The news that a complex tax law change known as "combined reporting" could have resulted in $170 million in additional payments from businesses into Maryland's coffers if it had been in effect in 2006 is bound to reignite a familiar debate in Annapolis next year, with progressive groups on one side and the Chamber of Commerce on the other.
The two sides have been duking it out over this issue for years, with proponents of combined reporting insisting it ensures that businesses pay their fair share and are unable to hide profits in other states, and opponents saying it would be a logistical nightmare. Adding fuel to the fire, Maryland is in the midst of a deep budget crisis. As much as $2 billion may have to be cut from the budget next year, with the effects likely to hit government workers and those who depend on state services. Meanwhile, the state is struggling to emerge from the recession, and the chamber is already staking out the position that combined reporting would hurt businesses when they're most vulnerable.
The preliminary report from Comptroller Peter Franchot's office to the Maryland Business Tax Reform Commission does provide sufficient grounds to keep the debate over combined reporting alive. But the way the debate is being framed is the wrong way to look at the issue. It's not a matter of whether Maryland can score some quick cash to help with its budget problems on the backs of faceless, interstate corporations, and it's not a matter of whether the General Assembly is anti-business. It's a matter of designing a corporate tax structure that's fairer and that makes the state less susceptible to wild rises and falls in revenue with each change in the economy.
The $170 million figure comes from an analysis of 2006 tax data. That's not a huge number in the context of a $13 billion budget, but it is a fairly big swing in the corporate tax, which at the time was about $790 million a year.
Does that make combined reporting "anti-business"? Not exactly. The report found that combined reporting produced winners and losers in the business community. About half of the businesses in the state would have paid less under combined reporting rules, and the heaviest burden would have fallen on the largest companies. That's what makes the chamber's reflexive opposition so peculiar; though a handful of big companies would pay more, many others would benefit. It would seem that Maryland's small-business owners would have as big a stake in exploring this idea as progressive groups and labor unions do.
But the $170 million figure doesn't exactly make combined reporting a panacea for the groups seeking to soften the effect of state budget cuts, either. As the state's analysts pointed out, the figures they analyzed came from a year when the economy was expanding, not in one when the state is struggling to emerge from the worst downturn since the Great Depression. There's no guarantee that if the rules were applied now they would produce a windfall.
Maryland's tax structure is now uncomfortably sensitive to the swings of the economy. During boom times - such as the real estate bubble of 2005-2006 - the state posts huge surpluses that the government quickly spends, or in the case of the late '90s tech boom, gives back in a tax cut. When the economy - and particularly, the stock market - goes bust, as happened over the last 18 months, the income taxes on which the state depends for nearly a quarter of its revenue plummet.
It would be nice, before enacting a tax law change like combined reporting, to have a sense of how it would perform under varying economic circumstances in the hopes that we make the revenue structure more stable, not less. As fate would have it, we have just such an opportunity. The final report from the business tax reform commission isn't due until December 2011, giving Mr. Franchot's office time to see how the numbers would have played out during a recession and, we hope, a recovery.
Combined reporting isn't a radical idea - 23 states, including West Virginia and New York, employ it. And it might be a fairer way to measure economic activity and to divide the tax burden among businesses. But it should be approached with that goal in mind, not as a political battle between the little guy and big corporations.
