Delegate Tony McConkey's Official Blog

Augustine Commissions Debates Maryland Tax Reform

maryland-tax-reformThe Maryland Economic Development Commission, better known as “The Augustine Commission” after the chairman, was established on March 11, 2014, to investigate “tax issues affecting economic development” and recommend Maryland tax reform. The commission’s members come from a broad spectrum of backgrounds and is conducting hearings throughout the state discussing issues with business, labor, government, academic and related communities.

As reported in the 2014 interim report, the commission has stated that “.. Maryland has not nearly reached its potential in growing business and creating jobs. Although operating in a high-tech economy and ranking first in the nation in the monetary value of research conducted within its borders, Maryland, during the past decade, ranks thirty-seventh in percentage job growth and twenty-sixth in the growth rate of creating university-based start-ups. Various organizations that assess business friendliness place Maryland at sixteenth, thirty-fifth, and forty-first among the 50 states.”

The commission believes the state needs to fundamentally change its attitude
at every level to assist in economic development, business growth, or job creation – a change that is not high cost but requires a major management commitment, particularly given the difficulty of changing the entrenched indifference of the bureaucracy.

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Donald C. Fry: Maryland Business Taxes and a Tale of Two States

Donald C Fry in Center Maryland, Sept 11, 2015

The discussion over whether Maryland should trim corporate and personal income taxes as a step toward improving the business climate and spurring economic growth and job creation is back on the table these days.

Not everyone’s in favor of trimming such taxes. Some argue that it’s just another way to reward big corporations and won’t help Maryland residents. Others argue it would spur economic growth around the state and thus lift all boats.

There’s no question that it’s a balancing act when it comes to trimming personal and corporate income taxes. First, any such legislation would affect state revenues.

The Maryland Economic Development and Business Climate Commission, a 25-member panel created to explore ways to improve the state’s business climate, is wrestling with these same questions as it takes a hard look at how Maryland tax rates and policies might be adjusted as one way to improve the state’s business climate.

Earlier this week the commission—often called the Augustine Commission because it’s chaired by former Lockheed Martin CEO Norman Augustine – held a hearing at which I appeared to present research the Greater Baltimore Committee has done looking at how Maryland stacks up in terms of business and personal income taxes.

A stable, predictable and fair environment for business to compete in today’s economy is critical for Maryland. And so, tax reforms are worth a hard look as a way to improve the state’s economic landscape.

In our research the GBC found that a number of well known business news organizations, including Forbes and CNBC, haven’t ranked Maryland particularly high in the periodic “Best States for Business” lists they publish.

Such rankings should be taken with a grain of salt. Metrics used to come up with these lists can change year to year. In addition, each news organization has its own set of metrics. So a state may be listed high on one list but middle of the pack on another.

But such lists, especially when put out by news organizations with broadly recognized names, do fuel perception. And, as the old maxim goes, “perception is reality.”

On some of these “best business states” lists we found that neighboring states which Maryland competes with for business, like Virginia and North Carolina, often rank higher than the Free State. This creates a perception that they have better business climates.

Even more compelling is that in some of these states the corporate tax rates have been trending downward in recent years. But in Maryland they have trended upward.

And so it seems clear that to stay competitive in today’s environment there are steps Maryland should take when it comes to business taxation – especially if we can become more attractive than neighboring states.

One option would be to consider establishing a gradual reduction in the corporate income tax. It’s currently 8.25 percent – fourth highest among the peer group. This could help chip away at the perception that Maryland doesn’t have a welcoming climate for business.

A second step worth considering is to provide some relief through a tax structure that sets up credits or exemptions for what are known as “pass-through entities.” These are typically small businesses – which when combined, provide large numbers of jobs statewide. Such relief could give these business owners reason to expand or add jobs.

In both cases, we should proceed – but proceed with caution.

To do otherwise could backfire. As I noted to the Augustine Commission, two states – Kansas and North Carolina – enacted major tax reforms in 2013. But the outcomes so far have been starkly different.

Kansas trimmed personal and other taxes, but didn’t reduce spending. The reforms don’t seem to have resulted in a wave of new businesses to expand the tax base.

Instead, its bond rating got cut – a big deal for any state looking to raise money in the bond market. Kansas also trimmed its state pension contribution, put on hold $300 million in road maintenance projects and schools closed early due to a lack of funding. Now Kansas legislators are revisiting tax rates and policies.

North Carolina, on the other hand, enacted major reforms to its tax rates and regulations and came out on the winning side.

In May, the state announced it expected to end the fiscal year with a $400 million surplus. The governor and state leaders credit economic growth and job creation spurred by the tax reforms as the reason for the surplus.

Our elected leaders at the state and local government levels should take steps to grow our state’s economy and create jobs. If the tax structure creates a competitive disadvantage it should be altered.

A competitive business environment that promotes job creation and a strong economy is good for all Marylanders.

But important lessons may be gleaned from Kansas and North Carolina as the Augustine Commission presses on with its important work of developing proposals to improve the overall Maryland business climate.

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Legislative Advisory Panel Considers Business Taxes

By Natalie Sherman in The Baltimore Sun

As state weighs tax code changes, GBC chair urges state leaders to make some news

Maryland is one of the few states in the Mid-Atlantic to raise its corporate tax rate in the last 10 years, the head of the Greater Baltimore Committee said Wednesday, urging a drastic reduction he said would help change perception of the business climate.

The proposal was one of several presented to the Augustine Commission, a 25-member group of business and political leaders that has been examining the state’s business climate since last year. Wednesday’s meeting in Baltimore was the commission’s third focused on the state’s tax structure, as members gather information to prepare recommendations for the next legislative session.

Donald C. Fry, president and CEO of the Greater Baltimore Committee, urged the commission to include a reduction in the state’s corporate income tax rate, which he said has an outsize effect, contributing to the state’s relatively poor showing on some business climate rankings while raising a relatively small share of state revenue.

The increase in the corporate rate from 7 percent in 2007 to 8.25 percent in 2008 was unusual compared to nearby states, such as New York, North Carolina and West Virginia, which have moved in the other direction, Fry added.

“If you took it down to 5.5 percent, and reduced it lower than Virginia, you would be making some news,” Fry said.

The Augustine Commission, headed by former Lockheed Martin CEO Norman Augustine, earlier this year persuaded legislators to adopt a series of business-friendly recommendations, including bills to create customer service training for state employees and a council to review state regulations.

But building consensus around tax changes is expected to be more difficult.

Several of the ideas business advocacy groups presented to the panelists Wednesday morning, including lowering the corporate tax rate, have been debated repeatedly.

The Maryland Chamber of Commerce said the commission should create a tax exemption for the owners of businesses, mostly small, whose company profits are taxed on owners’ personal returns. Similar proposals did not move forward in the legislature in 2013 and 2014.

The chamber also suggested the commission recommend that legislators reject adoption of a combined reporting structure, which would change the way companies operating in multiple states through affiliates are taxed.

Such bills have failed repeatedly, but advocates say combined reporting — in which the state calculates its share of taxes based on a firm’s full profits rather than those of the separate legal entity organized in Maryland — reduces corporate tax sheltering.

The Chamber of Commerce has consistently opposed the idea.

The debate “creates a degree of uncertainty to the business climate in Maryland,” said Herman B. Rosenthal, a partner at the Whiteford Taylor Preston law firm, who spoke during the chamber’s presentation. “We would urge the commission to include a definitive statement to take that off the table.”

Augustine said the commission hasn’t come to any conclusions. The next meeting is scheduled for October.

He said he is optimistic that the commission will find changes the legislature can support, given the backing for its work from both Republican Gov. Larry Hogan and state Democratic legislative leaders, who created it.

“Rarely do the planets align to improve the business climate and job creation as they have in Maryland today,” Augustine said. “So if we can’t do it today, it probably won’t get done.”

At least one recommendation — notably not an immediate move to change the tax code — appeared to spark interest: the chamber’s suggestion that the state start to offer guidance to companies on tax questions by private-letter rulings, as the federal government and 32 other states already do.

David R. Brinkley, Hogan’s secretary of budget and management and until January a longtime member of the state Senate, said after the session that the idea was new to him, but he supports it.

“I don’t see that costing a lot, if anything,” he said. “That’s kind of a no-brainer.”

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