Low-tax ranking bit of a stretch

August 01, 2008|By JAY HANCOCK

The consulting firm KPMG planted hypothetical companies in different places and concluded that metro Baltimore boasts the second-lowest business taxes of any major U.S. city.

I asked real Baltimore business people paying actual taxes whether this sounded on the up-and-up.

"What dope are they smoking?" asked Bert Wilson of South River Consulting.

"It's hard to believe," said Robert O.C. Worcester of Maryland Business for Responsive Government.

"Ha ha ha. I don't have their data in front of me, but I find it extremely hard to believe," said Scott MacDonald of Maryland Thermoform Corp.

KPMG, we're having trouble replicating the results outside the lab. Maybe that's because the study is blemished with wrong assumptions and unrealistic scenarios.

In fairness, KPMG doesn't claim its paper is the last word on global business taxes. It looked only at major metropolitan areas, mainly from the point of view of international companies seeking to put big operations overseas. Like all such rankings, the study oversimplifies and makes broad assumptions.

The research is good publicity for Baltimore. But Mayor Sheila Dixon and Gov. Martin O'Malley need to think twice before pasting it on their fridges or blizzarding us with news releases.

One big gap is that the study considered only one type of company - the so-called "C" corporation that gives legal form to most of the Fortune 500 and other big business. But most companies, including many quite large ones, are organized as partnerships, limited liability corporations or "S" corporations. They are taxed at the personal rates of the owners.

In case you hadn't noticed, Maryland's personal income tax rates just headed north. The top rate (the bracket that will apply to much business income) just went to 5.5 percent. Add Maryland's "piggyback" tax for localities and you get what are nearly the highest personal income tax rates in the country.

When you consider that those are the taxes being paid by small companies that generate the most job growth, that is not a competitive business tax.

The KPMG study accounted for the recent increase in Maryland's corporate income tax rate from 7 percent to 8.25 percent, according to firm spokesman Ichiro Kawasaki.

But it didn't include the recent pop in Maryland's sales tax. Many businesses pay sales tax, and KPMG was careful to put it in the study. Even so, the firm put metro Baltimore down for a 5 percent sales tax - not the 6 percent that went into effect Jan. 3. (Researchers looked at tax rates as of Jan. 1, said KPMG corporate relocation consultant Hartley Powell.)

Nor did the study include the city of Baltimore's cell phone tax.

And - this explains a lot - KPMG used industrial real estate taxes in Cecil and Harford counties as representative of metro Baltimore.

Largely rural Harford and Cecil may be the first places somebody looks in Maryland to put a warehouse or plant. But their property taxes are substantially below those of Baltimore County and less than half those of Baltimore City. They're hardly typical.

In the overall survey, metro Baltimore ("total tax index": 92.1) only narrowly beat out competitors such as Atlanta (95.1), Tampa (98.1) and Phoenix (98.1). (Melbourne, Australia, was 95.3, and Toronto was 85.4.) A more sensitive study might have put Baltimore in the middle of the field instead of ahead of every U.S. metro area except San Juan, Puerto Rico.

But even with revisions, Baltimore would still probably beat places such as Philadelphia and Boston and cream Yokohama and Paris. (Paris' total tax index: 190.7!)

And however Baltimore ranks, the taxes here pay for good roads and excellent universities that churn out great workers. Believe it or not, many companies are more interested in them than rock-bottom government revenue.

Even so, taxes are an important part of corporate costs. Their recent ascent has added a burden to doing business in Maryland, which competes vigorously with Delaware, Pennsylvania and Virginia to recruit and keep companies.

Baltimore businesses, you're not hallucinating. Taxes here aren't as low as the KPMG study makes them look. With future revenue again thrown into doubt by a weak economy, politicians again will be looking for ways to balance budgets. We don't need them using KPMG's work to suggest that Maryland companies can tolerate even higher taxes. They need to cut costs this time.

jay.hancock@baltsun.com

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