Tax monster is big, bad and baffling

April 27, 2003|By JAY HANCOCK

IF THIS year's debate on Maryland business taxes was as clear as asphalt, the fault lies partly in the quality of information brought to bear.

How much - even a rough guess! - does business directly contribute to the enterprise of Maryland government?

How much profit are companies sheltering from Maryland tax by shuffling it to a file with another state's name on it? What does business pay in property tax? In sales tax?

Nobody knew.

The last time Maryland business taxes were easy to figure out was probably, oh, 1937 or so. That year, to cope with Depression-era deficits, Republican Gov. Harry W. Nice sired Maryland's first corporate income tax, of 0.5 percent, as well as its first personal income tax, which was 5 percent.

Sixty-six subsequent years of striving by politicians, lobbyists, lawyers and accountants have produced a cow pie of company taxes, a muddle of contradictions, duplications, exceptions and boilerplate that saps the economy and blinds policy. The more rules, loopholes and switchbacks any legislature adds to the tax maze, the harder it is for the people in charge to figure out what's going on.

Everybody - presumably even companies themselves - wants business to hoist its "fair share" of the tax load. That's hard to achieve when nobody agrees on what "fair" means. It may be impossible when nobody knows which businesses pay now and how much. The corporate income tax, the focus of this year's business tax debate, is a black box. We know Maryland collected $358 million in such tax in fiscal 2002.

But we don't know what came from small corporations or big multinationals. We don't know what relationship income tax receipts had to companies' Maryland employment. And we don't know how much Maryland tax companies ducked by making dubious deductible "payments" to affiliates in other states.

Last year New Jersey Gov. James E. McGreevey was brandishing a study that said 30 of that state's 50 largest employers paid only the $200 minimum in income tax. The research was incomplete and perhaps misleading; it didn't include subsidiaries that might have filed separate income-tax returns. But Maryland hasn't even gone that far.

For state revenue officials, "the problem is, there is a lack of information because tax information is confidential," says Michael Yarborough, a tax analyst with Maryland's Department of Legislative Services. "It requires an examination of returns to even get close" to truth, and "that doesn't necessarily tell the whole story about what a corporation might be doing with regard to its related corporations."

And that's just the corporate income tax. Profits at thousands of businesses are taxed not at the corporate rate but on individual returns as personal income from partnerships, limited liability companies and the like. Businesses also pay sales taxes, property taxes, license taxes and more.

The General Assembly's tax monster has grown far beyond the ability of state officials to analyze it with any thoroughness. I'm not objecting to the level of state taxes but to the complexity. The Bureau of Revenue Estimates, for one, is unlikely to produce a detailed overall picture of Maryland business taxes anytime soon. It already has its hands full analyzing recent changes in taxes for manufacturers, electrical utilities and individuals.

But it would be good to have. Businesses probably pay around 40 percent of all state and local taxes, but you'd never know it from the conversation in this year's legislature, which centered on the puny 4 percent of the general fund consisting of corporate income-tax receipts. A study sponsored by the Council on State Taxation, a business lobby, says business paid 41 percent of the country's state and local taxes in fiscal 2002.

Because Maryland has a fairly typical tax structure, its share of state and local business revenue is probably about the same as the nation's, says Joseph Crosby, legislative director for the council. Crosby is hitting up corporate donors to try to finance a state-by-state study of who pays what, which would probably add clarity to Maryland's situation.

If Gov. Robert L. Ehrlich Jr. fulfills his promise to veto a batch of business-tax increases passed by the General Assembly, clarity will be useful. These issues will be back in the next session.

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