Industries fear losing sales-tax breaks

THE BALTIMORE SUN

ANNAPOLIS -- Legislation that would raise millions of dollars for the state by abolishing major sales-tax exemptions is striking fear into the hearts of a variety of industries that currently enjoy the exemptions.

The bills -- one each in the House and Senate -- arrive amid debate about whether permanent tax exemptions should be put under the microscope occasionally. A report on tax expenditures published this week by the state Department of Budget and Fiscal Planning shows that Maryland's tax exemptions, exclusions, deductions and preferences cost the state than $1.5 billion a year in lost revenue.

In the report, Budget Secretary Charles L. Benton endorsed a "sunset process" to examine all tax exemptions. In last year's report on tax expenditures, he noted that "while budget items must be approved each year, tax expenditures go on year after year after year until the law is changed again."

H.B. 874, sponsored by Delegate James W. Campbell, D-Baltimore, would take care of that problem in one stroke -- and raise state revenues by more than $96 million a year. The bill simply would remove the sales-tax exemptions on almost two dozen items, including:

* Machinery and utilities used in manufacturing or research and development. Removal of the exemption would raise $45.3 million a year, according to an analysis by the Department of Fiscal Services.

* Photographic and artistic materials used in publication ($24.6 million).

* Sales and printing of newspapers ($11.9 million).

* Sales of vehicles used in interstate or foreign commerce and replacement parts ($5 million).

* Some transfers of business property ($4.1 million).

"I think in light of the fiscal situation of the state, [the bill] is worth a look," said Mr. Campbell, referring to the state's $423 million fiscal 1991 deficit.

In a hearing last week, lobbyists for chemical manufacturers, newspapers, mobile-home makers and others affected by the bill told members of the House Ways and Means Committee why they thought passing H.B. 874 would be a mistake.

"We see this as not having an immediate impact on manufacturers, but there's no question that it would be devastating in the long term," Carolyn T. Burridge, lobbyist for the Chemical Industry Council of Maryland, said this week. "There would be decisions simply not to invest in Maryland. They will let good plants die, and relocate elsewhere."

David Mahler, director of environmental controls for Vista Chemical Co. in the Fairfield section of Baltimore, said his company spends about $8 million a year, free from sales taxes, on capital investments, about 60 percent of it on environmental and safety controls.

"Our costs on a per-pound-of-product basis already are higher" than those of Vista plants in other states, Mr. Mahler said. The bill would jeopardize the Baltimore operation's ability to compete with other Vista plants for investment money from headquarters in Houston, he said.

A Senate bill sponsored by John A. Pica Jr., D-Baltimore, would eliminate most of the tax exemptions targeted by the House version but also would make changes in the state income-tax and property-tax systems. Altogether, the bill would raise about $560 million in additional state revenues in the first year, Mr. Pica said.

"We're interested in raising revenues to increase aid to education in certain parts of the state and reduce the property-tax burden," he said. Some of the measures in his bill came from the controversial Linowes report on the state's tax structure. That report, however, did not recommend removing the sales-tax exemptions.

"We balanced the political and the substantive considerations with each exemption," Mr. Pica said. The money from his bill would send more money toward education, transportation projects and poorer jurisdictions, such as Baltimore.

He said the business interests have a legitimate complaint about being socked with essentially new taxes. But "in this environment we have to balance that interest vs. raising taxes of the citizens of Maryland. And in our analysis the citizens won."

Although most observers agree that Linowes-type legislation stands little chance of passing this year, the fear of the currently tax-exempt industries is that smaller parts of the bills could survive if legislators notice how much money they would raise for a state facing at least $200 million in budget cuts for fiscal 1992.

"The Campbell bill scared me," said J. William Pitcher, a lobbyist who represents asphalt manufacturers and precious-metals dealers, both of which won exemptions in recent years. "It was almost too neat, too good to be true for a legislator."

Mr. Pitcher argued that all of Maryland's tax exemptions are worthwhile. "Every one of those exemptions, no matter how frivolous or useless they may seem on paper, had hearings over the years. They each had justifications that were endemic only to those issues," he said.

Last year's new exemption on gold coins and bullion, for instance, worth about $100,000 to the industry according to the Fiscal Services analysis, has resulted in two additional precious-metals trade shows in Baltimore this year, with about $900,000 in economic impact each, Mr. Pitcher said.

Hitting manufacturers with $45 million in new taxes, he said, might deepen the state's recession. "That's the opposite of Keynesian economics -- hit 'em when they're down."

But Mr. Campbell said the exempted industries need to give their fair share to help the state out of its fiscal crisis. Besides, he noted, just about every state nearby is suffering the same kinds of problems Maryland is.

"I can't imagine it would force them out of the state," he said.

Mr. Pica acknowledged that some tax exemptions have merit. But he said the only reason many exemptions exist is that special-interest groups "had real good lobbyists, times were good, and we didn't need the money."

Exemptions

A sampling of sales tax exemptions and what they cost the state in tax revenues, according to the Maryland Tax Expenditures Report for Fiscal 1992, published this week by the Department of Budget and Fiscal Planning.

Tax Exemption Value ($ millions)

Major exemptions

Groceries .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 451.2

State and local government purchases.. .. .. .. .. .. . 174.6

Residential fuel, electricity, steam, natural gas, etc. 117.3

Medicine, medical supplies and health aids.. .. .. .. .. 52.9

Agricultural products.. .. .. .. .. .. .. .. .. .. .. .. 48.3

Manufacturing and research and development equipment.. . 45.3

Photographic and artistic materials for publication .. ..24.6

Sales and printing of newspapers.. .. .. .. .. .. .. .. 11.9

Miscellaneous

Dietary animal food.. .. .. .. .. .. .. .. .. .. .. .. .. 0.2

U.S. and Maryland flags.. .. .. .. .. .. .. .. .. .. .. . NRE

Crabs and seafood for consumption off premises.. .. .. .. 0.3

Manufacturing equipment for asphalt.. .. .. .. .. .. .. . 0.7

Used mobile homes.. .. .. .. .. .. .. .. .. .. .. .. .. . 0.5

Precious metal coins or bullion over .. .. .. .. ..$1,000 0.1

Seafood harvesting equipment.. .. .. .. .. .. .. .. .. .. 1.5

NRE = No reliable estimate

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