Report Gives MD Favorable Rating for Fiscal Planning

A newly released report by the Center on Budget and Policy Priorities gives Maryland high marks in its use of fiscal planning tools in creating the state budget. Maryland received a score of 8.0 out of 10 to rank second among all states, indicating that the state has strong systems in place facilitate both long-term planning and mid-course correction. As the authors of the report point out, having a sound method of fiscal planning is important in improving Maryland’s business climate, managing ups and downs in the economy, and effectively providing public services.

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Source: Center on Budget and Policy Priorities

Like many states, Maryland’s budget has yet to fully recover from the Great Recession, which greatly reduced the amount of revenue coming into the state and challenged Maryland’s ability to invest in important public services such as education and health care. This is evident in the current efforts of lawmakers in Annapolis to close the $584 million budget shortfall. However, CBPP’s report indicates that Maryland effectively uses fiscal tools to generate information on the state’s needs and expected tax revenue that help inform lawmakers’ decisions.

The ten tools discussed in the report fall into three categories:

• A map for the future: 
• Multiyear forecasts of revenue spending
• Fiscal notes with Multi-year projections
• Current services baselines

• Professional and credible estimates: 
• Independent consensus revenue forecasts
• Legislative fiscal office
• Pension oversight 

• Ways to stay on course:
• Well-designed rainy-day funds
• Oversight of tax expenditures
• Pension funding and debt level reviews
• Budget status reports

Maryland scored well on almost all of these measures, owing largely to the quality of the states nonpartisan Department of Legislative Services (Maryland’s ‘legislative fiscal office’) which is responsible for composing fiscal notes for General Assembly Bills as well as the analysis that informs Maryland’s Spending Affordability Committee briefings and decisions.

Maryland received lower marks on the bolded items above which relate to the state’s oversight of tax expenditures, pension oversight, and debt level. Indeed, during December’s Spending Affordability Committee briefing and January’s Fiscal Briefing, the Department of Legislative Services’ chief analyst, Warren Descenaux warned that Maryland should not authorize more debt and was critical of Governor O’Malley’s planned $100 million reduction in pension payments.

Despite these areas of improvement, this welcome news stands in contrast to other reports that are more critical of Maryland’s fiscal solvency and business climate. Compared with almost every other state, Maryland’s budget process employs tools that enable Maryland to make sound decisions on how to invest in public services and a strong economy.

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.

Paid Sick Leave Hasn't Harmed D.C. Businesses

MBTPI strongly supports legislative proposals requiring employers to provide workers with earned sick and safe leave. This critical public health tool allows employees to attend to health needs for themselves or their children, thus protecting coworkers, classmates, and business customers from communicable illness. Overall, earned sick leave would lower health care costs and improve workplace well-being and productivity. According to a report by the Institute for Women's Policy Research (IWPR), if a law guaranteeing workers this right were to pass in Maryland, health care expenses in the state would fall by $41 million annually, with roughly half the savings returning to taxpayers.

Unfortunately, the Maryland Earned Sick and Safe Leave Act (House Bill 735/Senate Bill 703), which would have allowed workers to earn a minimum of one hour of paid sick leave per 30 hours on the clock, failed in committee last session. Critics of the bill claimed the law would impose too great a burden to small businesses, though the IWPR report disputed that and a large majority of Marylanders supported the bill according to independent polling.

While initiatives have been introduced in several states in the past few years, Connecticut remains the only state to have passed such legislation (it did so through a close vote in 2012), but several cities, including San Francisco and Washington D.C., have had such requirements for over half a decade.

Effective in May of 2008, the District of Columbia's Accrued Sick and Safe Leave Act mandates that employers offer one hour of paid leave to workers for every 37 to 87 hours worked (depending on the size of the company) to workers that have been employed at that firm for at least one consecutive 12 year period.

For the first time since its enactment, the D.C. Auditor has now studied the economic impact of the law on the private sector. The report, which was released Wednesday, includes the results of a survey sent to 800 D.C. businesses that asked owners if paid sick leave would lead them to move their firm out of the District, to which over 87 percent responded in the negative. The audit further found that this new law did not discourage new businesses from forming in the District, and 91 percent of employers in the District complied with the law's requirement of posting the notice of sick leave rights within the workplace.

This provides strong evidence that sick leave laws do not create excessive burdens on small business, which advocates can point to in this coming session should related bills be reintroduced.

Maryland’s ranking on business taxes: anywhere from 6 to 41

We are obsessed with where Maryland ranks. It’s human nature. That's why we pay attention to stories about how the Free State ranks in terms of education or business climate. However, most of the published rankings of tax levels or “business climate” don’t tell us what we think they do or what we want to know--they lack any relation to actual economic performance or to Maryland's ability to invest in a high quality of life for ourselves and our children.

Peter Fisher’s new report, “Grading Places: What do Business Climate ranking Really Tell Us?” critically examines six different measures of tax or business policies, and find them to be "deeply flawed and of no value in informing state policy."

Four of the measures are widely reported indexes that are supposed to summarize something about states’ friendliness to businesses. Fisher’s analysis discredits these indexes in three ways:

• First, he finds that many of the indicators used as components of the indexes don’t make sense.
• Second, he finds that the way the final score is computed often gives greater rate to more trivial components, so that the final rankings could be meaningless even if the individual components did have some value.
• Third, and most importantly from a practical viewpoint, Fisher shows that the results of these rankings actually have no statistically significant relationship to growth in Gross State Products, employment, wages, or poverty rates.

The other two measures are “representative firm” models. These studies use the approach of specifying a uniform, hypothetical business, and then estimating the tax bill that firm would have if it were located in any of the 50 states. Fisher finds this approach sounder. However he finds that in these studies the simplifying assumptions used make the results irrelevant for most real businesses.  

Index	Maryland’s Rank	Top State
Business Climate Indexes
US Business Policy Index (Small Business and Entrepreneurship Council)	36th	South Dakota
State Competitiveness Report (Beacon Hill Institute)	23rd	Massachusetts
State Business Tax Climate Index (Tax Foundation)	41st	Wyoming
ALEC-Laffer Economic Competitiveness Index (American Legislative Exchange Council)	32nd	Utah
Representative Firm Models
Competitiveness of State and Local Business Taxes on New Investment (Council on State Taxation/Ernst and Young)	12th (effective tax rate on capital) 25th (ETR on jobs)	Maine
Location Matters (Tax Foundation/KPMG)	46th (new firms) 8th (mature firms)	Nebraska (new firms) Wyoming (mature firms)
Reference for Comparison Purposes
Estimated effective tax rates (Council on State Taxation/Ernst and Young)	6th	Oregon

The chart shows that the ranking for Maryland varies wildly from one report to the next. And that would be true for pretty much any state. The top-ranked states in the different reports are  - literally - all over the map. And, with all due respect to the many wonderful qualities of Nebraska and South Dakota, they may not be the states where you would prefer to live and do business.

Here in Maryland, conservatives and business advocates particularly like to indict our state’s policies using the Tax Foundation’s State Business Tax Climate Index. This index combines 118 different features of state tax policy. They include the top corporate- and individual-income tax rates and also the number of tax brackets. States are rewarded for applying the sales tax to gasoline and groceries, and downgraded for applying it to business purchases. States get points for conforming with federal depreciation schedules, but lose points for having tax credits for research and development or job creation.

The main components of the Tax Foundation index are assigned weights based on the degree of variability in the component scores. This has the effect of maximizing the differences among states’ final scores. However, it also creates a nonsensical result. If the authors of the index had used the percentage of taxes associated with each category as the weight, 31 states would move up or down at least 10 places in the rankings. Maryland would be 34th instead of 41st. That doesn't mean that 34th is Maryland's correct ranking - it shows that the TF's system for calculating the ranks changes markedly when you make small changes in the methodology.

Finally, the mish-mosh of indicators has no relation to what businesses actually pay in taxes. While Maryland ranks 41st in the Tax Foundation index, we rank 6th lowest in business taxes as a share of Gross State Product.

Maryland gets low marks from TF mainly because of our progressive income tax. Maryland businesses benefit from lower-than-average property and sales taxes (much larger slices of a typical business' tax bill), but the TF's methodology gives lower weights to these factors. 

Fisher concludes that the Tax Foundation’s ratings consistently favor regressive tax structures that fall disproportionately on the poor.

About the state ranking studies in general, Fisher writes: “They display no predictive value about economic growth. They come to highly inconsistent findings among themselves…. The result is not a useful summary measure of business climate as claimed. It is at best meaningless, and at worst a state ranking manipulated to make the case for policy positions advocated by the organization sponsoring the index.”

As hard as it is, we in Maryland should ignore these slanted pseudo-scientific pieces of corporate propaganda. To build our economy for the future, we need tax policies that are adequate to fund public investments in education, infrastructure, and a high quality of life; and that are fair to working families and businesses of all sizes.

CEOs’ favorite states: lower incomes, less education, less health coverage

Big business and anti-tax groups have been making hay out of a story in CEO Magazine in which a survey of CEOs ranked Maryland 41st in business climate. But look closely: a lot of the things that made CEOs downgrade Maryland (and the other states that ranked low in this poll) are actually things you would want for yourself and your family.

The results are based on a survey of over 700 CEO’s on the subjects of “Tax and Regulation,” “Workforce Quality,” and “Living.” So, what have these CEO’s told us about the states they like and don’t like? Here are their top 10 and bottom 10 states:

CEO Magazine Top 10	CEO Magazine Bottom 10
1. Texas	50. California
2. Florida	49. New York
3. North Carolina	48. Illinois
4. Tennessee	47. Massachusetts
5. Indiana	46. New Jersey
6. Arizona	45. Connecticut
7. Virginia	44. Michigan
8. South Carolina	43. Hawaii
9. Nevada	42. Pennsylvania
10.Georgia	41. Maryland

To find out how well the CEOs opinions tracked with the actual economic data, I looked at some indicators related to these twenty states. Median household incomes. Growth in per capita incomes. Poverty rates. Health insurance coverage. Education attainment.

 

Sources: CEO Magazine, US Census, MBTPI calculations

 

In each of these indicators, CEO Magazine’s bottom 10 states outperform their top 10. The blue bars on the graph show the average ranking of CEO Magazine’s top 10 states on these indicators. The green bars show the average ranking of CEO Magazine’s bottom 10 states. For example, the top 10 states, as rated by the CEO’s actually averaged the 28th highest median household income. Household incomes in the states ranked in the bottom ten were much higher – ranking 11th on average. In fact, CEO magazine’s 10 least favorite states included 6 of the 10 states with the highest incomes.

And it goes on like that for category after category. The states ranked lowest by CEOs had faster income growth, lower poverty, more health insurance coverage and more college grads. These are all things we want for ourselves and our families: we want to make a good living, to avoid poverty, for our kids to have a good education, and to have access to health care.

As business managers focused on their bottom lines, some CEO's might like to operate where they can get labor cheaply and without being expected to provide a lot of benefits.

As citizens, though, we want to promote good jobs that can support families, broad access to education, and health services.

This is not just an article in a trade magazine. This divergence between the interests of the short-term profit for investors and managers versus workers and citizens has a real impact on families in the real world. I know, because there was one measure I found where CEO’s top 10 lined up with economic realities: job growth.

CEO Magazine’s top 10 includes 8 of the 10 fastest-growing states in terms of employment over the past decade. The CEO top ten ranked 10th on average in job growth. The bottom 10 ranked 21st on average (Maryland fared better on this measure, ranking 11th).

And this helps to explain why workers are no longer benefiting from increases in productivity and why nearly all of the benefits of economic growth are going to the top 1 percent. These new jobs in the CEO-preferred states are low-quality (for the worker) jobs--lower paid, lacking benefits, and with few prospects for advancement.

CEO Magazine's kind of employment strategy is not what we want in Maryland. We need to continue to focus on maintaining our high standards for education and quality of life, and on attracting and retaining jobs that will help Marylanders thrive.