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.
Last week we blogged
about the need to reform corporate income taxes as part of any rate-cut deal, and about why "the tax-free week" is a wasteful, expensive and ineffective program. Also Marceline White of the Maryland Consumer Rights Coalition guest-blogged about how Baltimore City's proposed use of foreclosure settlement funds would not actually help victims of foreclosures. 
