Describing his personal encounters with business leaders, Virginia Gov. Terry McAuliffe, a Democrat, has said that their first question is typically “‘What is your tax rate?’” That’s why he made recruiting new companies a priority and pushed for lowering Virginia’s corporate tax rate because of that consistent line of questioning.
There was a sense of urgency at the time, prompted by North Carolina’s own move to lower its corporate tax rates. Here is where corporate tax rates stand now: Maryland 8.25 percent, Virginia 6.0 percent, and North Carolina 3.0 percent.
Continuing down the I-95 corridor to South Carolina, Georgia and Florida, these states all have corporate tax rates at least 2 points lower than our own. If you run a company where even a fraction of a percentage point in corporate income tax rates makes the difference in millions of dollars in retained earnings, where would you want to go?
We’ve been down this road so many times. Former Maryland Gov. Marvin Mandel and General Assembly House Minority Leader Ellen Sauerbrey asserted several years ago that “states battle for business.” The bipartisan message from the veteran political leaders in 2011 conveyed that states do not operate in an economic bubble. They compete with one another for companies and the jobs they bring.
More recently, Gov. Larry Hogan successfully campaigned on improving Maryland’s business climate and, looking ahead a year from now, voters will ask themselves whether “open for business” is merely a slogan for highway signs or if it means better jobs for themselves and their families. In 2016, the state’s bipartisan Augustine Commission, charged with assessing Maryland’s business climate, concluded Maryland’s tax structure is a “detriment” to attracting and retaining companies and jobs.
But companies the size of Amazon have a solution to high taxes: They negotiate with politicians for the legal right not to pay them. That is why the information technology and e-commerce giant started a bidding war throughout the country by announcing a new second headquarters. What Marylanders should be concerned with, however, are the legions of smaller companies that won’t consider our state for new operations or will leave altogether. While this may not generate headlines, it stifles the economy.
One recent corporate relocation decision did generate headlines when Marriott threatened to move its headquarters out of state from Bethesda. “Maryland has not been great for business, but it hasn’t been aggressively trying to run them out,” CEO Arne Sorenson told the Washington Post in 2015. Hardly a ringing endorsement of continuing to do business in Maryland, the Hogan administration offered a $62 million incentive package to keep the hotel company in the state. Nobody interested in sustained job growth should expect the state government’s Commerce Department to negotiate with each and every company threatening to leave.
Maryland’s laws, regulations and rules don’t win the confidence of business leaders. Mandated benefits, onerous employer penalties and meddling in private sector hiring practices are among the perennial measures state legislators propose, generating bad publicity and poisoning relations with the business community.
Regulations, harder to compare than straightforward metrics like tax rates, also do not help Maryland. One easy comparison we can make, however, is Maryland’s workers’ compensation system where $364 million was paid out last year — nearly $100 million more than Virginia. This is distorted given Maryland’s significantly lower employment base. Maryland’s worker’s compensation laws and regulations tilt toward litigation and pay-outs at the expense of hiring.
Financial media outlets CNBC and Forbes and think tanks like the Tax Foundation have been measuring state business climates for years. Using a variety of criteria, most notably taxes and regulations, Maryland ranks behind every state from Virginia to Florida in all three comparisons. By these widely-monitored benchmarks, we are simply not competitive with other states.
Maybe the best advice comes from the president of the Seattle Chamber of Commerce, who stated that Amazon’s expansion elsewhere was a “wake-up call.” Seattle has enacted a number of anti-business policies, and local officials are concerned as to why Amazon just didn’t expand its headquarters there.
As state officials were forced to do with retaining Marriott, expect a staggering price to attract Amazon in the event Baltimore makes the short list for final consideration. And expect a political backlash as small businesses wonder why they don’t get taxpayer support. It’s one thing to say open for business. It’s quite another to develop the competitive ecosystem companies demand when it comes to deciding where to set up operations.
Jay Steinmetz is the CEO of Baltimore-based Barcoding Inc. His guest column will appear every other Sunday through October, He can be reached at email@example.com or on Twitter: @barcodeman.