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Want to fund education reform? Close Maryland’s corporate tax loopholes | COMMENTARY

Twenty-eight states, plus Washington D.C., require combined reporting for corporate income taxes. Mostly southeastern states, including Maryland, have resisted the practice. (Handout/Center on Budget and Policy Priorities).
Twenty-eight states, plus Washington D.C., require combined reporting for corporate income taxes. Mostly southeastern states, including Maryland, have resisted the practice. (Handout/Center on Budget and Policy Priorities). (Courtesy Center on Budget and Policy Priorities)

Texas is nobody’s progressive state. Neither are Montana and North Dakota. But here’s something those states have in common: They hold large corporations accountable for paying their fair share of taxes. In fact, that’s kind of a trend. In all, 28 states and the District of Columbia have passed a rule known as “combined reporting” that treats big companies with one or more subsidiaries as a single unit for tax purposes. If that sounds rather dull and dry, that might be the point. Average people don’t follow corporate accounting practices. But here’s why everyone should care: Without combined reporting, companies can hide their profits by shifting them around subsidiaries like a game of Three-Card Monte. With combined reporting, all their cards are turned over for the tax collector to see.

Maryland doesn’t have combined reporting, but that may soon change. Legislation pending in the House of Delegates and state Senate, the Corporate Tax Fairness Act of 2021, would bring combined reporting to Maryland beginning July 1. It would also close another corporate tax loophole with a fix known as the “throwback rule” that taxes profits on Maryland-based corporations that do business out-of-state (but aren’t taxed by those states). In other words, their profits are “thrown back” to Maryland and the state corporate tax applied. Like combined reporting, a plurality of states have adopted this fix. And they include states on either side of the political spectrum including Alabama and Mississippi on the right, and California and Oregon on the left.

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These reforms have been attempted by the General Assembly before and fallen short. Corporations have an impressive amount of lobbying muscle. And Maryland has a relatively high corporate tax rate of 8.25% compared to neighbors Virginia (6%), West Virginia (6.5%), Delaware (8.7%), Pennsylvania (9.99%) and D.C. (8.25%). But that merely brings corporations to the vicinity of Maryland’s personal income tax (when the local “piggyback” is added in). And speaking of fairness, it also bring big companies to the same level as smaller ones. Maryland’s mom-and-pop operators (even fairly large ones) that operate entirely within the state don’t have any such tax loophole to hide profits. So combined reporting and the throwback rule give these smaller companies a more level playing field on which to challenge the Amazons and Walmarts of the marketplace.

But there’s another reason why the General Assembly should make this legislation a high priority for the final weeks of the 2021 session: Public education needs the money. One month ago, senators and delegates rallied to override Gov. Larry Hogan’s veto of the Blueprint for Maryland’s Future, the K-12 education reform bill that calls for a significant boost in state spending on education in future years. Today, Maryland can meet that financial obligation, but whether it can keep up the pace several years from now is in serious doubt. Closing these corporate loopholes would go a long way toward fixing that long-term imbalance: Beginning in Fiscal 2023, the Corporate Tax Fairness Act would funnel the majority of all corporate tax collection toward schools including an estimated $131.7 million that first year, according to a legislative analysis.

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Opponents will offer their customary objections. Some will claim this is a tax increase, which it isn’t, and highly inappropriate as businesses struggle with the COVID-19 pandemic. But that latter argument ignores how certain large companies, such as Amazon or Grubhub or the big supermarket chains, have prospered this past year. And it ignores the reality that the less Maryland collects from corporations, the more it relies on taxes from state residents. Why should individuals be subsidizing corporations? And then there’s the matter of the blueprint education bill. A lot of state lawmakers would happily wind up the 90-day session (and perhaps past the 2022 election) without passing the means to finance the Kirwan Commission reforms over the decade ahead. After all, the state budget is in balance — and likely will be next year, too. But the piper must eventually be paid. Better to put this down payment on it now than continue to suffer these unfair tax loopholes for one minute longer.

Lawmakers ought to be a little embarrassed that Maryland is behind the curve in this respect. And small business owners ought to be downright irate. If places like Texas and Mississippi won’t stand for this level of social injustice and corporate greed, why in the world does the Free State continue to tolerate it?

The Baltimore Sun editorial board — made up of Opinion Editor Tricia Bishop, Deputy Editor Andrea K. McDaniels and writer Peter Jensen — offers opinions and analysis on news and issues relevant to readers. It is separate from the newsroom.

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