I was having breakfast with a Maryland developer on the beachfront patio of a Florida country club 28 years ago when I learned that taxes have economic consequences. Between jobs in journalism, I was doing a newsletter for a new venture the man had set up in Florida.
Over breakfast, he told me that establishing residence in Florida – staying there at least six months and a day, which had to be well documented to the IRS – saved him $100,000 in Maryland taxes. Doing the math quickly in my head, meant my client earned over $1 million a year from his properties in Maryland.
That’s why business people like this man and many others move to the nine states with no income tax, particularly the warmer and more conservative ones like Florida and Texas. It is also why they move in even greater numbers from other high-tax states, such as New York, New Jersey, Massachusetts, and California.
That’s just anecdotal, some say. But these anecdotes are backed up with data that come from the IRS. In 2021, Maryland lost 27,000 residents who had filed 16,000 tax returns with an average income of $170,000. This was not just an aberration. Data shows the outflow of higher-income taxpayers from Maryland has been going on for years.
At the traditional breakfast unveiling his budget to legislators Gov. Wes. Moore talks to House Speaker Adrienne Jones and House Appropriations Committee Chair Ben Barnes. (Governor’s Office photo by Joe Andrucyk)
Higher taxes for higher incomes
So when Gov. Wes Moore announced that he was backing an increase in the state income tax for people making over $500,000 and an extra 1% on capital gains from the sale of stocks and property like real estate, that move ran counter to his goal of boosting Maryland’s lagging economic growth.
These high earners ought to pay their fair share, say advocates of higher taxes. What’s a fair share? The high earners probably own bigger homes with higher property taxes. They buy more expensive cars, boats, and luxury items that bring in more tax revenues. They are more likely to send their kids to private schools. They do not need the most expensive state services like Medicaid, the health insurance for the poor and disabled.
Many of these high-income folks have grown businesses over the years, working hard and taking lots of risks to become wealthy. They make decisions about where to start and grow enterprises that will make them more money. They may continue to run businesses in Maryland and even continue to be active in its civic life and charitable causes, as my developer client did. But they may also do the same in their adopted states, as he also did.
They are the kind of decision-makers that help the economy grow. That’s something Maryland sorely needs.
Lagging growth
“From 2017 to 2022, the national economy grew by 11%. But Maryland’s economy grew by just 3%,” said Moore. “If our economy had been growing more rapidly, we wouldn’t be dealing with this kind of historic budget crisis. If our economy had been growing more rapidly, we could better withstand changes in Washington. Economic growth must be our north star. It’s the key to every challenge we need to overcome.”
Why is Maryland’s economy growing slower than the nation’s and that of our neighbors Pennsylvania and Virginia?
In June of 2023, Moore created a Maryland Economic Council to study the slow economic growth and make recommendations to change it. Some of those recommendations have shown up in his budget and other announcements.
The council’s first report pointed to the state’s fractured and confusing economic development structure. There are dozens of competing agencies at the state and local levels, hard for businesses to figure out. In a follow-up report in October, the council said, “The state regulatory environment consistently ranks poorly, creating a burden for businesses, particularly small and disadvantaged ones, and contributing to Maryland’s low ranking in business friendliness.”
Regulatory burden
Amen to that. I’ve been running a small nonprofit news site MarylandReporter.com for 15 years. Because I got an A in accounting at Catonsville Community College and did 1,500 tax returns one tax season working at H&R Block decades ago, I do all of the accounting and taxes. You get used to all the paperwork, but then there are the additional demands — like the audit by the state Department of Labor to determine if my independent contractors who do most of the work for the website were actually independent contractors, not employees. Who knew the Labor Department had auditors? After taking some hours to comply with the many documents requested, I never heard back from the auditor, so I’m presuming everything is OK.
Then there was the new requirement to provide retirement savings programs for employees. It took some time just to verify that the company was exempt.
I’m sure other small businesses could offer similar examples of the well-meaning regulatory burden.
Moore is making efforts to modernize state government, smoothing and accelerating the permitting process. However, government streamlining takes time to change, particularly the laws that lead to regulations and the people who have been enforcing the same regulations for years.
Corporate taxes
Moore’s economic council also found that Maryland’s corporate tax policy was “uncompetitive.” The state had the 5th-highest corporate tax burden in the nation, and a corporate tax rate of 8.25%, higher than our competing states.
Moore made a slight bow to the council by proposing a tiny cut in the corporate income tax to 7.99%/ Yet he is also backing an unrecommended move to combined reporting for corporations, which takes into account a company’s national earnings. Twenty-eight states calculate corporate taxes this way, but Maryland’s business community has resisted the move for decades and still does.
Moore talks about economic growth, but his budget and tax proposals may hinder it.
For this column, I reached out to well-known longtime Maryland economist Anirban Basu for his read on Maryland’s slow growth.
“Maryland’s business climate is lacking,” Basu said. “High taxes, major jurisdictions with stagnant or declining populations, and burdensome regulations. The result has been an utter lack of private investment growth and accompanying employment gains. With the public sector increasingly cash-strapped, Maryland needs to change to become more inviting for private investment and business expansion. That transition has yet to occur, positioning Maryland’s economy for some very difficult times.”
Combined state and local income taxes for high earners in Maryland under Gov. Moore’s proposed tax increase compared to those taxes in neighboring states. (Illustration by the Tax Foundation)
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