Friday, October 19, 2012

Maryland's Heavy Business Tax Burden Keeps Investment and Jobs Down

Just as businesses compete with other businesses for customers, states compete with other states for new businesses and jobs. By creating economic climates favorable to start-ups and business migrations, states benefit from increased investment and job growth.

But as detailed in the Tax Foundation's 2012 Business Tax Climate Index, Maryland remains one of the nation's least economically competitive states. The Index places Maryland at number 42. That is, the Index designates Maryland's system of business taxes as the 8th worst state in terms of its fostering a favorable business and jobs climate. 

Interstate tax competition, including business tax competition, is especially important in difficult economic times, when job creation is most urgently needed. As the State Business Tax Climate Index explains, "the Index is an important and useful tool for policymakers who want to make their states’ tax systems welcoming to business." Maryland's lawmakers need to take the Index's findings seriously: the state is long overdue for significant tax reforms improve its attractiveness to increased financial investment and job creators.

The State Business Tax Climate Index is based on five weighted components: state corporate taxes, state individual income taxes, state sales taxes, state unemployment taxes, and state property taxes.

Overall, Maryland ranks 42nd in the Index. Maryland's bottom-tier status owes in significant part to the poor economic impact of the state's individual income tax and unemployment insurance tax systems. Maryland's property tax system is also a serious cause of concern.

In terms of state individual income taxes, the Index puts Maryland near the cellar, at 46th place. State individual income taxes have a critically important impact on a given state's economic competitiveness. According to the Index, "a significant number of businesses, including sole proprietorships, partnerships and S-corporations, report their income through the individual income tax code." Also, "[t]axes can have significant impact on an individual's decision to become a self-employed entrepreneur." In addition, heavy state income tax burdens reduce the quantity and the quality of the labor force and raises costs for doing business.

The Index points to the individual income tax burdens resulting from states, like Maryland, that permit income taxes at the municipal and county levels. By calculating an average effective local option income tax rate for such states, the Index concludes that "Maryland has the highest average effective local rate, at 1.56 percent of state personal income." Maryland's poor individual income tax rating is also attributed to its imposing a marriage penalty on taxpayers filing jointly as well as its double taxation of capital income – such as ordinary dividends, interest, and cap gains – for which businesses have already paid taxes.

Maryland also has one of the worst overall scores for its unemployment insurance tax system. It ranks 45th in this category. These taxes are paid by employers to finance benefits for recently unemployed workers. Competitive states have "rate structures with low minimum and maximum rates and a wage base at the federal level," along with simpler charging methods. Maryland, however, is among states with the highest minimum tax rates (2.2%) and the highest maximum tax rates (13.5%).

And when it comes to property taxes, Maryland makes a poor showing once more. Out of 50 states, Maryland has the 40th most economically competitive property tax system. For Maryland, this low score results substantially from its wide state property tax base. The state's property taxes include: inventory taxes, real estate transfer taxes, estate taxes, and inheritance taxes.

Keep in mind that neighboring states all fare significantly better than Maryland in the Index's scoring: Delaware (12th), Pennsylvania (19th), West Virginia (23rd), and Virginia (26th). And the consequences of Maryland's business unfriendliness have already been observed. Look no further than Maryland Public Policy Institute's Larry Hogan's May 30, 2012 article, "How Maryland's Tax Rates Are Driving Jobs to Virginia." Citing another Tax Foundation study, Hogan wrote:
Maryland accounted for the largest taxpayer exodus of any state in the region between 2007 and 2010, with a net migration resulting in 31,000 residents having left the state. Where did most of them go? Virginia. Virginia is now home to nearly 11,500 former Marylanders—a shift of $390 million from the tax rolls of one state to another.
Maryland's dismal Index ranking should be another wake-up call to officials and citizens in Maryland. There is urgent need for tax reforms to make the state's economic atmosphere more conducive to investment and job growth. For Maryland to continue on its current path means losing economic opportunities and jobs to neighboring states.