Monday, November 23, 2015

Maryland Needs to Improve Its Business Tax Climate Ranking

On November 17, 2015, the nonpartisan Tax Foundation released its 2016 State Business Tax Climate Index co-authored by Jared Walczak, Scott Drenkard, and Joseph Henchman. Unfortunately, in this annual ranking, Maryland has not improved since the 2015 index was released. Indeed, it actually fell one place to No. 41. This slippage drops the state into the Tax Foundation’s “10 Worst Business Tax Climates” grouping.

As I have written several times earlier this year, Maryland Governor Larry Hogan, since taking office, has taken some concrete steps to improve the state’s business climate reputation – and, thus, Maryland’s competitive position among the states. But the governor needs more cooperation from Maryland’s General Assembly to effect the changes that would improve Maryland’s overall business climate, including its tax climate.

In developing its state rankings, the Tax Foundation examines the following five factors (with Maryland’s rank indicated): Corporate Tax (19); Individual Income Tax (45); Sales Tax (8); Unemployment Insurance Tax (28); and Property Tax (42). Sadly, Maryland’s rank did not improve in any category from 2015 to 2016. As stated, its overall ranking fell from 40 to 41.

I do not claim that rankings such as this are perfect. I do not even claim that this particular study necessarily tells the complete story about Maryland’s “business tax climate.” But the Tax Foundation’s study surely is useful as an indication that changes are needed if Maryland is to improve its business tax climate. As the study states: “While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems, and provides a roadmap for improvement.” And with respect to the ten worst states in the ranking, the Tax Foundation says this of special relevance: “The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates.”

Of course, the rankings are not just for sport; they reflect real-world factors that influence businesses decisions that, in turn, impact jobs, investment, and a state’s overall economic prosperity. As the Tax Foundation recalled in this year’s study: “In 2010, Northrup Grumman chose to move its headquarters to Virginia over Maryland, citing the better business tax climate.” And as you can see from the map below, none of Maryland’s neighboring states rank in the “10 Worst Business Tax Climates.” Delaware, West Virginia, and Virginia, for example, rank significantly higher.

Aside from the Tax Foundation’s just-released business tax climate index ranking discussed here, Maryland recently has been ranked 37th in overall fiscal health; 39th in small business climate; and 45th in individual income tax structure in various studies. Again, it is not necessary to claim infallibility for each of the various studies from which the rankings were derived in order to maintain that there is much room for improvement with respect to Maryland’s business climate and its overall fiscal health.

In the past several months, with the research assistance of my Free State Foundation colleague Michael Horney, I have published a series of blogs addressing various aspects of Maryland’s regulatory and business climate and its budgetary and fiscal situation. For convenience sake, here they are:

Of course, Maryland’s national ranking in other important measures, such as education and household income, are higher. And its current unemployment ranking at 5.1% is right in the middle. So, the overall picture is by no means bleak.

But Governor Hogan is right to focus on improving Maryland’s business climate and its overall fiscal health. His actions this year to eliminate or reduce over 100 fees across state government, amounting to an estimated savings of approximately $51 million over five years, and to establish a commission to recommend elimination of unnecessary regulations are tangible steps in the right direction. Governor Hogan should continue on this course, and the legislature should support the change in direction towards a lower tax, more restrained spending, less regulatory environment that Maryland needs.