Unraveling the Great Annapolis Loophole Mystery

October 10, 2004|By C. Fraser Smith

GOV. ROBERT L. Ehrlich Jr. announces periodically that he's been up in Delaware visiting his money.

We get the joke: Delaware has slots. Marylanders cross the state line with gambling dollars that could be collected in their home state. Wouldn't it be better, he's saying, if that money stayed in Maryland? Maybe, but no one has figured out how to make that happen.

And there's even more Maryland scratch across the border -- at least $55 million goes there every year as various businesses transfer their profits to shell corporations legally situated in Delaware. This situation is sometimes referred to as the Delaware loophole. Using this and other shelters, 110 of the 150 largest businesses in Maryland paid no state taxes in the 2002 tax year.

During the most recent legislative session, the governor filed a bill that would have made it more difficult to evade Maryland taxes. By the end of the 90-day session, though, he'd changed his mind. His minions lobbied against passage of their boss' bill. The measure passed anyway, and Mr. Ehrlich allowed it to become law without his signature.

Then last week, Mr. Ehrlich said he would no longer try to recapture the money at all. That wouldn't be bad if the original loophole-closing idea had been flawed beyond salvaging. But why not work hard at achieving the highly prized level playing field? Lots of businesses pay what they owe. Why give some of them a pass?

The reversal defies fairness. And it comes with glaring political negatives. An important Ehrlich ally, Comptroller William Donald Schaefer, says he will resist any effort to codify such a perversity. Mr. Schaefer earlier won a lawsuit in which a Maryland court ruled that two companies improperly sheltered profits from taxation in Maryland by shifting them to shell corporations in Delaware.

Further legislation is needed to close the tax shelter altogether, but suddenly you had the comptroller and the governor headed for a head-on collision.

Many faithful payers of taxes, individual and corporate, must wonder why the governor would allow high rollers to skate. Herewith some possible explanations:

We can afford a little corporate welfare. Tax receipts are flowing handsomely. Even with ominous budget deficits rolling out into the future, Maryland can afford to see $55 million more flowing to corporations hiding in Delaware. We're an even wealthier state than we thought.

It's an economic development thing. Perhaps a loophole or two must be allowed in the effort to make Maryland an even more business-friendly state. The state, lapsing into some odd version of salesmanship, says Maryland is not business-friendly. Mr. Schaefer says we are. Go figure.

Turnabout is fair play. Will those corporations that save millions via the Delaware loophole be grateful? Will they reward the governor by generously supporting his re-election campaign?

It's the dangerous thing somewhat altered: At the end of the last General Assembly session, Mr. Ehrlich urged businessmen to get dangerous. According to my handy-dandy computer-based thesaurus, dangerous means risky, dodgy, hazardous, precarious, treacherous and perilous.

Mr. Ehrlich seemed to be saying that businessmen should put the hurts on legislators who don't vote a strong business line. The CEOs should make campaign contributions to the political opponents of those who don't vote against higher taxes, against a living wage, against requiring businesses to pay for health insurance, against closing the tax loophole. Stuff like that.

It seems unlikely, but maybe the business guys were listening and figured out how to play the game at a very high level. Chambers of commerce in other states are going after candidates who work against their interests. So maybe businesses in Maryland accepted the governor's challenge and asked him to keep the loophole open. Maybe there was just the hint of a willingness to support a Democrat in 2006.

Actually, that would be too dangerous. Payback from a powerful executive would be ugly. Moreover, both leading Democratic challengers, Baltimore Mayor Martin O'Malley and Montgomery County Executive Douglas M. Duncan, probably would try to close the loopholes. Democrats love taxes, you know. So, go with the gratitude thing.

Of course, that doesn't account for the fuming comptroller. It's risky to leave him twisting in the wind. Could be perilous or even dodgy. Definitely dangerous.

C. Fraser Smith is news director for WYPR-FM. His column appears Sundays.

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