Businesses that avoided Maryland taxes for years by funneling income elsewhere have coughed up nearly $200 million in response to a state settlement offer, but Comptroller William Donald Schaefer said the deal's popularity proves the state could have gotten more than twice as much had it taken a tougher stand.
Schaefer said yesterday that while the settlement program reaped far more money than expected, it was at least $306 million less than the state could have collected from the companies that came forward.
The settlement, part of a law passed this year that closed the so-called Delaware holding company loophole, offered a deal to companies: If they settled by Nov. 1, they didn't have to pay taxes owed before 1995 and were charged no penalties and half the normal interest on taxes owed afterward.
"It's a lot of money, but we had to give up a lot to get it," said Stephen M. Cordi, the deputy comptroller. The state would have been better off in the long run "to have simply borrowed the money" now at a cost of $8 million in annual interest to get a shot at the entire amount later, he said.
Of the money collected, $142.7 million goes into the state's general fund. The rest is required by state law to be put in the transportation trust fund.
That new revenue cuts Maryland's projected budget shortfall to $311 million for the 2006 fiscal year, which begins in July. It was once as high as $1 billion.
But the state is still expected to have a shortfall of more than $1 billion for fiscal 2007.
"We're not out of the woods by any stretch, and we won't be any time soon without something fundamental changing," said Warren Deschenaux, director of the Office of Policy Analysis for the state Department of Legislative Services.
More than 440 "corporate entities" settled with the state, though many of them were multiple subsidiaries of larger companies. They had avoided Maryland taxes by taking advantage of laws in Delaware, which does not tax income from intangible property such as slogans and icons.
After transferring intangible property to a holding company in Delaware, a corporation would pay royalties to the subsidiary for use of those assets, reducing its income - and tax burden - in Maryland and other states.
The Court of Appeals ruled in Maryland's favor on one case involving two holding companies last year, before the General Assembly passed its holding-company law with the settlement offer.
"We let a lot of people off the hook," Schaefer said. "We'd have gotten it all."
Schaefer had asked Gov. Robert L. Ehrlich Jr. to veto the settlement bill. Schaefer, a Democrat, has been a reliable supporter of the Republican governor, and the Ehrlich administration hastened to soothe ruffled feathers yesterday.
"The governor is aware of the comptroller's views, and he values them," said Henry P. Fawell, an Ehrlich spokesman. "But ... in the governor's view, this is $142 million we didn't have a week ago [in the general fund]."
Karen T. Syrylo, tax consultant for the state Chamber of Commerce, believes it's fair to forgive taxes owed before 1995 because the comptroller's office didn't take a stand on Delaware holding companies until then.
The comptroller's estimates of what he could have collected are likely too high, she added.
"A lot of companies had decided that without the settlement terms as they were passed by the General Assembly, they were willing to continue the court battle," she said. "We believe some of the cases the comptroller would have lost, and even those he would have won, he wouldn't have seen the money for five or 10 years."
But now an even uglier tax fight is brewing.
Schaefer is upset about a bill being drafted by the state Department of Business and Economic Development that supporters say would fix problems with this year's holding-company law.
Cordi contended the bill would instead create huge new loopholes, including one similar to the royalty-payment scheme but involving sham loans between corporations and their holding companies. Corporations are already doing so elsewhere, getting millions in deductions for interest "paid" on the loans, he said.
"It would take out the corporate income tax to the last dime," Cordi said. "There would be nothing, not a dime left on the table."
Syrylo, the chamber consultant, said that many companies with multiple subsidiaries set up one holding company to handle loans for honest business purposes, but they're treated the same way as the scammers.
The proposed bill would not keep Schaefer from going after companies with phony loans, she argued.
"The amendments that are being sought are not to gut the [law] and take away his ability to close down abusive actions, but to correct some unintended consequences," said Syrylo, who is acting as a technical adviser on the proposal.
Tom Hucker, executive director of the liberal advocacy group Progressive Maryland, said most state residents want to see fewer tax loopholes for corporations. Polling for the group by Gonzales Research & Marketing Strategies found that 80 percent of Marylanders favor a law that requires companies to pay taxes on all profits earned in the state.
"It's clear they're just scratching the surface," he said of the tax settlement. "The single biggest reason why we're all stuck in traffic, why classrooms are dilapidated, why school construction hasn't kept pace with the need, why there's so many thousands of Marylanders without health insurance, is because corporations have gotten a signal that it's OK to cheat on their taxes."
Schaefer urged the legislature and Ehrlich in a report this week to "preserve the remedies enacted" in the law this year.
"We're going to fight the bill all the way down," he vowed yesterday after railing against the settlement terms.
Worth the wait
Cordi thinks it would have been worth the wait to go after the full $500 million the comptroller's office believes Delaware holding companies owed to the state. He's confident that businesses would have lined up to pay up if one more court case ended in the state's favor.
But it's impossible to know what would have happened, said Deschenaux, the legislative services official.
"Right now," he said, "we're in the bird-in-the-hand situation."