Four Victories for Working Marylanders: The 2014 Legislative Session in Review

With the 2014 legislative session in the books, it is time to assess the General Assembly’s achievements as well as take stock of the work left undone. Today, we focus on several measures the legislature passed that will help move the needle toward broadly shared prosperity in Maryland.

1. Minimum wage increase. The General Assembly’s high-profile passage of legislation to raise the minimum wage in Maryland to $10.10 by 2018 will benefit nearly half a million workers and their families as well as boost the state’s economy (though compromises made by legislators will leave others behind). Maryland is now a leader in the nationwide effort to lift the stagnated earnings for workers, becoming the second state after Connecticut to raise the minimum wage to $10.10 per hour.

2. Expansion of tax credit for working Marylanders. Less noticed, but just as important, the expansion of Maryland’s Refundable Earned Income Tax Credit (EITC) to 28 percent of the federal credit from 25 percent will benefit over 422,000 Maryland households and lift many Marylanders out of poverty. The EITC enjoys bipartisan support because it encourages work, promotes personal responsibility, and helps struggling families get by. 

3. A budget that protects Maryland workers and businesses.  Lawmakers in Annapolis passed a $39 billion budget while minimizing deep or unnecessary cuts to important programs that benefit working Marylanders. The General Assembly began their work under the cloud of reduced revenue estimates that were cut even further in the middle of the session, so it is important to recognize their efforts to balance the budget while avoiding damage to important programs that benefit working families and businesses alike.

4. Stopping corporate tax giveaways. Success is not just about passing good legislation but also preventing harmful laws from enactment. This session, the General Assembly wisely blocked legislation that would cut taxes for large, multistate corporations (though they did pass a misguided tax cut for the top 3 percent of estates). And – though it came down to the wire – lawmakers did not allow themselves to be blackmailed into providing more film tax credits for out-of-state production companies.

The victories achieved during the 2014 legislative session will help improve the lives of Marylanders and strengthen the state economy. Of course, important work remains to foster broad prosperity in Maryland. Check back tomorrow for our discussion of the work that remains in the 2015 legislative session and beyond. 

Major US Corporations Not Paying their Fair Share in Federal Taxes

Maryland residents filling out their tax forms and paying their monthly utility bills might be surprised to find out that one of the companies that 526,000 of them write checks to has been dodging its fair share.

The utility company actually has received more money from the federal government than it paid in taxes over the past five years -- for an effective tax rate of negative 33 percent – according to a new report.

Pepco is far from alone. It is one of 26 Fortune 500 companies, including Boeing, General Electric, Priceline.com, and Verizon, that paid no taxes at all in the last five years, despite combined profits of $170 billion, according to research by the Institute for Taxation and Economic Policy and Citizens for Tax Justice. Their study of  288 highly profitable companies and found that one third paid a tax rate of less than 10 percent between 2008 and 2012. The average effective tax rate of all 288 companies analyzed in the study was 19.4 percent, barely more than half the statutory federal corporate income tax of 35 percent.

Source: Citizens for Tax Justice and the Institute for Taxation and Economic Policy

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The Maryland General Assembly is considering closing loopholes in the state’s corporate income tax; Congress should do the same.  The “Tax Dodgers” report proposes steps lawmakers can take to close these loopholes, emphasizing the need to  require companies to disclose in which states they pay taxes, and how much.  This will both assist Congress in holding companies accountable for their fair share of federal taxes and  help states close their own tax loopholes.

This is not simply a matter of playing by the rules. Like individuals and families, businesses benefit from what taxes pay for, like an educated and healthy workforce, reliable transportation systems to move their products, and the expectation of a clean air and water.  The point is not to demonize companies, but to make sure they pay their fair share for the public services and investments that help them prosper.

Closing Corporate Loophole Would Make MD’s Taxes More Fair and Generate Needed Revenue

By closing a loophole in the way corporations report their earnings, Maryland can make its tax system fairer and generate needed revenue for schools, public safety and other services.

The Senate Budget and Taxation Committee will take up legislation today that would close the door to a range of currently legal accounting tactics businesses use to avoid paying taxes to the state. The Maryland Center on Economic Policy will join others in testifying in support of the Business Relief and Tax Fairness Act (HB 1298/SB 395).

The legislation  would treat a parent company and its subsidiaries as one corporation for state income tax purposes, a concept known as ‘‘combined reporting.’’

Combined reporting provides a more complete and accurate accounting of the profits corporations earn from their activities in Maryland. For example, under current law, a company can  establish a subsidiary in a state with a lower tax rate and shift its earnings there on paper by purchasing goods from the subsidiary at artificially high prices. The legislation would end this tax avoidance tactic.

Combined reporting also helps put smaller, locally-owned corporations with no presence outside of Maryland on a more equal tax footing with larger companies that operate in many states. This level playing field helps protect local jobs.

By stemming the flow of profits earned here to other states, combined reporting will also have the benefit of raising  revenue for education and other public services that bolster Maryland families, businesses and our economy. The Department of Legislative Services estimates that Maryland would collect tens of millions of dollars in additional revenue annually.

Maryland faces serious and well-documented needs in education, healthcare, public safety , environmental quality, and many other areas. But the state doesn’t have adequate resources to meet those needs, threatening further damaging cuts . The additional revenue from combined reporting is  crucial to preventing those cuts.

Combined Reporting WOULD BRING NEEDED REVENUE TO MARYLAND 

Source: Maryland Department of Legislative Services

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Combined reporting is well-established around the country. Twenty-three of the 45 states with corporate income and similar business taxes and the District of Columbia use combined reporting. Because it is so common, most large corporations that would be subject to a Maryland combined reporting law already have experience using it elsewhere. Maryland will not be breaking any new ground with this proposal.

States with Combined Reporting
Alaska	Kansas	New Mexico
Arizona	Maine	New York
California	Massachusetts	North Dakota
Colorado	Michigan	Ohio
District of Columbia	Minnesota	Utah
Hawaii	Montana	Vermont
Idaho	Nebraska	West Virginia
Illinois	New Hampshire	Wisconsin

Though corporate accounting practices may seem obscure, they have major implications for whether Maryland is able to collect enough revenue to fund  the public services and investments that support Maryland residents and business. By implementing combined reporting, Maryland would create a more fair, effective, and productive corporate tax system. 

Resources for Today’s Hearing on Reducing Maryland’s Corporate Income Tax Rate

Today, the Senate Budget and Taxation Committee will held a hearing on Senate Bill 8, which would reduce Maryland’s corporate income tax rate by .45% each year for 5 years, from 8.25% to 6%. We have submitted testimony opposing the bill, because cutting the corporate income tax in Maryland would harm the state’s economy and budget, and increase inequality.

Here is our recently released report on the impact of reducing the corporate income tax in Maryland, as well as a two-page Policy Snapshot that highlights the key points from the paper.

Last fall, the Department of Legislative services also released a study on the cost of a corporate tax cut in Maryland. You can also find the DLS Fiscal and Policy note on Senate Bill 8 here.

The Washington Post also published a related blog post yesterday: Want to help the middle class? Don’t kill corporate taxes

Check back here at Maryland’s Money Matters for more on the ongoing debate about corporate tax policy in Maryland.

DLS Report Shows Trade-offs from Reducing Corporate Income Tax Bring More Harm than Good (Updated)

The costs of reducing Maryland’s corporate income tax rate outweigh any potential benefits, according to a recent report from the state’s Department of Legislative Services. Reducing the rate has received renewed attention in recent months, but this report should serve as a warning to policymakers of all stripes.

The corporate income tax is an important source of income for the state. In fiscal year 2012, Maryland raised $877.9 million through the corporate income tax. This represented 5 percent of general fund revenue. These funds pay for many important programs and services—such as education, transportation, and health care—that benefit Marylanders and businesses alike.

The DLS report projected the revenue that would be lost each year if Maryland were to reduce its corporate income tax rate by 1 percent, from the current rate of 8.25 percent to 7.25 percent:

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The DLS projects that the total cost of a 1 percent corporate tax reduction over ten years is just short of $1.4 billion.

In light of recent projections indicating that Maryland will face a structural budget deficit in the upcoming year and the constitutional requirement to pass a balanced state budget, any loss of revenue from the corporate income tax must be offset by some mix of spending reductions or additional revenues from other sources. The DLS report models two different scenarios: one in which a loss of revenue is offset solely through reduced government spending, and another in which lost revenue is offset through an increase in sales taxes. The DLS projects consider the impact of these scenarios on employment in the state, disposable income available to residents, and economic migration in and out of Maryland.

Scenario 1: Reduce Government Spending to Match Reduced Revenues

The DLS report rightly notes that reductions in government spending come at a cost. Because government spending is relatively labor intensive, budget cutbacks tend to reduce government employment, which in turn leads to private sector job losses as a result of lower overall demand in the economy. As a result, accounting for reduced corporate income tax collections solely through reductions in government spending results in net job losses for the foreseeable future and reduced disposable income for Maryland residents:

Scenario 2: Increase in State Sales Tax to Replace Foregone Revenues

In the second scenario, the decrease in the corporate income tax is offset by increases in the state sales tax. Increasing the state’s sales tax effectively raises consumer prices. While the DLS models indicate that this option has a less negative effect on employment and personal income than the previous scenario, they also find that it will result in increased economic migration as residents leave due to higher prices for goods subject to the sales tax:

It should also be noted that shifting more of the burden of state taxation to the sales tax would increase the inequality of Maryland’s tax system, especially when paired with a reduction in the corporate tax rate. Sales taxes, because they do not account for income, fall hardest on those least able to pay. Pairing such a shift with a massive giveaway to business would merely amplify the disparity between Maryland’s most and least fortunate.

Neither scenario indicates that reducing the corporate income tax would be a good idea for Maryland at this time. No matter what mix of spending reductions and tax increases policymakers choose to employ to offset lost revenue, reducing the corporate income tax shifts the cost to low and moderate income families who will see a reduction of jobs and public services as well as an increased tax burden.  So why would anyone think this is a good idea?

Update (11.13.13):

Survey results released by Gonzales Research and Marketing Strategies find that 57% of Maryland residents oppose reducing the corporate income tax. (h/t Maryland Reporter)

Close-out - revenues slightly under estimate. Maryland ends year with $1.2 billion in the bank.

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 Comptroller Peter Franchot today released the results of the state’s close-out of fiscal year 2013. Fiscal year 2013 began July 1, 2012 and ended June 30, 2013.

The state ended the fiscal year with $510 million in the general fund and $700 million in the “Rainy Day” reserve fund, for a combined balance of $1.2 billion.

General fund revenues fell $62.4 million short of official estimates, growing 4.5 percent over fiscal year 2012. General fund revenues for fiscal year 2013 totaled $14.9 billion.

Favorable variances in expenditures and transfers offset $15.4 million of this loss, so general funds overall finished $46.9 million below the previous estimate.

The Bureau of Revenue Estimates cited poor growth in wages as a cause of the reduction. However, most of the shortfall in revenue was actually in the corporation income tax. Individual income taxes actually finished very slightly above the estimate. Losses in withholding were offset by gains in final payments (or refunds) of 2012 taxes.

The Board of Revenue Estimates will meet on September 17 to release revised revenue estimates for fiscal year 2014 and the preliminary estimate for 2015. The $62.4 million shortfall in fiscal 2013 is less that one half of one percent of general fund revenues. By itself, it does not materially affect the state’s financial picture.

 

Reserves are adequate enough so that mid-year adjustments are unlikely to be needed in the current fiscal year 2014. If the Board of Revenue Estimates determines that federal budget cuts and the state’s overall prospects for income growth will seriously harm future revenue collections, it could make it more difficult for the state to meet current service commitments in fiscal 2015.

A Glossary of Surpluses and Deficits
+$1.2 billion	FY 2013 total balance	The state’s total available reserves as of June 30, 2013, including $511 million in general funds and $700 million in the “Rainy Day” reserve fund
+$511 million	FY 2013 general fund balance	The amount in the state general fund on June 30, 2013
+$247 million	2013 unassigned funds balance	The amount that would be left in the general fund on June 30, 2014 if there were no changes to the FY 2014 enacted budget
-$46.9 million	FY 2013 general fund actual below estimate	The amount by which the fiscal year 2013 ending general fund balance was below the previous official estimate. The $62.4 million shortfall in revenue was partially offset by $14 million in below-estimated expenditures and $1.4 million in transfers in excess of the previous estimate
-$62.4 million	FY 2013 revenue shortfall	The amount by which actual revenues for fiscal year 2013 fell short of the official estimate