Nearly half of Maryland's largest for-profit companies did not pay corporate income taxes in 2005, a new report shows, strengthening calls from some lawmakers to begin tackling the state's projected $1.5 billion budget shortfall by closing business tax loopholes.
The report, released by state Comptroller Peter Franchot in response to a legislator's request, does not identify specific corporations that avoided taxes. But it found that half or fewer of the state's biggest financial, retail and manufacturing companies paid corporate taxes.
Only in a fourth sector analyzed - transportation, communications and utilities - did a majority of for-profit companies pay corporate income taxes. Overall, 68 of the 132 largest for-profit companies in the state paid corporate income taxes and 64 did not.
Franchot has pushed to stop a practice, used by Wal-Mart and other large companies, in which companies use real estate investment trusts to shift profits to states with low or no corporate taxes, and he has continued the attempts of his predecessor, William Donald Schaefer, to stop companies from hiding their profits in Delaware holding companies.
Liberal-leaning lawmakers and advocacy groups say the data suggest that despite several efforts in recent years to make sure that multistate corporations that do business in Maryland pay taxes here, the loopholes have not been closed.
"It's about looking at tax fairness when the upcoming budget package is put together," said Sen. Paul G. Pinsky, a Prince George's County Democrat who requested the data. "Before we talk about sales tax, we have got to address tax fairness, and this is a piece of that."
The report focused on the 150 largest corporations operating in Maryland, as defined by their payrolls. In the 2005 tax year, 18 were nonprofits and thus were excluded from the calculations. Government agencies also pay no taxes and are not included.
The final 2005 tally could change because some corporations operate on a later tax schedule, meaning their returns are not yet due. In 2004, 77 of the 128 largest for-profit companies paid taxes.
Iris Lav, deputy director of the Center on Budget and Policy Priorities, a nonpartisan research organization in Washington, said Maryland is not unique.
"It's unfortunately fairly common that multistate corporations are able to avoid corporate taxes," Lav said. "A lot of states are somewhat fed up with this."
The analysis covered companies with at least $40 million in payroll, including major corporations such as Wal-Mart, Verizon, Giant Food, Baltimore Gas and Electric, Northrop Grumman and Bank of America. The Sun is also on the list. Confidentiality laws prohibit the comptroller's office from revealing which of those companies paid taxes and which did not.
Maryland has a flat corporate income tax rate of 7 percent. Local taxes add 0.75 percent. Comparisons with other states are difficult because many have progressive rate structures for corporate taxes, but Maryland falls in the middle of the pack, according to the Tax Foundation.
In terms of growth in collections, though, the state lags far behind. According to the most recent figures from the comptroller's office, collections dropped 8.4 percent in the fiscal year that ended June 30, at a time when corporate taxes are booming in many other states.
Franchot has made closing corporate tax loopholes a major focus of his administration, said his spokeswoman, Christine M. Duray. In March, he announced that he would crack down on "captive real estate investment trusts."
Using that tax strategy, Wal-Mart, for example, has transferred the deeds for some of its stores, including at least one in Maryland, to out-of-state corporate subsidiaries. Wal-Mart can then effectively charge itself rent, which can be deducted from its corporate income taxes.
"We're going after businesses aggressively to get as much money back as we can," Duray said. "We all have to pay our fair share. ... It's the only way to fix the structural deficit."
Corporate taxes aren't a big part of the state's budget picture - Maryland collected about $574 million in corporate taxes in the fiscal year that ended June 30, a little less than 5 percent of total general fund revenues - but advocates for change think they could be a big part of the solution to the deficit.
Pinsky and others advocate a change in corporate tax law known as "combined reporting," a method of calculating state taxes that backers say prevents companies from shuffling income to subsidiaries in states that have no corporate income tax or low rates.
More than 20 states have passed combined-reporting laws, but few of them are in the East, and estimates of how much revenue such a change would generate vary widely.
Pinsky said he thinks the change could raise as much as $100 million a year for the state, but Maryland's nonpartisan legislative analysts said a reliable figure is difficult to estimate. The change could generate as little as $19 million in the first year, they said.
Previous attempts to enact a combined-reporting law in Maryland have failed amid arguments that it would be overly complicated and put the state at a competitive disadvantage with its neighbors.
"You're not creating a level playing field," said Sen. David R. Brinkley, the minority leader from Frederick County.
The Maryland Chamber of Commerce strongly opposed previous attempts to enact combined reporting. In a brief on the subject, chamber analyst Karen T. Syrylo wrote that combined reporting is better suited to a law school class debate than to the practical realities of the business world. The idea is too complicated for the state to administer or for businesses to follow, she wrote.
"The combined reporting returns will generate increased levels of litigation, requiring even more time and cost," Syrylo wrote.
Lav of the Center on Budget and Policy Priorities said that despite the complexities, combined reporting has gained favor recently. New York, Michigan and West Virginia have adopted combined reporting laws this year, she said.
Gov. Martin O'Malley, a Democrat, has not taken a position on combined reporting, though he supports efforts to ensure tax compliance, said his spokesman, Rick Abbruzzese.
"The governor is focused on making the tax system modern, inclusive and fair," Abbruzzese said. "He looks forward to working with the General Assembly to address the issue and make sure that Maryland corporations are paying their fair share."
andy.green@baltsun.com