Maryland Should Lower Tax Rates to Attract More Businesses

On May 31, 2018, the Tax Foundation published a study by Katherine Loughead titled “State and Local Individual Income Tax Collections Per Capita.” According to the study, Maryland has the third highest state and local individual income tax collection per capita in the country. Moreover, Maryland collects significantly more than its neighboring states. At bottom, Maryland should lower its state and local tax rates in order to attract more businesses and residents, increasing overall tax revenue and improving its long-term fiscal health.

On average, Maryland collected $2,200 from each resident in fiscal year 2015 (the most recent data available), ranking behind only New York ($2,789) and Connecticut ($2,279), placing it significantly above the national average of $1,144. Importantly, Maryland’s state and local individual income tax collection is much higher than the amounts collected by its neighboring states. Delaware is ranked 12^th with a per capita individual income collection of $1,267. Pennsylvania is ranked 11^th with a per capita individual income collection of $1,276. Virginia is ranked 9^th with a per capita individual income collection of $1,420. And West Virginia is ranked 26^th with a per capita individual income collection of $1,048.

Free State Foundation scholars have contended that relatively high state and local tax rates in Maryland can lead to businesses and residents migrating across state lines. By lowering state and local tax rates, Maryland would incentivize existing businesses to stay in state and encourage new entrepreneurs to open up shop in Maryland. Moreover, by some measures, Maryland has suffered from a poor fiscal climate for years.

Notably, Maryland’s $20 billion in unfunded liabilities remain a problem. Attracting additional businesses and residents to Maryland with lower tax rates would expand the state’s tax base and increase overall tax revenue. With a reduction in discretionary spending, or even holding discretionary spending constant overtime, additional tax revenue should help reduce Maryland’s unfunded liabilities in the long-run.

New Jersey is ranked 8^th with a per capita individual income collection of $1,479 but for years state leaders have attempted to increase the state and local income tax burden even more. New Jersey Governor Phil Murphy stated during his campaign that he would raise income tax rates for residents earning over $1 million a year, also known as the “millionaire’s tax.” But now that the proposal is on the table, state leaders are balking. Former New Jersey Governor Chris Christie vetoed an increase in the millionaire’s tax rate and has stated in the past that “if you tax them, they will leave.” Moreover, this week, the CEO of Mimeo John Delbridge announced that the company would be leaving New Jersey because “frankly the tax rates are very expensive.”

Some New Jersey leaders argue that the recently-passed federal tax legislation, which limited the state and local tax (SALT) deduction, punished wealthy taxpayers, therefore making it more difficult to raise state and local income tax rates on wealthy earners. As I stated in a December 2017 blog:

“SALT” is the acronym referring to the deduction for individuals who itemize certain tax payments to state and local governments on their federal tax returns. SALT is essentially a wealth transfer from residents in states with relatively low tax rates to residents in states with relatively high tax rates. Additionally, because residents who live in states with relatively high tax rates benefit disproportionately more from the SALT deduction, they have less incentive than they otherwise would to hold their public officials accountable regarding tax and spending policies.

Now that wealthy New Jersey taxpayers have a limit on the state and local taxes they can deduct from their federal tax return, they have a greater incentive to hold their public officials accountable and to make sure state and local tax rates do not increase. Therefore, it is not wrong to say that the limit on the SALT deduction has made it more difficult for New Jersey and other states to raise tax rates on wealthy residents. However, the limit on the SALT deduction should create greater fiscal responsibility and ultimately benefit taxpayers in the long-run.

Because Maryland has the third highest state and local individual income tax collection per capita, Maryland policymakers at the state and local level should understand how future tax and spending policies will impact residents. Governor Larry Hogan has made it his mission to improve Maryland’s regulatory and tax climate during his first term. His reforms created significant improvements to Maryland’s business climate, according to a 2017 CNBC study. With the 2018 elections fast-approaching, Maryland’s citizens should pay attention to which candidates pledge to reduce Maryland’s state and local tax burden as part of focused efforts to retain Maryland’s current residents and to attract more businesses to the state.