Cut business taxes only if other reforms come too

After seven years of budget crises, Maryland’s finances are in better shape now, which has some policymakers in Annapolis floating trial balloons about tax cuts. But let’s not go overboard. We’ve barely started recovering from the devastation of the Great Recession, and the state absolutely cannot afford a big tax cut.

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There is, though, a case to be made for lowering Maryland’s corporate income tax rate. It would help many local businesses, and it could bring corporate income tax rates into line with typical individual income tax rates.

There are two practical problems. If we just lower rate, that would provide a huge windfall to many big multistate corporations that do not in any way need the help. And it would cost Maryland a lot of money that we need for education, health care, transportation, public safety and other proven tools for job creation and building a strong economy. Maintaining these services is critical for businesses and households to thrive in our state.

We could, however, make room for a corporate tax cut if we take other steps to shore up our tax laws, namely, closing loopholes that today allow profitable multistate companies to dramatically reduce their taxes in Maryland or avoid them altogether.

The corporate income tax is a small but important part of Maryland’s resources. It is over one billion dollars a year. The individual income tax and sales tax together provide 12 times as much revenue. The corporate tax dollars help ensure that profitable corporations are doing their part to support the public services that all businesses need to operate:  schools, colleges and universities that educate and train a productive workforce; roads, bridges, the port and airport that help get their goods to market;  a timely and impartial court system to enforce contracts and settle disputes; adequate and effective police and fire departments to protect their property.

The problem is, big multistate corporations have many opportunities for avoiding Maryland’s tax regardless of the rate. They can arrange transactions among their affiliates and subsidiaries to shift their profits to other states that have lower business taxes or none at all. They can avoid taxes on profits allocated to states where they have no physical presence and so do not owe tax. They can avoid taxes on profits from selling property, equipment, or other assets. Little of the money they save on Maryland taxes is used to create jobs here. It’s going to out-of-state investors and managers.  Smaller businesses that operate principally in Maryland generally can’t use  these legal tax-avoidance tools, so the playing field is uneven.

One thing we could do is plug the loopholes.  Most of the states that have corporate income taxes have laws that prevent these tax avoidance maneuvers. But attempts to bring this reform to Maryland have been blocked year after year by big business groups in Annapolis.

These reforms have technical-sounding names: “combined reporting,” “non-operating income,” and “the throwback rule.” What they do is to help make sure that multistate companies have to pay tax on the full amount of their actual profits. If we enacted  these reforms, we could reduce the tax rate to 7.5 percent (the 2007 level) from 8.25 percent) for all corporations. In the process of making the system fairer for Maryland-based businesses we would be increasing the revenue available to the state to meet growing public needs.

 Maryland can’t afford to be reckless about corporate tax revenue. The continued weak economy and federal cutbacks that will cost jobs here mean that the state’s financial capacity still is fragile. Maryland needs to maintain its public investment in education, healthcare, and public safety to continue strengthening its economy, now and for the long run.

If we are going to cut corporate income tax rates, we should make sure that the big multistate corporations that operate in Maryland and benefit from Maryland’s public services pay their fair share.