Old fears give tax loophole new life

November 08, 2007|By DAN RODRICKS

This year marks the 25th anniversary of what many corporate executives, the politicians who cater to them and some professional journalists like to present as Exhibit No. 1 in their case that Maryland is an anti-business state.

The events of 1982 were cited again this week as the special session of the state General Assembly grappled with taxes and some sorry wimps on a certain Senate committee refused to close a multimillion-dollar loophole in Maryland corporate tax law.

(We don't want to get the suits upset, see. We don't want them taking their companies out of state. We don't want them refusing to write checks for our re-election campaigns!)

Every time someone suggests closing a tax loophole or adding a layer of regulation, you can count on a suit to raise the idea of widespread corporate exodus.

In testimony the other day, a vice president of the very profitable Bethesda-based Marriott Corp. suggested that the company would "adjust operations" if the General Assembly closed the corporate tax loophole in question. "We are not threatening to move," Debbie M. Harrison added, allowing everyone to breathe a sigh of relief.

And then there was this, from a Sun article: "Many lawmakers also remember when credit card giant MBNA Corp., once a subsidiary of a Baltimore-based bank, left for Delaware in 1982 after the legislature refused to lift caps on the interest rates lenders could charge."

Ah, yes, 1982.

Ronald Reagan was president. Harry Hughes was governor of Maryland. Steve Sachs was attorney general and one of the best friends the state's consumers ever had.

The age of the credit card was about to kick into high gear. Credit card companies and banks were getting together to get plastic into the hands of as many people as possible, no matter their ability to repay debts, and few, if any, legislators were willing to fight it. Most just saw it as the way of all things for the future. (I guess they were correct, too: Since 1989, credit card debt has tripled in the United States, to more than $700 billion.)

Credit card companies wanted to charge higher and higher interest rates as well as annual fees. In Maryland, Sachs took a position against that, as did the General Assembly.

This courageous stand against modern usury sent the credit card companies packing to Delaware - or so we were told - and ever since, the suits have been telling us how the climate in Maryland is so-god-awfully anti-business.

They cling to the story of 1982 because they have little else on which to hang their case. (Not even the "anti-business" Wal-Mart health insurance measure - supported by nearly 80 percent of Marylanders in a 2006 Washington Post poll - kept that company from expanding operations here.)

I'm always amused to see the reference to 1982 and not surprised to see that it came up again this week.

A Senate committee of the General Assembly rejected an O'Malley administration proposal to close a corporate tax loophole.

The proposal called for the adoption of "combined reporting," a change meant to prevent large companies that do business in Maryland from hiding profits in subsidiaries elsewhere. Twenty-two other states have adopted such a change, but Maryland remains weak-kneed, even after state Comptroller Peter Franchot reported that nearly half of Maryland's largest for-profit companies did not pay any income taxes in 2005 - zero.

The combined-reporting measure would have straightened this out.

"Maryland's corporate tax has remained between 15 and 40 percent below the national average throughout the past 25 years," Matthew Gardner, executive director of the nonprofit Institute on Taxation and Economic Policy, told the legislature last week.

"A decline of the corporate taxes paid by the biggest, most profitable companies inevitably means that taxes paid by smaller businesses and taxes paid directly by individuals must make up a bigger share of the pie."

To prevent multistate companies from using income-shifting strategies to avoid corporate taxes, Gardner's group and others supported the adoption of combined reporting as "a way of closing the barn door" on loopholes. It would require a multistate company to combine the profits of all its subsidiaries, no matter where they are, in computing state taxes.

Unlike the politicians in the legislature, Gardner is generally unimpressed by doomsday predictions of economic damage from such relatively minor corporate tax changes.

"Serious economic analyses ... find little or no relationship between tax levels and economic outcomes," he says, adding that state and local taxes amount to only a fraction of the costs of doing business.

Far more important than taxes are the available work force, infrastructure, transportation, housing, schools, quality of life - the stuff that taxes pay for. "By and large, business leaders in Maryland know that an effective public sector can improve their bottom lines," he says.

Gardner likes this quote from self-made billionaire and New York Mayor Michael Bloomberg: "Any company that makes a decision as to where they are going to be based on the tax rate is a company that won't be around very long. If you're down to that incremental margin, you don't have a business."

Doesn't matter. The loopholes remain. Some corporate vice president talks about "adjusting operations," some lobbyist mentions 1982, and our fearless leaders fold like a futon.

dan.rodricks@baltsun.com

Find Dan Rodricks' column archive and blog at baltimoresun.com/rodricks

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