The Tax Foundation just released its 2013 State Business Tax Climate Index. The Index considers over 100 variables in state tax systems which affect the competitiveness of a state’s business environment. Unfortunately, Maryland was named among the 10 worst states with respect to its business tax climate, ranking 41st. This is a clear indication that there is significant room for improvement in Maryland's tax policies.
The Tax Climate Index describes some of the factors that contributed to Maryland’s consistently low rank. Problem sources include the individual income tax base, where statutory local rates in Maryland are often around 3 percent, while the effective local tax rate is approximately 1.5 percent. Other areas where Maryland’s tax structure ranked among the worst of the states are its property tax base and its unemployment insurance tax.
Maryland’s closest neighbors' business tax climates ranked much more favorably. Virginia ranked 26st, West Virginia ranked 23rd, Pennsylvania ranked 24th, and Delaware just missed the top ten by ranking 13th.
The Department of Labor reports that most mass job relocations are from one U.S. state to another, rather than to a foreign location. As such, if Maryland doesn't want to continue to lose private sector jobs to its neighbors, Maryland needs to remain competitive with its neighboring states and states in the same region that have more favorable tax climates.
Taxes are just one factor businesses consider when determining where to locate, and some give little weight to the impact of a state’s tax system on business success. However, states with tax systems that foster business competition also tend to attract new businesses, which generate economic and employment growth. Changes to the tax code can quickly improve a state’s business climate.
It would be wise for Maryland to consider the success of other states, particularly its high-ranking neighbors, and to implement changes which establish a climate that is more conducive to attracting and retaining private sector businesses.