Business is bracing for jump in taxes

June 27, 2007|By Jay Hancock | Jay Hancock,Sun Columnist

David Edgerley may be the only business leader in Maryland who isn't worried that an impending tax increase will harm the state's economic climate.

"I don't have any information that there's a threat," Edgerley, Gov. Martin O'Malley's economic development secretary, said on the phone last week. "You're not hearing it from me."

That's a reason to worry even more.

Edgerley seems oblivious to what's obvious to many: As it addresses a budget gap of $1.5 billion, Annapolis again looks likely to demonstrate its talent for taxing companies ineptly or excessively.

Legalizing slot machines, if it happens, is likely to go only partway toward filling the budget hole. Business taxes being eyed probably include raising the corporate income tax; raising the sales tax from 5 percent to 6 percent; expanding the sales tax to apply to services such as architecture or law; and reversing a 10 percent cut in the personal income tax that was enacted a decade ago.

The personal income tax is also a business tax because sole proprietorships, partnerships and most corporations get taxed at personal rates. Raising it might be the single worst signal that the state could send. Expansion of the sales tax seems preferable, or increasing the corporate income tax rate.

"Maryland business should be very concerned about the impending tax increases," says James T. Brady, who held Edgerley's position when Democrat Parris N. Glendening was governor. "The attitude in Annapolis is that business tax increases carry minimal political risk for incumbent officeholders."

Brady was probably the most important proponent of the 1997 cut in the personal income tax.

But he broke with Glendening over the governor's opposition to a connector highway between Interstate 270 and Interstate 95 and other stances that Brady deemed anti-business. Brady became a Republican and headed Republican Robert L. Ehrlich Jr.'s transition team after Ehrlich was elected governor in 2002.

You don't have to be Republican or join the chamber of commerce, however, to be concerned about what will probably be a special, tax-raising session of the General Assembly this fall.

Maryland is heading in the same direction that it took 20 years ago. Just as the Reagan defense boom rendered the state fat, happy and oblivious in the 1980s, federal deficits and the homeland security boondoggle have made policymakers forget that we have a private sector.

In the 1980s, we got careless about over-strict business regulation, high taxes and keeping government costs under control, and the signs point to the same mistakes being made now.

Ehrlich, who fought the tax-raising instinct woven into the Democratic legislature's genome, is gone. O'Malley, who owes little to business and dismissed Aris Melissaratos, Ehrlich's popular economic development secretary, is in control. Nobody will be surprised if O'Malley and legislative leaders present the special session with a precooked deal that raises business taxes too high in the wrong places.

"You don't want to put yourself in a situation where you are at a competitive disadvantage to an adjoining state," says Donald Fry, president of the Greater Baltimore Committee, a liberal-leaning coalition of companies and not-for-profit groups.

"It certainly appears as though the legislature is moving toward increased taxes," Fry says, and business "is seen by some to be an easy target."

True, it's early. "I can't predict the future," says Edgerley, who adds that he's concerned about maintaining Maryland's strong business climate.

But let's acknowledge the risk of bad business taxes before things go further.

"Assuming we're having this discussion, it's important for policymakers to at least ask the question of what effect various decisions will have on the competitiveness of various industry sectors," said David S. Iannucci, economic development director in Baltimore County and state economic development chief in Glendening's second term.

Rocky Worcester, head of Maryland Business for Responsive Government, describes his concerns about Annapolis' approach less delicately: "They'll probably do it with a meat ax. And a dull one."

Sure as the U.S. government owes $9 trillion in debt, the federal money showering Maryland will someday dry up. We'll be in the same place as in the early 1990s, with rising unemployment and zero job creation, and we'll remember the importance of the private sector.

Maryland may indeed need higher tax revenue to finance the Thornton Commission's education plan or other measures. But there are judicious and injudicious ways to do it. (And the state can simultaneously cut tens of millions in costs.)

An administration that won't even acknowledge the potential for mistakes in a state with a long history of them, however, doesn't seem likely to be judicious.

jay.hancock@baltsun.com

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