Ehrlich to consider closing corporate loopholes

He previously defended tax practices as legitimate

October 15, 2003|By David Nitkin | David Nitkin,SUN STAFF

To help pull Maryland from its fiscal troubles, Gov. Robert L. Ehrlich Jr. will consider closing loopholes that allow corporations to avoid paying income taxes, a top aide said yesterday.

"For those corporations that may be ducking their responsibility, [the governor] wants to make sure they are paying their fair share," said Budget Secretary James C. "Chip" DiPaula Jr. after a meeting with legislative and private-sector business leaders on the state's finances.

DiPaula's comments represent a change in message for the governor, who had previously defended some loopholes - such as companies shifting assets to Delaware to avoid taxation - as legitimate business practices.

This year, the governor vetoed a bill that would have closed the Delaware loophole, while increasing corporate income tax by 10 percent and imposing a new tax on health maintenance organizations.

DiPaula's statements indicate that the governor is willing to accept the loophole part of the package, as long as the HMO tax is not included. Analysts estimate that Maryland could collect at least $45 million by closing loopholes, and $44 million through the rate increase.

Senate President Thomas V. Mike Miller and House Speaker Michael E. Busch said that the governor indicated his willingness to talk about business taxes during a dinner meeting last week.

"There's going to be a corporate tax in place next year," Miller said. "When I mentioned corporate taxes to [Ehrlich] at the mansion the other night, he said we can talk."

But business taxes would provide only a small part of the solution the state needs. Yesterday's meeting of the Spending Affordability Committee, which makes recommendations on how much the state budget should grow, confirmed that an anticipated $700 million gap between revenues and expenditures exists for the budget year that begins July 1.

Maryland's overall budget is about $22 billion.

Warren G. Deschenaux, the General Assembly's top budget analyst, said that state spending is expected to grow by 8 percent a year because of required increases for education and Medicaid expansion, while revenues from taxes and other sources will grow by 5 percent.

Deschenaux told the committee that the state appears to be on its way toward an economic recovery, with job growth and sales and income tax receipts looking better than they have in months. But the recovery is not enough, he said, to solve the structural gap between revenue and expenses.

"The only opportunity you have to make up growth is to have your revenues growing faster than your spending, and that has not been the case," he said.

Ehrlich and legislative leaders remain far apart on a comprehensive solution.

The governor advocates a slot machine program that could eventually produce up to $700 million a year in additional money, and is ruling out sales and income tax increases.

Miller said a combination of slots, other revenues and spending cuts is warranted. Busch prefers higher sales or income taxes to pay for the Thornton education plan, which has a price tag building up to $1.3 billion in additional money in four more years.

Yesterday's briefing showed that the current state budget underestimated expenses by nearly $200 million, predominantly because Medicaid and mental health services projections were inaccurate.

A one-time infusion of $244 million in federal assistance has erased the problem temporarily, budget analysts say.

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