As Maryland political leaders struggle with the worst budget crisis in a decade, a growing number of fiscal experts want to plug tax-law leaks that they say cost the state up to $200 million in corporate tax revenue each year.
Collecting more money from corporations, some advocates say, could prevent devastating cuts in health care, education and services for needy residents that are threatened by gloomy budget projections.
Legislators who will convene next week for the General Assembly session must figure out how to close a projected $1.2 billion gap in the state budget beginning July 1. That budget is expected to include about $11 billion in general fund spending for services that taxpayers typically rely on.
"We have two choices: raising revenues or cutting services," said Steve Hill, an analyst with the Maryland Budget & Tax Policy Institute. "If we are going to raise revenues, this might be one of the first places to look."
A sensible way to raise more money, some say, is by reforming a strategy that allows corporations to avoid taxes by creating holding companies in Delaware and transferring profits to them.
The shell companies typically collect sizable licensing fees for the use of trademarks and patents from affiliates that operate in Maryland.
One such example is Geoffrey Inc., a Delaware company that owns the Toys R Us logo and the likeness of its giraffe character, enabling it to collect fees from Maryland Toys R Us stores. Once the money is moved out of state, it is no longer subject to Maryland corporate income taxes.
The strategy - which is legal under Maryland law - has drawn the attention of leaders in other states who are faced with similar budget problems.
In Maryland, the state comptroller's office and advocacy groups hoping to preserve state services are renewing attention to obscure tax code provisions.
"Our tax system hasn't kept up with tax planners," said Hill. "If we have a tax, we should either apply it to everyone or get rid of it."
In a report released last week, Hill's group says that Maryland loses $100 million in corporate tax revenue from companies that created out-of-state holding companies, including Toys R Us, Home Depot and retailer Limited Brands Inc.
The report identified two other loopholes that cost an estimated $50 million to $100 million per year.
The office of the state's tax collector, Comptroller William Donald Schaefer, has been tracking the holding-company issue for years.
The comptroller has sued several corporations to collect taxes on income transferred to Delaware, and is awaiting the results of two lawsuits - against a holding company created by the Sym's discount clothing chain, and Crown Cork & Seal Co., a manufacturer of bottle-closing devices - pending before the Court of Appeals.
"We believe that the subsidiary [holding companies], which essentially exist on paper, must be viewed as doing business in Maryland," said Gerald Langbaum, an assistant attorney general who is counsel to the comptroller.
"If we get a decision from the Court of Appeals that endorses our theory, that would serve as precedent and would leave us in a very strong position for all of the other cases," he said.
A rise in avoidance
Langbaum and others note that corporate tax avoidance techniques appear to be on the rise. In 1980, according to the tax policy institute report, corporations paid $2 in income tax for every $10 paid by individuals. Today, that has fallen to $1 for every $10 that individuals pay.
Some states have closed the loophole, according to the Center of Budget and Policy Priorities in Washington.
Alabama, Connecticut, Mississippi, North Carolina and Ohio have passed laws that address income-shifting, the center says.
The prospect of similar legislation succeeding in Maryland, however, is unclear.
Republican Gov.-elect Robert L. Ehrlich Jr. campaigned on a theme of being friendly to business, and the new revenues to be included in the budget he will submit to the General Assembly will almost certainly be generated by slot machines.
Ehrlich's budget consultants are "looking for immediate fixes to the immediate problem," said Paul E. Schurick, an Ehrlich spokesman.
Changing the state's corporate tax structure requires "a very complex analysis, and the transition group does not have the time to look at it," he said.
Del. Howard P. Rawlings of Baltimore, chairman of the House Appropriations Committee, said he was reluctant to endorse one revenue-raising technique without a broader discussion of how the state pays for all the services it wants to provide.
"My concern is that the governor in his campaign has taken a lot of these things off the table," Rawlings said. "That is certainly one way of addressing the fiscal problems we have, but it is not the only way."
Any tax law change would meet resistance from business groups, raising concerns about keeping Maryland's business climate competitive.