Compromise closes tax loophole for corporations

Measure will take effect without Ehrlich signature

May 26, 2004|By David Nitkin | David Nitkin,SUN STAFF

Companies that set up out-of-state corporations to avoid Maryland taxes will begin paying at least $38 million a year into state coffers under a bill that will go into effect without Gov. Robert L. Ehrlich Jr.'s signature.

Ehrlich announced last night that he won't veto a bill that prevents companies such as Toys `R' Us and The Gap from shifting assets to holding companies in Delaware and other states to bypass taxes - abiding by a General Assembly decision to end the practice.

The decision allowing the loophole-closing bill to become law without Ehrlich's signing it represents a compromise that ends weeks of speculation and intense lobbying by business and consumer advocacy groups.

Many political observers viewed the Delaware loophole bill as an important test for the governor. Ehrlich first proposed the measure when he released his budget in January, and relied on the money raised by it to balance the spending plan. But he later said the final version passed by the General Assembly was too onerous, raising the odd prospect that he might veto a measure he first introduced.

Democrats openly wondered whether the governor would side with the wishes of large corporations, or would allow badly needed tax dollars to begin flowing in the aftermath of favorable court decisions won by the office of Comptroller William Donald Schaefer. The Maryland Chamber of Commerce led the veto push.

"I have to believe that pressure from the public and from the papers and from the comptroller have all convinced the governor that he would take too big a hit politically if he was going to reward tax cheaters at the same time he is slashing funding for services," said Tom Hucker, executive director of Progressive Maryland, a liberal advocacy group. "This is a good victory."

In a letter announcing his decision, Ehrlich said he believes the bill "overreaches" and "penalizes legitimate business transactions." He called on the General Assembly to fix its flaws during the next legislative session.

The governor will also allow a related tax-loophole measure to become law without his signature, costing the state $88 million. The bill grants amnesty to those same corporations for taxes they owed dating before 1995. Some of the money has been collected by the comptroller's office and must now be returned.

Schaefer, a close ally of the governor's and a crucial vote on the three-member state Board of Public Works, vigorously opposes the amnesty concept.

In addition to the loophole bill, 16 veto decisions and scores of bills to be signed by the governor were released late yesterday. Today is the last of four bill-signing ceremonies for Ehrlich to act on bills approved during the Assembly's 2004 session, which ended April 12.

`Living wage' veto

As promised, the governor vetoed a bill establishing a $10.50-per-hour "living wage" for private-sector employees working under state contracts worth at least $100,000. He called the measure bad for the state's business climate.

Also vetoed: a measure that would have raised corporation income taxes by 10 percent - from 7 percent to 7.7 percent - and allocated the proceeds to the state university system to allow a limit on tuition increases at 5 percent.

The bill guaranteed a 5 percent annual increase for the state university system, which the governor called in a veto letter an "irresponsible and haphazard" unfunded mandate.

"I think it's unfortunate," said House Speaker Michael E. Busch, who convened a task force last summer to examine ways to end a string of double-digit public university tuition increases. "It's really going to have a detrimental effect on middle-class and working-class families who are struggling to save and put their kids in the university system."

Home-care bill rejected

Sen. Paula C. Hollinger, a Baltimore County Democrat, said state Health Secretary Nelson J. Sabatini called her from Italy yesterday to tell her that the governor was rejecting a bill that would have allowed thousands of frail elderly Marylanders to receive care in their homes or assisted-living facilities, rather than in nursing homes.

Hollinger said the governor's decision to reject the bill would harm senior citizens who don't want to move to nursing homes and who are waiting for the state to obtain permission from the federal government to spend Medicaid and Medicare dollars on community-based care.

The measure had been backed by senior citizen groups, and advocates for people with Alzheimer's and dementia who could have qualified.

The governor said in a letter that the senior care legislation was rushed through the Assembly and did not contain enough flexibility to allow the health department to save money in the Medicaid program. Even without the law, the administration will use its authority to seek greater flexibility in the use of federal money to comply with a federal law requiring that senior citizens receive care in the least restrictive setting, the governor said.

Other bills vetoed by the governor include:

An anti-bullying measure that would have required schools to collect and report data on incidents of harassment and intimidation. Ehrlich said the bill was burdensome and unnecessary. "Teachers have enough demands on their time without the state imposing new demands," the governor wrote. "Local school systems already have plans in place to adequately deal with harassment."

An open-meetings act stemming from a court decision in Howard County, where a judge ruled that a resident could not file a complaint against the county school board because he had not been "adversely affected" by the closed-door meeting. The General Assembly passed a bill allowing any person to sue for open-meetings law violations, but the governor said the bill would lead to frivolous lawsuits.

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