A `teachable moment' in corporate taxes world

This Just In...

February 15, 2002|By Dan Rodricks

TODAY'S COLUMN is about corporate income taxes -- but wait! Don't go away! We're serving bagels and coffee, and anyone who reads this column will be eligible for an all-expenses-paid trip to the Cayman Islands with your choice of escorts -- Jennifer Lopez, The Rock, robbed-of-gold Olympic figure skater Jamie Sale or Czech hockey hunk Jaromir Jagr.

OK, I made up the part about the bagels. And J-Lo never got back to me.

But look, I only make these empty promises because I'm like you -- when someone mentions corporate income taxes, a crust forms on my eyes.

So, bear with me. I'm under a lot of pressure to be both entertaining and informative in this, the age of Britney Spears' belly button.

Now, it's time to become the informed citizens you were always meant to be.

"This is a teachable moment," says Michael Mazerov.

Allow me to introduce this Mazerov. He is a policy analyst with the Center on Budget and Policy Priorities in Washington. He's been studying tax policy, and he thinks it's silly for states to be going around cutting taxes and providing other forms of corporate welfare in the name of economic development.

Maryland, despite its radio talk-show rep for being "anti-business," is one of the states that engages in such silliness.

Look at what happened last year. (If you missed this the first time, don't feel bad. It didn't get much news coverage because "it's arcane and obscure stuff," Mazerov says.)

A tax formula change gave Maryland manufacturers significant reductions in their corporate income taxes.

The Glendening administration, House Speaker Cas Taylor and a generous General Assembly obliged Black & Decker, Northrop Grumman, McCormick & Co. and many other companies by chopping away at the way the state calculates manufacturers' taxable income.

For years, Maryland based the calculations on three factors -- a company's in-state sales, its payroll and its property.

But, last year, the legislature made sales the single factor.

That means a company's income taxes will be based only on the proportion of its sales that occur in Maryland.

And that means a "substantial" tax break, according to the comptroller's office.

Wonder why the state gave this up?

"The current law is a disincentive to locate or expand here," said Gene L. Burner, in his role as lobbyist for Maryland manufacturers. "This bill is a fairly clear incentive to locate or expand. I see it as an economic development bill."

The state Department of Business and Economic Development did, too.

Mazerov didn't. He argued against the change.

Massachusetts, he pointed out, enacted the "single sales factor" formula at the urging of Raytheon Corp. in 1995, and since then Raytheon has reduced its Massachusetts work force by at least 3,000. Massachusetts has lost 15,200 manufacturing jobs since it began phasing in the new formula.

What won the Maryland legislature over last year was the state comptroller's opinion that "single sales factor" would have a minimal impact on -- maybe even increase -- revenues from corporate income taxes.(Are you still with me? This is the really thick part that only guys like my accountant, Myron, get.) Supporters of the "single sales factor" argued that it would shift the burden of corporate income taxes to out-of-state companies that have little or no payroll or property here, but significant sales.

So this shakes out as corporate windfall for Maryland manufacturers. It doesn't require them to do anything, such as expand operations and create jobs.

Look, for instance, at Black & Decker. Last month, coming out of 2001 sales of $4.33 billion, it announced a "restructuring plan" that included taking 450 jobs out of its plant in Easton. The company will cut 2,400 jobs in the United States and United Kingdom and shift most of them to Mexico, China and the Czech Republic.

"The decision to transfer certain production from our Easton plant to Mexico is part of a comprehensive restructuring of our entire global manufacturing network, and, thus, is based on a range of considerations well beyond Maryland tax law," explained Barbara Lucas, a B&D spokeswoman, in an e-mail this week.

"The restructuring is designed to reduce our worldwide manufacturing floor space by 25 percent and substantially reduce our manufacturing and other costs so that we may remain competitive in world markets. The factors that made this restructuring necessary were global in nature, caused by the dramatic weakening of the U.S. and European economies since late 2000 and increased price competition, especially from Asian producers."

Makes sense.

But if the factors that forced Black & Decker's downsizing were "well beyond Maryland tax law" and "global in nature," then why do we give them a tax break here?

That's Michael Mazerov's point.

He says these kind of tax cuts don't do what business lobbyists -- and obliging legislators -- claim they do. "There's very little evidence in the real world that [single sales factor]" causes manufacturers to move from state to state or create more jobs, Maveroz claims. And, just for emphasis, he throws in a quote from someone who did time in the real world of big business -- Treasury Secretary Paul H. O'Neill, former Alcoa chief executive officer.

"I never made an investment decision based on the tax code," O'Neill said at his congressional confirmation hearing. "If you are giving money away, I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements."

That concludes today's teachable moment. Thanks for joining us. Hope you enjoyed the bagels.

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