By Megan Poinski

Maryland’s economic prosperity and economic outlook are pretty middle-of-the-road when compared with other states, according to a new study, though analysts warn that high incomes of some Maryland residents may be disguising larger economic problems.

The study called Rich States, Poor States, put out by the American Legislative Exchange Council, is less pessimistic about Maryland’s economic climate than other reports, particularly the Tax Foundation which rates Maryland 44th in the nation.

Rich States, Poor States coverALEC is a nonpartisan group that favors free markets, limited government and federalism — generally positions take by Republican lawmakers. The report looks at several economic and policy factors in the 50 states. States are ranked by both economic prosperity, according to the factors defined by ALEC, and the economic outlook, according to ALEC’s principles. In the report released Wednesday afternoon, Maryland ranks 21st in both.

The organization favors low and flat rate income taxes, streamlined business regulations and taxes, and no requirements for workers to be unionized. States with larger tax burdens, higher minimum wage, and requirements for unionization received lower rankings in the study.

Study author Stephen Moore of the Wall Street Journal said that Maryland’s proximity to Washington, D.C. – and all of the highly paid government contractors and high-ranking federal officials who live in the state – may skew the results significantly.

“Maryland for years in this report has received far too good of a pass because of its elevated income levels,” Moore said.

The study looks at economic performance through items like personal income per capita, migration of people into and out of the state, and non-farm payroll employment.

Maryland ranks 21st largely because the state’s income and payroll employment are higher than the U.S. average. However, the state has lost about 96,000 residents between 2000 and 2009, putting it among the top 10 states to lose residents.

The report repeatedly decries Maryland’s “millionaires’ tax,” a surcharge on high incomes that expired last year.

Enacted in 2008, the “millionaires’ tax” taxed all net income above $1 million at a rate of 6.25%. The base tax rate for everything below $1 million was 5.5%.  The surcharge passed in 2008 to replace the sales tax on computer services that was to last only three years. While there was an effort by liberal lawmakers to make the higher tax rate permanent in the last General Assembly session, the bill did not advance past committee hearings.

According to the report, Maryland lost a third of its millionaires’ tax returns to the tax hike. Report authors said that the reason provided by analysts for the comptroller’s office – because fewer people made seven-figure salaries during the recession – were “misguided.” They cited a Bank of America-Merrill Lynch study stating that Maryland lost $1 billion in its net tax base because people moved to other states.

“It led even the liberal Governor Martin O’Malley to think, ‘Maybe we shouldn’t renew the millionaire’s tax,’” said study author Jonathan Williams, ALEC’s Tax & Fiscal Policy Director.

Karen Glenn Hood, a spokeswoman for Maryland’s Department of Business and Economic Development, said that while the study does take note of some potentially controversial practices, she maintains that there could easily be fewer millionaires because of the recession.

In the study, Maryland’s economic outlook is uneven.  This section of the report uses tax rates and business liabilities to determine a ranking. Maryland’s personal income tax rate of up to 8.55% is one of the highest in the nation, ranking 44th. It has relatively high corporate income taxes of up to 8.25%, it has an estate tax, and Maryland is not a right-to-work state – meaning that employees don’t have the option to reject required union membership.

However, the state ranks high for its low minimum wage of $7.25 an hour, which mirrors federal minimum wage. Debt service payments make up just 6% of tax revenues, which is the nation’s 7th lowest debt burden on taxes.

ALEC’s report appears to redeem Maryland from some negative reviews on its business friendliness.

Last year, the Tax Foundation put the state at the very bottom of ratings on business tax climate, ranking Maryland 44th. ALEC study authors said that their ranking is consistent with the Tax Foundation’s study, which concentrates solely on business issues. ALEC’s study also looks at individual and quality-of-life issues.

Hood said that most Marylanders do not pay the 8.55% tax rate cited by the study — that would only be paid by someone in the highest income bracket living in the area with the highest local taxes. She also disagrees with any study that says Maryland is not business friendly.

“Maryland is very friendly to business, and we’re working to make that more so,” she said.