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The tax cut Hogan should pursue

Although we would prefer to see Gov. Larry Hogan and the General Assembly pursue a broad reforms of Maryland's tax and fee structure to improve its competitiveness and fairness, some of the targeted ideas Mr. Hogan unveiled this week are intriguing, such as the acceleration of increases to the Earned Income Tax Credit. We do wish, though, that he would revive an unheralded part of his agenda from last year: exempting small businesses from the personal property tax. The way the levy currently works for small businesses is simply idiotic.

Unlike the real property tax, which is based on the value of buildings and land and which is paid by individuals and businesses, the personal property tax is only paid by businesses and includes inventory, equipment, furniture, supplies and so on. Local governments set the rates and keep the revenue, but the state handles the assessments and collects filing fees.

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Last year, Mr. Hogan proposed exempting businesses with assets of less than $10,000 from the tax, with the idea that the state would offset some of local governments' revenue losses for three years. More pertinently, the governor initially proposed eliminating the requirement that those businesses file an annual personal property tax report or pay the fee associated with it.

Here's where the idiocy of the current system comes in. Mr. Hogan's proposal to exempt small businesses from the tax would have saved them about $7.6 million state-wide in the next fiscal year, according to a Department of Legislative Services analysis of his 2015 proposal. But eliminating the filing fee would save them nearly $70 million. Most businesses pay a $300 annual filing fee, regardless of their size, with family farms paying $100. Yet a typical tax bill for the 75,500 businesses with assets of less than $10,000 would only be about $72. And there are an additional 156,000 businesses and farms that report no personal property whatsoever yet still have to pay the filing fee.

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Last year, Mr. Hogan dropped the exemption from the filing fee amid concern by legislators about the cost of the proposal. This year, with an improved state budget picture, he wants to reduce the fee by $50 a year for four years for all businesses, but a smarter approach would be for the state to charge higher filing fees for big businesses and eliminate them for small ones. The $300 fee is meaningless for Under Armour but potentially significant for a corner barber shop. But eliminating the need to file personal property tax forms might be the biggest relief of all for a small business. The pittance in local revenue that the personal property of small businesses generate is by no means worth the hassle and cost of all the tax preparation it requires.

To be sure, there would need to be mechanisms to check whether a business that certifies itself as having less than $10,000 in assets doesn't grow to a much higher level, but the state already has plenty of ancillary data, such as corporate or personal income taxes, sales taxes, unemployment insurance payments and the like that would help indicate whether a business had become substantially larger from one year to the next.

The issue of personal property taxes is of particular importance to Baltimore City. Until recently, counties were required to set their personal property tax rate at two-and-a-half times the real property rate, and Baltimore City has maintained that ratio. Because the city's real property tax rate is double that of any of its suburban neighbors, its personal property tax rate is, too. The city's current rate of $5.62 per $100 in assessed value is far higher than any other in the state, with second place going to Charles County at $3.0125. Thus, even though Montgomery County has twice as many businesses that would have qualified for relief under Mr. Hogan's bill, the biggest fiscal impact would be in Baltimore City, where it would have saved small businesses $1.3 million a year in taxes.

Last year, the Senate approved the amended version of Mr. Hogan's bill 47-0, but it never got so much as a committee vote in the House. Now, with a modest state surplus and a bipartisan consensus on the need to improve the state's business tax climate, we hope the state will move forward to relieve not only the tax but also the administrative burden from thousands of small businesses. Any issue that showed up on both Governor Hogan's agenda and progressive Democrat Heather Mizeur's gubernatorial campaign platform, as this one did, ought to be a no-brainer.

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