

But, of course, it's worse than that. Inevitably, a change in the tax system will benefit one type of business at the expense of another. That's why certain reforms that have been adopted elsewhere — like combined reporting or closing certain corporate tax loopholes — can't seem to get much traction in Annapolis. Even business groups like the GBC often find themselves supporting only tax reductions and not more ambitious reforms that will divide their membership.

The GBC would love to see small businesses (sole proprietorships, S corporations, limited liability corporations and similar entities) not be taxed at Maryland's relatively high income tax rates. No doubt they'd also like to see a reduction in the corporate tax. Reducing both is the kind of thing that makes CEOs happy.

But not so fast. The reality is that with the sequester, federal spending in Maryland is in decline and with it, tax collections. If we are to reduce those rates, we'll have to be prepared to raise other taxes and fees to offset or cut government spending dramatically. And then the question becomes, are we just moving the burden from the affluent to the poor and middle class who are the most likely to lose out when services are cut or the burden for financing them is shifted away from businesses?

Still, that the subject is difficult doesn't mean it shouldn't be examined. The GBC has begun a thoughtful discussion about an important topic and raised it in a non-partisan manner. Maryland's political leaders should be prepared to respond in kind. A third-party Simpson-Bowles-type investigative examination of Maryland's tax structure and spending may, like its federal precursor, provide a roadmap for genuine reform. Whether the politicians in Annapolis will follow it — or ignore it as they have on Capitol Hill — is another matter.

Copyright © 2014, The Baltimore Sun
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