2 divisive tax bills, one good, one not

November 09, 2007|By JAY HANCOCK

Maryland is having another one of those family feuds about business taxes and regulation that outsiders find hard to follow.

"MBNA! Business climate!" "Delaware! Loopholes!" "Marriott!" "Blackmail!" "Fair share!" "Confiscation!"

A small state with a liberal legislature, big corporations and neighbors with lower taxes and less regulation is going to have this conversation every five years or so, and it's healthy. Unfortunately, the discussion has a tendency to bulldoze nuances and polarize interest groups no matter what measure is under consideration.

I've got news for the conservative Maryland Chamber of Commerce: There are such things as just business taxes and good regulation. And here's a bombshell for the liberal Progressive Maryland: It is entirely possible to advocate and pass laws hurting not just business but all of Maryland.

The trick is figuring which is which.

The "combined reporting" tax measure - which still may have a chance in Annapolis even though the Senate rejected it last night - is the wave of the future and ought to be approved.

Gov. Martin O'Malley's proposed top personal-income bracket of 6.5 percent is an anti-business tax in disguise and should be reduced. In any event, a little more subtlety would be a good thing.

Much of the South still mourns the Confederacy. Here in Maryland, always more mercantile than the rest of our Southern brethren, the great lost cause is the credit-card company that got away.

Every time the General Assembly threatens something that displeases companies, they dredge up the tale of MBNA, Maryland usury laws and the business that rebuilt downtown Wilmington, Del.

Maryland Bank NA was then a credit-card affiliate of Maryland National Bank that wanted to charge membership fees, which Maryland outlawed, and raise interest rates beyond what state law allowed.

Letting MBNA escape to Wilmington with what turned out to be thousands of jobs ranks high on the list of Maryland mistakes.

Prohibiting companies from recovering their costs is not a great way to foster a positive economy. That's what usury laws did by limiting card rates to 18 percent on the first $700 of a card balance and 12 percent on the remainder.

Remember, it was 1981 and 1982, when inflation was nuts. Banks were paying as much as 18 percent to attract deposits and charging blue-chip corporate customers 20 percent on loans. Nobody knew how high rates would go. Gandhi himself, were he running a credit-card company, would have moved to Delaware, which allowed higher rates.

But waving the MBNA flag over proposals for combined corporate tax reporting is a bit much. Combined reporting would close loopholes by requiring multistate corporations to file a Maryland income-tax return reflecting all their economic activity in the state. It would prevent companies from making tax-deductible payments to out-of-state affiliates or otherwise gaming the system.

In short, it would make Maryland's corporate income tax, which is supposed to levy 7 percent on in-state income, mean what it says. (Gov. Martin O'Malley wants to raise it to 8 percent, which businesses seem to be much less exercised about.)

And then there's hotel giant Marriott International making noises about "adjusting operations" if combined reporting becomes law. Marriott gets its own chapter in the annals of Maryland business relations. In the 1990s it threatened to move its headquarters from Bethesda to Virginia if it didn't get $44 million in potential corporate welfare.

The emoluments turned out to be less because Marriott didn't add as many jobs as it had projected. But its head-fakes to other states, on grounds far less serious than what repelled MBNA, are getting old.

Combined reporting isn't unusual, arcane or nefarious, although it would require big changes at the state comptroller's office. Even though Maryland's Senate rejected it, there were indications last night that the House might revive it.

More than a dozen states already require combined reporting, and others are considering it. Until recently the Council on State Taxation, the big-business tax lobby, was neutral on combined reporting, although it recently decided to oppose it.

Some corporations like it. "Constellation Energy believes that for affiliated companies, the amount of taxable income that is earned within a state is more properly measured on a combined reporting status," reads a handout the giant energy company distributed to legislators. "We also believe combined reporting would simplify the tax filing process. ... "

On the other hand, raising Maryland's top personal income tax rate to 6.5 percent, as O'Malley has also proposed, is not a good idea. Most Maryland businesses are taxed at personal rates because they're organized as partnerships or S corporations. Add on local "piggyback" taxes and they'll be paying nearly 10 percent in state income tax alone.

That really might send a company and potential jobs to Delaware (top personal bracket, 5.95 percent). Let's keep talking.


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