States that want to become magnets for new businesses, or strengthen their position as such, must focus on eliminating harmful taxes that stifle economic growth such as income taxes and estate taxes. Maryland — with a 5.75 percent state income tax, large local income tax add-ons, a state estate tax and an incoming Republican governor — has an unprecedented opportunity to join the ranks of pro-growth states by passing a law to cut taxes equal to increased revenues from passage of a federal "e-fairness" bill.
"E-fairness" is the colloquial term for closing an outdated tax loophole that allows online merchants without a physical presence in Maryland to forgo collection of state sales taxes, even as their brick-and-mortar competitors are required by law to collect such levies. This online sales tax loophole creates the illusion that online retailers have better prices, thereby attracting more customers to e-commerce.
This is a classic example of the government picking winners (online retailers) and losers (Main Street businesses) in the private marketplace. Online retailers are effectively receiving a price subsidy on all their goods equal to the state sales tax rate. This represents a shocking level of government interference in the retail market and should be anathema to true conservatives in Maryland and across the United States.
It also represents a massive challenge for brick-and-mortar businesses, especially given the tight margins of most retail businesses. It is nearly impossible for your local shop to compete with an online rival that has "cheaper" goods, just because sales tax is not included in the final total. Local businesses are shrinking and even shutting their doors as a result, impacting whole communities.
Congress is trying to tackle this situation via the Marketplace Fairness Act, which would give states the authority to collect sales taxes online. The Senate has already passed this bill by a wide, bipartisan margin.
But the bill has gotten stuck in the House of Representatives where some are trying to paint it purely as a tax increase. It is not one, and I would not support it if it were.
The Marketplace Fairness Act has the support of a broad spectrum of individual citizens, civic and business groups, and elected officials of both parties. No less than a dozen current or incoming governors called for a closing of the online sales tax loophole at a recent National Governors Association meeting. In fact, Republican governors have emerged as a driving force behind the push for e-fairness.
These state executives understand passage of the Marketplace Fairness Act would give them yet another tool to use to lower taxes and promote economic growth. When states are able to effectively collect sales tax on online purchases (this tax is already due but nobody pays it), they will see sharp revenue increases. But instead of simply adding those revenues to their coffers, Republican governors in states like Wisconsin, Ohio and Utah have taken steps to use these funds to cut more onerous taxes, like income taxes, in order to help drive true economic expansion.
Gov.-elect Larry Hogan campaigned aggressively on the need to reduce or eliminate many of the new taxes signed into law in recent years in Maryland. He's right. Getting rid of some of those silly new taxes and fees will make Maryland a more competitive state for job growth.
Last year, I studied what the impact would be if the Marketplace Fairness Act were to become law and states wisely cut taxes in amounts corresponding to the resulting revenue increases. Nationally, such action would result in 1.5 million new jobs and an additional $563 billion in GDP over the next 10 years. In Maryland, you would see $7.1 billion in additional GDP and 17,476 new jobs during the same time period.
There has never been a better time to get a conservative e-fairness solution in place. The Republican Party made massive gains in the midterm election, not just in Congress, but in state legislatures and governors' mansions throughout the country. The stage is well set for the largest possible number of states to use passage of the Marketplace Fairness Act to enable pro-growth tax cuts and economic expansion.
The election made one thing clear: voters are eager for action on this and many other pro-growth issues. The U.S. House must push forward with the Marketplace Fairness Act, both to show the nation that they — and their party — can lead, and to give states and small businesses a fighting chance to thrive, grow, and create much-needed employment for American workers.
Arthur B. Laffer is chairman of Laffer Associates. He can be contacted through http://www.laffercenter.com.