Businesses should ante up as state scrapes for revenue

March 19, 2003|By JAY HANCOCK

NEWS ALARM: Chamber Admits Maryland Has $1.8 Billion Deficit. Group Agrees State Needs New Tax Revenue.

"We recognize that the state is in dire straits," says Kathleen Snyder, president of the Maryland Chamber of Commerce. "We recognize the state has a tremendous hole. That hole has gotten bigger."

But the chamber doesn't think Maryland businesses should have much to do with filling the hole or sailing out of the straits.

The chamber and other business groups oppose a measure to close legal loopholes that shift taxable Maryland profits to Delaware, costing the state millions.

They're against a proposal to tax Maryland corporate income derived from some sales in other states. They deplore measures boosting taxes on Maryland-based companies.

And they really hate a plan to make companies file a single, unified tax return for all their subsidiaries and holding companies, a change that would raise taxes for some companies but lower them for others.

The chamber, true to form, is completely correct about some of these ideas, which are wacky. Which ones, in a minute.

But, if you don't like the menu, at least give the chef a better idea.

The chamber and other business groups seem to think Maryland companies bear little responsibility for helping the state regain its fiscal feet. Until late yesterday, the chamber's revenue-boosting proposals were slot machines for financing education and a 5-cent gasoline-tax increase to pay for highways.

Last night, chamber leaders got on board with the governor's proposal to raise $85 million through higher business filing fees. But the deficit is $1.8 billion. Should business do more?

"We need to pull in the reins on spending" first, Snyder says. "We do believe cuts have to be discussed before any increases in taxes are going to be put on the table."

That's a fancy way of running out the clock.

Cuts are being discussed -- big ones -- but even the Republican governor has conceded that new revenue is necessary. By the time any spending cuts are ratified, it'll be too late to raise business taxes.

In arguing against corporate taxation, Snyder cracks the chestnut about business as the golden goose that will flee to other states if taxes get too bad -- and she's right. By working, employing, creating and selling, businesses drive every state's economy and are a prerequisite for governments and taxes of almost any kind.

But businesses are also distinct legal entities deriving enormous benefits from state government. Many are owned by out-of-state shareholders who pay no Maryland personal income or property taxes.

All companies get protection from the state's police, justice from the court system, educated workers from the schools and transportation from the roads, port and airport. They ought to contribute, but by one measure their contribution has fallen sharply in recent years.

Maryland corporate income tax collections plunged from 5.5 percent of general fund revenues in 1980 to 4.5 percent in 2000 and 3.8 percent last year.

David F. Roose, director of the Board of Revenue Estimates, notes that this doesn't come close to gauging total Maryland business taxes. Many companies, such as S corporations and partnerships, pay taxes on the personal returns of their owners, not at the corporate level, and these revenues are almost impossible to measure.

But, all by itself, the drop in corporate income tax as a proportion of revenue deprives Maryland of $160 million annually and contributes to the deficit that the chamber agrees is a problem. Fortunately, there's a partial fix.

Mending a loophole letting Maryland companies send royalties, interest and other payments to affiliates in Delaware and elsewhere -- cutting their Maryland taxable profits -- could spawn $20 million to $150 million in new corporate income tax revenue, estimates legislative analyst Matthew Riven.

This is at least one measure to raise corporate taxes that the legislature should approve and the governor should sign. Some other proposals -- the ones discriminating against Maryland-based companies, for example -- seem like lunacy. A combined tax return for all affiliates is intriguing but needs more study.

But closing the Delaware loophole is endorsed by no less than the Council on State Taxation, a big-business lobbyist.

"We have no problem with shutting those down," says Joe Crosby, the council's legislative director.

His bosses include Coca Cola, Johnson & Johnson, American Express, General Motors and Shell Oil. He told me the Delaware loophole is "tax abuse."

Case closed.

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