Corporate tax cut, tax hike get mixed reviews in Senate committee

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Testifying in support of a corporate tax cut last week were, from left at table, sponsor Sen. Andrew Serafini, Pam Kasemeyer for the Tech Council of Maryland and John Rausch of Vision Technologies. Screenshot from the hearing

By Diane Rey

For Maryland Reporter

Vision Technologies is just the kind of company Maryland economic development folks would want to celebrate.

The IT integrator started in a room above the CEO’s garage in 2000 and ended that first year with a revenue of $800,000 and 10 employees, according to Vision’s website.

Fast forward and the company has grown 33% in the last 3 years. They’re projecting $130 million in revenue for 2019 and have a workforce of 500 employees.

Now they’re looking to move out of their headquarters in Glen Burnie. Will they stay in Maryland? The answer may depend on what happens in Annapolis.

“We see companies choosing to locate elsewhere due to constraints and taxes,” said John Rausch, the company’s vice president of corporate sales.

He testified Wednesday (Jan. 30) before the Senate Budget and Taxation Committee in support of SB37, which would lower the corporate tax rate from the current 8.25%. The bill, sponsored by Sen. Andrew Serafini, R-Washington County, calls for the reduction to be phased in, with the rate dropping to 8% for tax year 2019, 7.5% for tax year 2020, and 7.0% for tax year 2021 and beyond.

This was one of the top recommendations to legislative leaders by the Augustine Commission on Maryland Economic Development and Business Climate three years ago, but never implemented.

Rausch pointed to neighboring Virginia, where the corporate tax rate is 6%.

“An 8.25% tax rate puts Maryland in the highest 25% of all states – 37.5% higher than Virginia. That’s where a lot of our competition comes from… It’s detrimental to us winning new work,” he said.

Impact on revenue debated

James McKitrick, senior policy analyst for the Maryland Chamber of Commerce, also testified in support of the bill, saying Maryland lost out to its neighbor when Amazon decided to locate its second headquarters in Northern Virginia rather than Montgomery County.

“Maryland is just not competitive enough…Rates matter,” he said.

Gene Burner, president of the Manufacturers’ Alliance of Maryland, also argued for the bill, saying recent changes in federal tax law have raised the effective tax rate by eliminating certain deductions. “By passing this bill, you’d be revenue neutral,” he said.

A left-leaning think tank disagreed, however. Speaking out against the bill was Maryland Center on Economic Policy Executive Director Benjamin Orr.

He said Maryland can’t afford to lose any revenue that could be used to improve health care, education and transportation.

“Marylanders of color would bear the greatest brunt of that cost,” he said.

Combined reporting also proposed

How corporate taxes are computed and reported in Maryland is also up for debate this session.

The Small Business Fairness Act, SB76,  would require retail and restaurant chains with locations in Maryland to compute Maryland taxable income using a combined reporting method in which corporate income is apportioned among the states in which they do business. It is limited to those two industries as the bill is currently written.

How exactly the new method would play out is debated, with opponents saying it won’t generate as much revenue as expected and would have a chilling effect on business growth. But state legislative analysts estimate the proposal would generate $55-$60 million annually after the first year it is put in place.

“This bill is about improving tax fairness and competitiveness for small businesses in Maryland,” said Sen. Ron Young, D-Frederick County, Wednesday (Jan, 30) in his testimony before the Senate Budget and Taxation Committee. “Half the country has combined reporting,” he said.

Besides Young, the bill is being sponsored by Sens. Jill Carter, D-Baltimore City, Jim Rosapepe ,D-Prince George’s and Anne Arundel counties, and Shirley Nathan-Pulliam, D-Baltimore City and Baltimore County.

Young said the change would generate $50 million in new state revenue “at no expense to any Maryland companies and no expense to taxpayers … It’s just foolish to let $50 million lay on the table and go to out of state companies.”

Orr said the Maryland Center on Economic Policy supports the bill — with amendments that would expand coverage to all industries, not just restaurant and retail chains, and include parent companies and subsidiaries.

“These are tax loopholes … It allows large competitors to take unfair advantage,” he said.

McKitrick said the Maryland Chamber of Commerce is against the bill.

He said the 2015 Augustine Commission report on improving Maryland’s economic climate made it clear: “We need to stop hovering the specter of combined reporting over businesses who operate in Maryland.”

Combined reporting has been repeatedly introduced by various sponsors in various forms over the past decade. Last year, Young’s bill died in committee.  

Combined reporting raises concern for business groups

David Sawyer, tax counsel for the Council On State Taxation, took issue with the amount of money proponents said the bill would raise.

“Studies have shown combined reporting is absolutely no silver bullet. It’s not a guaranteed revenue raiser,” he said.

Combined reporting, along with Maryland’s higher corporate tax rate, “makes the situation volatile,” he said. He also called it “discriminatory” to single out specific industries. “It arbitrarily picks winners and losers.”

Melvin Thompson, senior vice president for government affairs for the Restaurant Association of Maryland, also decried the legislation’s narrow targeting.

He used the Clyde’s Restaurant Group that owns 13 restaurants in the Washington metro area, with four in Maryland, as an example, saying combined reporting would cost them an extra $100,000 a year because income from their locations in Virginia and Washington D.C. would be factored into their Maryland taxes.

“It would discourage other restaurant groups from expanding into Maryland,” he said.

Maddy Voytek, legislative and membership director at the Maryland Retailers Association, agreed.

When it comes to attracting more businesses to Maryland, “This bill would be a step in the opposite direction,” she said.