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Hogan tax break becomes widespread business audit

Gov. Larry Hogan's plan to give a modest tax break to some small businesses has been turned into a bill that could force tens of thousands of Maryland companies to undergo tax audits.

The transformation — achieved through a unanimous vote of the Maryland Senate this week — undercuts the Republican governor's pro-business message by tying a $72 tax break for tiny firms to a widespread audit of personal property tax returns filed by the state's largest companies.

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"It's the Robin Hood effect: Take from the big business and give to the small," House Speaker Michael E. Busch, a Democrat, said of the Senate action. He said he expects the state's business community to vociferously object.

Busch said unsettling the business community by forcing them to open their books seems at odds with the message the new Republican administration has installed on signs at the state's borders saying Maryland is "open for business."

"It should be 'Maryland: Open for business. Bring your accountant,'" Busch said. "The way I read the bill, every business in the state should expect to be audited."

Hogan's spokesman and senior staffers said they were aware the audit provision was added to the bill by a Senate committee, but at the time they did not realize its effect. They said they don't support forcing companies to undergo audits.

"We're concerned about what kind of other stresses it would put on businesses in Maryland," said Hogan spokesman Doug Mayer.

Sen. Richard Madaleno, vice chair of the Budget & Taxation Committee, which added the audit to the bill, said the panel's intention was clear: If Hogan wanted a tax break for some businesses, the state needed to be sure it was appropriately collecting taxes on the rest.

All 14 of the Senate's Republicans voted for the bill with the audit provision on Wednesday, passing it without discussion nor objection.

Republican Minority Leader Sen. J.B. Jennings of Baltimore County said lawmakers misread the provision to mean subjecting state's Department of Assessments and Taxation — not businesses — to audits.

"Unfortunately, more information has come to light since it has come out of the Senate," Jennings said, adding he hopes the House of Delegates will strip out the provision.

The Maryland Chamber of Commerce did not return phone calls seeking comment on the bill. The association supported Hogan's initial proposal for the tax break. Other business groups, including Maryland Business for Responsive Government, the National Association of Independent Businesses and the Greater Baltimore Committee, also did not provide comment on the audits.

Maryland businesses pay property tax annually on their assets, netting local governments a combined $597 million last year, according to legislative analysts.

Hogan sought to let firms with less than $10,000 in property — including furniture, computers and land — avoid the costly process of doing an annual inventory and filing paperwork, only to be assessed a small tax.

Legislative analysts estimate that about 75,000 businesses in the state have property worth less than $10,000, and their average tax break under Hogan's proposal would be $72 a year.

But Democratic lawmakers and staffers said they worried that the agency in charge of reviewing tax returns would not be able to track whether people were cheating the system. A 2013 audit found that personal property tax returns from 2008 to 2011 had not been reviewed by the state for accuracy.

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The problem — exacerbated by years of staffing cuts at the assessments department — led to a work group this summer. It brought in a private company to outline what the state could collect if it hired a private firm to more vigorously audit those returns.

"That is money that, under the law, should be collected but isn't," said Sen. Bill Ferguson, a Baltimore Democrat on the budget committee.

The North Carolina company that made the pitch to audit personal property tax returns has been meeting this session with senior members of Hogan's administration, top lawmakers and legislative analysts to sell the idea that an audit could recoup millions for local governments.

The estimate by Tax Management Associates Inc. said auditing 25,604 of Maryland's bigger companies would generate $118 million in unpaid taxes and penalties.

The company's CEO, Richard "Chip" Cooke, said in an interview that its approach would be to run a computer analysis on 80 percent of the state's businesses, and then pore through the paperwork and vigorously review the 20 percent that generate the most revenue for the state.

Those more aggressive audits would involve sitting down with business owners, site visits, and reviews of account books and tax filings to make sure businesses are paying the taxes they owe.

"You're not looking for anything besides the truth," Cooke said.

The amended version of Hogan's bill calls for the state to spend as much as $5 million on hiring "a public or private entity" to do the audit. If the Board of Public Works does not approve the contract by April 1, 2016, the entire tax cut Hogan sought would automatically be repealed.

The House of Delegates has not yet scheduled a hearing on the Senate version of the bill.

Budget Secretary David R. Brinkley said the North Carolina company was just one of several pitching the state the idea of an audit.

In general, he said, the Hogan administration supports auditing state agencies to make sure they're working efficiently. He said the understaffing at the assessments department was part of the reason the governor pitched the idea of exempting small businesses from paying personal property taxes in the first place.

"They pay their filing fee, but then the paperwork just sits there and no one even opens it," he said.

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