Maryland-based companies would get a break on their taxes — while out-of-state firms could pay more — if Gov. Larry Hogan signs legislation passed by the General Assembly this week.
The bill, which was approved in the final hours of the annual 90-day session, would put Maryland on what is knows as a "single sales factor" system for calculating taxation.
The existing law takes into account three factors in calculating the state's 8.5 percent corporate income tax — how much a company sells in Maryland, how many people it employs, and how much property it owns.
Steve Banks, chairman of the Single Sales Factor Coalition that lobbied for the bill, argues that makes no sense.
"Under the current law, Maryland-based companies pay a penalty when hiring new employees and spending money on capital [projects] in Maryland," he said.
The legislation sent to the governor would calculate the tax solely on sales. Maryland would join about 20 other states that have gone to a single sales factor for calculating corporate income taxes.
"It levels the playing field for Maryland-based businesses of all kinds," said Banks, vice president and director of corporate services at Baltimore-based T. Rowe Price. "It make Maryland more attractive in attracting businesses."
The bill creates losers as well — particularly among companies that sell many goods and services in Maryland but do not have a large presence in terms of employees or property. Among those could be some telecommunications firms.
Switching to a single sales factor was a key recommendation made in 2015 by the Augustine Commission, a panel established by Senate President Thomas V. Mike Miller and House Speaker Michael E. Busch to study Maryland's business climate. Both men are Democrats.
Norman R. Augustine, the former Lockheed Martin chief executive who chaired the commission, told the House Ways & Means Committee this year that Maryland could no longer "disadvantage ourselves with a burdensome tax structure." He said the current system for calculating corporate taxes is "a non-trivial part of that burden."
Maryland already uses the single sales factor for manufacturing companies.
The legislation was backed by a high-powered coalition of companies that are either based in Maryland or have a large presence here. Besides T. Rowe Price, it included UnderArmour, Discovery Communications, Tradepoint Atlantic, Pandora, Erickson Living, HMS Host and Allegis Group.
The legislation did not have an easy time getting through, however. Similar measures were approved by the House of Delegates in 2016 and 2017 only to fail in the Senate. This year it squeaked out of the Ways & Means Committee on a 12-10 vote before passing comfortably on the House floor.
Del. Anne Kaiser, who chairs Ways & Means, said the vote became close after opponents argued the bill could hurt farmers. The Montgomery County Democrat said that under the legislation, large out-of-state agribusinesses might pay more but not family farms.
Businesses that would pay more fought the single sales factor.
"Companies that defend it like crazy in their home states argue against it in other states," Kaiser said.
The Senate version of the bill included exemptions for utilities and the banking and telecommunications industries. The House eliminated those exemptions and phased in the break over five years. Kaiser said the Senate agreed to the House changes.The estimated cost to the state is $6 million a year in lost revenue after the phase in period.
The measure passed both chambers with the support of the Democratic leadership. In the House the opponents were mostly conservative Republicans. In the Senate it was liberal Democrats who voted no.
Now it's up to Hogan, whose decision is final. Because it's an election year, lawmakers can't override a veto next year.
Hogan spokeswoman Amelia Chasse said the Republican governor will closely review the legislation.
"Nearly 1,000 bills were passed during the session that will come to the governor over the next few weeks after review by the Attorney General's office, at which point the governor has 30 days to act," Chasse said.
Economist Anirban Basu, chairman of Sage Policy Group, has done studies of the single sales factor. Basu, who is also the Hogan-appointed chairman of the Maryland Economic Development Commission, said the switch would make the state more competitive. He borrowed one of Hogan's own slogans to endorse the bill.
"I hope the governor sees fit to sign this and make Maryland even more open for business," Basu said.