A recent survey of small businesses conducted by Thumbtack.com and the Kaufman Foundation graded states on the basis of business friendliness and Maryland received a C- overall. Previous Free State Foundation blogs have discussed Maryland’s tax climate and the subsequent impact on interstate migration as well as the difficulty Maryland has remaining competitive in relation to other states due to its heavy business tax burden. But Maryland not only received a D+ for its heavy tax burden, it also received a D+ for its lack of business friendliness in the separate categories of regulations, licensing, environmental requirements, and zoning requirements.
It is very important that Maryland improve in these categories to attract more businesses and maintain a healthy tax base in order to continue to provide essential government services in the most efficient manner.
Neighboring states, Delaware and West Virginia, were not ranked because they did not have enough survey respondents to score, but Pennsylvania, Virginia, and the District of Columbia received grades of D, A+, and A-, respectively. The Tax Foundation’s latest report on state business tax climate suggests that Maryland is 41st, which is fairly consistent with the survey. As you can see below, Maryland’s neighboring states all rank higher.
While Maryland may be collecting a significant amount of taxes, it could do so in a way that does not discourage (as much) business and entrepreneurial activities.
When attempting to maximize tax revenue, economists would say the approach should be to keep the tax rate low and the tax base broad. Broadening the tax base can occur without even making changes to the tax code if other changes are implemented which reduce the costs of doing business in Maryland. Lessening the burden of regulations, and the costs of licenses and entry fees, will broaden the base by attracting more businesses, either from other states or new start-ups. Lower regulatory barriers in conjunction with lower tax rates will likely generate more revenue for the state than simply increasing the rates, because there will be more economic activity that the state can tax. Not to mention, we have seen how the status quo of Maryland’s business climate has negatively affected the migration patterns of individuals and businesses.
It is not just businesses possibly migrating into Virginia or other neighboring states that should be of concern. Businesses that remain in Maryland could be operating more efficiently if regulatory costs were lower.
Unnecessary regulatory costs increase the prices of goods and services, pushing some consumers out of the market and lowering the taxable profits of Maryland businesses. The cost of complying with regulatory burdens means businesses will have less money to put towards innovation, investment, or possibly new jobs - all of which could lead to more tax revenue for the state. In other words, broadening the tax base does not just mean lowering tax rates to incentivize businesses to move to or originate in Maryland. It means reducing all the regulatory burdens that current Maryland businesses must incur.