Tax policy likely a focus in the new year

Members of the Maryland House of Delegates convene in the house chamber in Annapolis, Md., Wednesday, Jan. 14, 2015, the first day of the 2015 legislative session.

Lowering taxes for business is likely to be a focus of Annapolis lawmakers in the new year, as Gov. Larry Hogan seeks to deliver on promises made during the election and Democrats look to burnish their credentials with business.

While momentum is gathering for reform, just what shape that tax relief may take — and how far it will go — remains unclear.


Lowering the corporate income tax rate of 8.25 percent in some way is likely to get backing from both the bipartisan panel organized by Democratic legislative leaders to address the state's business climate and from the Hogan administration, said Del. Wendell R. Beitzel, a Republican who represents Garrett and Allegany counties and serves on the panel.

While that may serve as a strong symbolic move, lawmakers and economists said it will be far harder to address the state's unusually high personal income taxes that — along with high utility bills — drive up the cost of doing business in Maryland.


"There's not a lot of low-hanging fruit here," said Dan White, a senior economist at Moody's Analytics, which produced a report in October analyzing the state's tax climate. "The changes that are to be made are difficult from a policy standpoint to make."

Marylanders pay 3.5 cents of every dollar earned to state or local personal income taxes — two-thirds higher than the national average of 2.1 cents and a penny higher than similar states on the East Coast — according to Moody's.

That affects many small-business owners, who often pay taxes at a personal rate on their enterprise's profits, while increasing labor costs more broadly because employers offer higher salaries to give employees equivalent take-home pay, White said.

The Maryland Chamber of Commerce and others have pushed for exemptions from the individual rates for small businesses, but critics say those are difficult to administer and would complicate rather than simplify the code.

Lowering the corporate tax rate is simpler and would improve Maryland's position in rankings that shape perception of business climate, keeping the state competitive with neighbors with lower rates, such as Virginia, which recently announced another reduction, say advocates, including the Greater Baltimore Committee.

Opponents say they do not believe corporate taxes drive location decisions and that lowering the rate would primarily benefit big businesses.

The Augustine Commission, the bipartisan panel charged with developing ideas for improving Maryland's business environment, has been struggling with these and other questions. The group, which won widespread support for an earlier set of recommendations, is expected to deliver a report next month.

Norman R. Augustine, a former CEO of Lockheed Martin Corp. who chairs the panel — formally known as the Maryland Economic Development & Business Climate Commission — declined to comment on specific proposals, but many of the ideas under consideration have been aired in public session or been introduced as legislation in the past.


The final version will likely feature about a dozen recommendations for improving the business climate, many of them tax-related, he said. The committee's 25 members have not voted on a final set of proposals, which must have majority backing to be included, he said.

"It's a very difficult subject, and my hope is that we can get bipartisan support for our recommendations," he said. "We've tried to be very balanced in what we're doing. Maryland has a serious problem in competitiveness, and taxes are part of it."

State officials said this fall they expect to begin the budget year with a surplus for the first time in a decade, offering some room to maneuver.

Still, any proposal for tax relief comes at a cost, setting the stage for difficult negotiations once the recommendations are presented to legislators, said state Sen. Edward J. Kasemeyer, a Democrat representing Baltimore and Howard counties who sits on the panel.

"These things are really expensive," he said. "That's where the battle begins."

Some recommendations likely to be endorsed by the Augustine Commission are, as Kasemeyer put it, "in the weeds," such as making penalties for late taxes less onerous. The commission also is considering allowing the state's comptroller's office to issue private rulings on questions related to the tax code.


Another recommendation that appeared popular would change how Maryland taxes multistate corporations — basing the levies solely on sales, instead of sales, payroll and property. The switch would be intended to reward businesses who invest and hire locally, and is supposed to have a more limited impact on revenues than other ideas, said C. William Frick, a Democrat from Montgomery County who sits on the commission.

Other moves under consideration are less oriented toward businesses, such as efforts to provide additional relief through the earned income tax credit, which is offered to low- and moderate-income working families, Kasemeyer said.

Members of the panel had considered identifying ways to make up the lost revenue as part of the report — such as raising certain taxes — but that is likely to be left for lawmakers, Frick said.

"The public officials are in a very different position than the commission is," he said, adding that just gathering the information was a useful exercise. "We've got to have a balanced budget."

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Representatives for Hogan and House Speaker Michael Busch declined to comment on priorities for next year, with Busch chief of staff Alexandra Hughes saying legislative leaders were waiting for the final Augustine draft.

Matthew A. Clark, a spokesman for Hogan, said the administration is still gathering information and points of view. The governor, who put forward some targeted tax cuts last year that made limited progress in the legislature, already has lowered many fees controlled by the administration, such as tolls, and hopes to continue to do so, Clark said.


Hogan cares about providing tax relief but also wants to hold the line on spending and address the long-term budget gap, Clark said.

"If you're asking me to prioritize that, I'm not going to," he said. "We're not doing any previews."

Even without specifics, the Maryland Chamber of Commerce is optimistic, given the commission and Hogan's promises, said Kathy Snyder, who led the group for more than 14 years before retiring in 2014 and recently returned as interim CEO.

"I think the stars are aligned for some action to take place," she said. "It may not be the big action where there's dramatic changes in tax rates for individuals or for businesses but … there might be enough momentum to start."