House of Cards or Race to the Bottom?

While the series ‘‘House of Cards’’ depicts politics as a deeply corrupt charade in which key players scheme and backstab behind the scenes to get their way, recent developments in Annapolis depict a simpler reality: lawmakers will give you money if you publicly threaten them. The Maryland Senate  voted overwhelmingly (45 – 1) to increase the amount of tax breaks available to film productions  in Maryland after the makers of “House of Cards” threatened to take their stage sets elsewhere. If the House knuckles under too, this would be the second time in as many years that Maryland has increased these subsidies in response to such threats. Lawmakers ought to get some backbone and consider a more stable and long-term approach to economic development in the state.

In 2011, the General Assembly enacted a system of tax credits that allows the Department of Business and Economic Development (DBED) to award a maximum of $7.5 million in credits each year to film productions. This system was scheduled to expire on June 30, 2014. But in last year’s legislative session, state lawmakers extended the sunset date through Fiscal Year 2016 and increased the amount of tax credits available for fiscal year 2014 to $25 million. They did so in an effort to keep “House of Cards” and another show filmed here, “Veep,” which threatened to move production to an unnamed other state with more generous tax credits.

Following last year’s extension, the tax credits were set to return to $7.5 million after FY 2014, but just last weekend, “House of Cards” star Kevin Spacey schmoozed with state lawmakers at a private event in Annapolis to woo the General Assembly into increasing the amount of film tax credits yet again, to $18.5 million in FY 2015 and $11 million in FY 2016. This charm offensive was complemented by a major threat: The show’s maker, California-based Media Rights Capital, refused to resume filming until Maryland ponied up higher tax credits.

(Click to enlarge)

Proponents argue that film tax credits are a good investment for Maryland because they generate more economic value than they cost as film companies hire local businesses and vendors. Others, such as the Maryland Film Office, contend that sustained investment in the film industry will attract other production firms to Maryland.

However, boosting the tax giveaways each year in response to threats from film companies is not a sound or sustainable policy. House of Cards spent just 53 days filming in Maryland in FY 2012 and 130 days filming in FY 2013. And no show, no matter how successful, lasts forever.

These threats themselves are evidence that states cannot count on the film industry as a long-term engine of economic development. Currently, 45 states and Puerto Rico offer film tax credits of some kind, and production companies will always be able to play states off against one another in this way. Maryland should make sound investments in its economy, but it should not do so in a race to the bottom with other states, fighting to see who can give the biggest tax breaks to film production companies. Besides, not all states are successful in their efforts to boost their economy via film tax credits.

Organizations as diverse as  the Center on Budget and Policy Priorities (CBPP), The Mercatus Center, the Tax Foundation, and Maryland’s own Department of Legislative Services argue that the primary beneficiaries of these tax credits are companies based outside of Maryland.  CBPP also points out that the best jobs often go to out-of-state residents.

The money spent on tax credits for film companies could be better spent on public services and investments in health, education, and transportation that would build a stronger, longer-lasting economic foundation for the state. Film tax credits actually remove funding from the state’s General Fund, the Higher Education Investment Fund and the Transportation Trust Fund, which will also result in less highway user revenues for local governments, as the Department of Legislative Services points out. DLS adds that only a portion of the tax credits  are recaptured in state and local revenues.

These industry-specific credits add up. Last week, we highlighted a report on how some Fortune 500 companies are able to avoid paying state taxes. One way they do so is clever accounting, but another is through targeted tax breaks like the film tax subsidy.

Maryland’s experience with “House of Cards” shows that it cannot win the film subsidy war. After coming into the state knowing the legal limit on film tax incentives and after receiving $31 million already, the show’s maker nonetheless threatened –in a letter to Governor O’Malley – to “break down our stage, sets and offices and set up in another state” unless Maryland increased its film tax credits. It makes sense for Maryland to invest in economic development, but the state should do so in an equitable way that plans for the long-term rather than responding to the annual threats of film production companies. 

Study Finds Many Large Corporation are Not Paying their Fair Share; Proposed Legislation Would Help

While state lawmakers in Annapolis discuss cutting important services and investments in an effort to balance Maryland’s state budget, we got further evidence today that large, profitable corporations are able to avoid paying their fair share of state taxes that support those services and investments. According to a new report, the 269 Fortune 500 companies that disclose their state income tax payments were able to avoid paying taxes on more than half of their profits. Some companies managed to not pay any state income taxes.

The list of companies that are able to avoid paying their fair share in taxes includes major companies that Maryland residents do business with every day. Marylanders support these companies when they go out to eat (Yum! brand restaurants like Pizza Hut and Taco Bell), surf the web (Yahoo, Facebook, Priceline.com), or pay their utility bills (Verizon, PG&E, Pepco, Comcast). Besides supporting such corporations with their business, Maryland tax dollars pay for the roads and bridges, communication systems, public safety, and educated workforce that these companies rely on. Yet they and many others that do business in Maryland are able to avoid paying for the services that they enjoy.

Between 2008 and 2012, these 269 companies paid state income taxes equal to less than 3.1 percent of their U.S. profits, less than half the average state corporate tax rate. As a result, these companies avoided paying $73.1 billion in state corporate income taxes over the five years the report covers. In 2012 alone, 25 companies paid no state income tax.

Source: Citizens for Tax Justice and the Institute for Taxation and Economic Policy (click to enlarge)

During the current legislative session, lawmakers in Annapolis have proposed a number of tax changes, some of which are better than others. This report’s findings are another sign that the General Assembly ought to consider tax reform that ensures large and profitable corporations operating in the state pay the legal tax rate.

Often, companies are able to dodge state corporate taxes through a shell game of creative accounting. As we have previously argued, Maryland can reduce such practices by instituting “combined reporting,” which would treat a parent company and its subsidiaries as one corporation for state income tax purposes. Doing so would provide a more complete and accurate accounting of the profits corporations earn from their activities in Maryland, limiting their ability to use tax avoidance tactics.

Maryland would collect tens of millions of dollars in additional revenue through combined reporting, Maryland’s Department of Legislative Services estimates. Multiple pieces of legislation put forward during the current session would enact combined reporting; state lawmakers need only to vote in favor of one of them.

When these large companies are able to pay less than their fair share in taxes on their profits, small businesses and families are left to make up the difference to pay for important public services and investments like schools, health care and public safety that benefit everyone in the state. State lawmakers ought to enact reforms that prevent tax avoidance and level the playing field for small businesses in Maryland that pay their fair share.

Earned Income Tax Credit Legislation Would Improve an Already Effective Tool

Maryland’s General Assembly has a unique opportunity to help the working poor in a variety of ways this session—including by expanding the refundable portion of the state’s Earned Income Tax Credit.

On Wednesday, the Senate Budget and Taxation Committee heard testimony on a bill to expand Maryland’s Earned Income Tax Credit (EITC), which fights poverty while encouraging people to work more hours in low-wage jobs. If passed, the bill would increase Maryland’s refundable EITC to 28 percent from 25 percent of the federal EITC, giving an additional boost to 422,019 Maryland households and lifting more Marylanders out of poverty. A portion of Maryland’s EITC is refundable, meaning that if it exceeds the amount of taxes owed, the balance is returned to the taxpayer.

By providing a credit that increases as earnings increase up to a certain amount, the EITC encourages work. It is also an effective tool to decrease inequality and lift families out of poverty by leaving low-wage workers with more income to spend on food, clothing and other necessities.

To claim the federal EITC in tax year 2013, a taxpayer must have a modified federal adjusted gross (earned) income of less than $14,340 if the family has no dependent children, $37,870 with one dependent child, $43,038 with two dependent children, and $46,227 with three or more dependent children. The Center on Budget and Policy Priorities provides a useful tool to calculate the expected EITC for households of various sizes and income levels.

Maryland’s Refundable Earned Income Tax Credit amplifies the federal EITC. Maryland’s refundable EITC currently provides a credit for up to 25 percent of the federal EITC, which is $2,300 on average. Below, a chart from Maryland’s Department of Legislative Services illustrates the relationship between the state and federal EITC and earnings for a single parent with two children.

Source: Maryland Department of Legislative Services

The darkest colored area at the bottom represents Maryland’s refundable EITC. By increasing from 25 percent of the federal EITC to 28 percent, Maryland’s refundable credit will do more for working Marylanders. Given the average EITC amount and the number of households that benefit from the EITC, this expansion could result in an additional $19 million for working families in Maryland.

Further, because Maryland’s refundable EITC is tied to the federal credit, any expansion to the federal credit will only increase the power of Maryland’s  EITC. Earlier this week, we highlighted a promising proposal in President Obama’s budget that would expand the federal EITC to many more childless adults (very few of whom currently qualify). Taken together, these proposed expansions to the federal and state EITCs will provide needed assistance to Maryland’s workers.

The EITC gives low- and moderate-income workers the opportunity to catch up on bills and debts, and to begin accumulating savings. The increased income the EITC provides workers also benefits local economies as families quickly spend the funds on necessary household expenses. More broadly, studies have shown that the EITC helps move young adult men into the workforce and boosts their effective income, and may  improve marriage rates,  reduce crime, and reduce incarceration.

Finally, the EITC complements another important issue on the 2014 legislative agenda in Maryland – boosting the minimum wage. Workers earning the minimum wage would greatly benefit from  being able to keep more of their increased earnings due to an expanded EITC, and that would also help Maryland’s economy.

Senate's Budget Relies on Short Term Solutions at the Expense of Long-term Investment

While the recently passed Senate budget avoids large cuts to services, the Senate plan includes unwise and unnecessary spending cuts and other short-term budget-balancing maneuvers that will cause long-term financial problems for the state. The Senate ought to reconsider its approach by adopting proposals that would responsibly boost revenue and abandoning irresponsible tax cuts that largely benefit corporations and millionaires.

In addressing the recently released estimate expecting $238 million less revenue, the Senate relied on spending cuts to bring the budget into balance. In the face of this large reliance on spending cuts, state leaders should certainly not cut to the state corporate income tax or increase the estate tax exemption. These would put the state in even worse financial shape.  

Source: Senate Budget & Tax Committee 

While the Senate’s plan will balance the budget in the short term, it will cost Maryland in the future. While Governor O’Malley’s budget proposed to reduce pension investment by $100 per year, the Senate plan doubles this reduction. Recent pension reform increased employee contributions and cut benefits, in addition to cutting the state’s contribution for pension costs for local educators, like teachers, librarians and community college staff. The Senate’s decision to reduce pension investment came despite expert warnings about the damage caused such cuts. The State Treasurer and Comptroller, the Chair and Vice Chair of the State Retirement and Pension System, recently testified against further cuts to retirement fund reinvestment; and Treasurer Kopp pointed to the $1.8 billion long-term cost of a permanent cut. 

In addition, the Senate budget includes unwise cuts to assistance and supports for the state's working families that are sound investments and leverage additional funds. The Senate plan cuts $18.3 million in state funds for Medicaid, which are matched dollar-for-dollar by federal funds. These unwise cuts to funding intended to expand community-based care options and nursing home care could threaten access to care for Medicaid recipients.

The Senate plan also cuts $1 million for childcare subsidies, which leverage federal matching funds, and $900,000 from the Employment Advancement Right Now job-training program. Like the diversion of pension savings, these short-term, one-time cuts cost the state the opportunity to further shore up its long-term fiscal condition by creating a stronger workforce. 

In addition to the General Fund cuts, the Senate plan removes Special Funds that would have gone to fund Program Open Space and Land Preservation. 

 

Source: Senate Budget & Tax Committee 

Like the governor’s plan, the Senate includes the transfer of $69.1 million to the General Fund, as well as an additional $69.1 million cut to related Special Funds pay-as-you-go (PAYGO) capital funding. The Senate plan would replace these special funds in the Capital Budget with additional debt, above DLS-recommended levels. Increasing capital debt to balance the Operating Budget is not a sustainable budget-balancing tactic and limits financing options in the Capital Budget.

Legislative analysts have also pointed out that interest owed on state debt and pension costs are consuming a growing portion of the Operating Budget (page 19 at link). Like the diversion of pension savings and Medicaid and child care cuts, these short-term tactics hurt working families and cost the state the opportunity to further shore up its long-term fiscal condition.  

Source: Senate Budget & Tax Committee 

Fortunately, alternative options to these unwise cuts are available as the House passes its version of the Operating Budget and it moves to conference committee. Increasing tobacco taxes as proposed in the Healthy Maryland Initiative (HB443/SB589) would raise $110.8 million in FY 2015 General Fund revenue.  In addition, legislative analysts recommended large reductions to personnel expenses, including a phase-in of merit pay increases for state employees throughout the fiscal year, reducing the number of health insurance premium holidays, and other state personnel cost-containment not adopted by the Senate. These would allow the state to continue making critical investments in things like pensions and child care.

Check back here for more information on House budget actions and the impact on valuable and proven services and programs.