Maryland Turning Eye To Tax Changes

Increased Revenue Sought Amid Recession And Cuts

August 12, 2009|By Laura Smitherman | Laura Smitherman,

Annapolis is girding for a debate on taxes as the traditional election season stance of "no new taxes" is being worn down by seemingly endless bouts of state budget-cutting.

Gov. Martin O'Malley has slashed spending as tax revenues have fallen and plans to announce about $470 million in further reductions this month. That has prompted some Maryland lawmakers and special-interest groups to suggest looking at the other side of the ledger to get more revenue flowing into state coffers.

One tax proposal that has drawn early backing from a powerful union is an accounting change aimed at preventing corporations from hiding profits in other states, a move that could generate $20 million to more than $150 million, according to varying estimates. In the past, O'Malley has supported such a change despite opposition from the business community, and aides say that he will look at the proposal again next year.

An Internet sales tax is another proposal that has drawn support. Backers say that such a tax would ensure fairness. Under the current system, some online purchases are subject to state sales tax and others are not. An Internet sales tax could generate an estimated $7.8 million a year, according to fiscal analysts.

Legislative leaders and the governor's aides say they have no plans to raise taxes when he and all 188 members of the General Assembly are up for re-election in November 2010. But proponents of the tax changes say that making corporations pay their fair share would be an attractive, populist message to take to voters, especially amid a recession precipitated by shenanigans on Wall Street.

"Certain districts don't have the same anti-tax sentiments as other districts," said Donald C. Fry, head of the Greater Baltimore Committee, an influential business group. "You're going to see a lot of people looking for alternatives, because there's a lot of angst that programs will be significantly impacted by the budget cuts."

The debate over the accounting change, known as combined reporting, is likely to peak this fall when Comptroller Peter Franchot's office releases a long-awaited report on how much the proposal could generate in additional tax revenue.

Efforts to raise tax revenue would surely become political fodder for the GOP. Republicans have criticized the fiscal leadership of O'Malley and the Democratic-led legislature, and many are warning that even if the Democrats do not approve tax increases next year, they will raise taxes to close deficits in future years.

"Here we go again," said House Minority Leader Anthony J. O'Donnell, a Southern Maryland Republican. "I want to say this very slowly for my tax-and-spend friends: 'Taxes bad.' "

Proponents of combined reporting say the change would prevent multistate corporations from shifting profits to states with lower or no corporate income tax.

The American Federation of State, County and Municipal Employees, which represents state workers, is supporting the change as an alternative to budget cuts.

O'Malley had included the proposal as part of a package of tax measures in the 2007 special legislative session, when it was rejected by a Senate committee. Lawmakers enacted $1.3 billion in other tax increases.

Among the corporations that have lined up against combined reporting are defense contractor Northrop Grumman Corp. and hotelier Marriott International Inc. Business groups say the change would drive major employers to surrounding states. While about half the states with corporate income or business taxes have implemented such a policy, Virginia and Pennsylvania have not.

House Speaker Michael E. Busch said emphatically that "there will be no new taxes" next year. He said he does not view combined reporting as a new tax but rather "a philosophical debate about the appropriate way to collect taxes."

States such as West Virginia have cut corporate tax rates when adopting combined reporting to neutralize arguments that the change was merely a money grab, but that strategy would likely weaken support for the change in budget-strapped Maryland. The budget must be cut by more than $1 billion to cover a projected shortfall next year, so collecting more taxes might become an attractive alternative.

"It would be some found revenue and reduce the need to make cuts to health care and state workers," said Sen. Paul G. Pinsky, a Prince George's County Democrat. "I don't see it as a tax increase. It's closing a loophole. This is revenue we should be getting."

The proposal could gain steam with the release of the report from Franchot's office, which required companies to file shadow income tax filings using combined reporting. Officials caution that the tax data being studied is from 2006, before the economy slid into recession, and that the proposal involves complex accounting issues that should be addressed carefully.

Franchot is "philosophically supportive of combined reporting, but he recognizes the devil is in the details," said spokesman Joseph Shapiro.

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