Plan for tax breaks decried

Schaefer says proposal will restore Md. loopholes

Ehrlich plan shaped by business

Del. shell corporations let companies escape Md. tax

October 05, 2004|By David Nitkin | David Nitkin,SUN STAFF

The Ehrlich administration is drafting legislation that critics say would restore corporate tax breaks closed by legislation earlier this year- prompting a rebuke by Comptroller William Donald Schaefer.

Schaefer, who has sued businesses that were shifting assets to shell corporations in Delaware to avoid Maryland taxes, was fuming.

"My people really think this is a bad bill," Schaefer hand-wrote at the bottom of a letter to Gov. Robert L. Ehrlich Jr., delivered late last month. "Will fight this one."

The legislation being drafted with advice from big business would "do nothing but make our present fiscal situation worse," Schaefer said in the letter.

Schaefer, a Democrat, has been one of Republican Ehrlich's most reliable political allies, particularly as a vote on the three-member Board of Public Works. Tension between the two could endanger Ehrlich's ability to implement an agenda.

The comptroller's office won two time-consuming court cases against businesses that were dodging state taxes, prompting Ehrlich to introduce legislation during the most recent General Assembly session that codified the courts' findings that such income shifts were illegal.

But the governor said he did not like the final version of the bill as amended.

He allowed it to become law without his signature while indicating that he would look to make changes when the legislature convenes next year.

Officials in the comptroller's office responded that the General Assembly's bill was largely the same as Ehrlich's proposal and was not overly onerous.

Budget analysts say the state should collect $55 million yearly by 2007 through shutting the Delaware holding company loopholes.

But the Ehrlich administration and businesses leaders say the new legislation is bad for business.

Among the worst

Aris Melissaratos, head of the state Department of Business and Economic Development, who is drafting the legislation, said the Maryland loophole law goes far beyond implementing the court decisions won by Schaefer.

The law "truly makes Maryland one of the very worst states in the nation in terms of corporate taxation," he said.

"Do you see a lot of corporate headquarters rushing in here, to take advantage of our tax structure?"

Melissaratos said he tried to get lawmakers to understand the harm earlier this year before they passed the loophole bill, but was unsuccessful.

Schaefer and his tax experts disagree, saying Maryland is a friendly place for companies to locate.

"Maryland can only be regarded, on the basis of its tax system, as among the most favorable states to set up or operate a multistate business," the comptroller's letter said.

The new law is also having unintended consequences, said Karen Syrylo, a tax consultant with the Maryland Chamber of Commerce.

For example, Maryland companies that borrow money from shareholders instead of banks can no longer deduct the interest costs of the loan from their tax bills, if those shareholders live in a state without income taxes, she said.

"There are companies who are not using those infamous ugly Delaware holding companies who are getting hurt by the way the bill ended up being worded," Syrylo said.

Melissaratos said the amendments he is considering, through consultations with large corporations such as Black & Decker, W.L. Gore and Legg Mason, could reduce tax collections by $5 million to $10 million yearly.

Some advocates say the state should be strengthening its corporate tax law, not creating more holes.

Delaware recently passed a law allowing companies to establish a new kind of tax shelter: a headquarters management corporation.

Such a corporation, said tax advisers Grant Thornton in a recent publication, could avoid the tax charges of Maryland and other states that passed laws requiring companies to "add back" income sent to Delaware holding companies.

Need for solution

"It illustrates the need for a more comprehensive solution," said Tom Hucker, head of the liberal advocacy group Progressive Maryland.

Such a solution, he said, would require companies to report all their income in one filing. Sixteen states have so-called combined reporting requirements, he said.

"It's outrageous that we ask nurses and firefighters and teachers to pay their taxes, but we allow WalMart to get off scot-free without paying any taxes at all," Hucker said.

Of the 150 largest businesses in Maryland, only 40 paid any taxes to Maryland in the 2002 tax year, according to figures from the state Bureau of Revenue Estimates.

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