State Court Strikes Down Maryland's Digital Ad Tax

On Monday, a Maryland judge held the nation's first – and, to date, only – digital ad tax, H.B. 732, to be both unconstitutional and inconsistent with federal legislation. The Free State statute, which became law only after a General Assembly override of Governor Larry Hogan's veto, imposed a sliding-scale levy on certain providers of digital advertising – but not on all, and not on traditional advertisers – that required large digital platforms (such as Google and Facebook) to remit up to 10 percent of annual gross revenues derived from "digital advertising services."

As Free State Foundation President Randolph May and I explained in "Maryland's Proposed Digital Advertising Tax Would Do Harm," a March 2020 blog post, H.B. 732 not only was vulnerable to legal challenges under the Permanent Internet Tax Freedom Act, the First Amendment, and the Commerce Clause, it also imposed higher prices on local businesses that depend on online advertising to reach their customers and, by direct extension, consumers themselves.

"Anne Arundel County Courthouse June 2005" by Wikipedia user Something Original

is licensed under CC BY-SA 3.0.

A group of impacted Comcast subsidiaries and Verizon Media (now Yahoo) sought judicial relief in the form of a Declaratory Judgment in April 2021. Yesterday, Judge Alison L. Asti of the Anne Arundel County Circuit Court, ruling from the bench, granted their Motion for Summary Judgment.

As expected, Judge Asti reportedly found that H.B. 732 impermissibly interferes with interstate commerce, thereby implicating the Commerce Clause; runs afoul of the Permanent Internet Tax Freedom Act's prohibition on discriminatory taxes; and, because it is "not viewpoint neutral," violates the First Amendment.

Comcast and Verizon Media are not the only ones to have challenged Maryland's digital ad tax in court. As I noted in a contemporaneous post to the FSF Blog, a group of trade associations filed a Complaint for Injunctive and Declaratory Relief with the U.S. District Court of Maryland Northern Division on February 18, 2021. Oral arguments on the parties' motions for summary judgment are scheduled to take place at the end of next month.

Maryland's "Connect Maryland" Broadband Initiative

 Maryland Governor Larry Hogan has announced that the state will commit another $100 million to the the $300 million investment that was announced in March as part of a bipartisan budget agreement to allocate federal funding from the American Rescue Plan Act. Together, these funds - $400 billion - are part of what Governor Hogan calls the "Connect America" initiative designed to close remaining digital divides.

The funds will be used both to deploy broadband in parts of the state that lack access to broadband networks and to subsidize service for low-income individuals.

The objective of closing remaining digital divides by closing both deployment and affordability gaps is a worthy one. But $400 million is a lot of new funding - on top of that which already has been expended. It will be especially important, if the funds are not to be used in an inefficient and wasteful fashion to carefully target the expenditures to meet the initiative's objectives - and then to carefully monitor the expenditures.

 

Coalition of Trade Associations Sue Over Maryland Digital Ad Tax

In a Tuesday post to the Free State Foundation's Blog, I reported that both chambers of the Maryland General Assembly had voted, by substantial margins, to override Governor Larry Hogan's veto of a gross revenues tax on digital advertising services. As anticipated, yesterday a group of trade associations sued in the U.S. District Court for the District of Maryland (Northern Division) seeking declaratory and injunctive relief.

Filed by the Chamber of Commerce of the United States of America, Internet Association, NetChoice, and the Computer & Communications Industry Association, the complaint alleges that H.B. 732 "is a punitive assault on digital, but not print, advertising" and "is illegal in myriad ways."

Specifically, the plaintiffs argue that H.B. 732 (1) "is preempted by the Internet Tax Freedom Act (ITFA), which prohibits States from imposing 'multiple and discriminatory taxes on electronic commerce,'" and (2) "violates the Due Process Clause and Commerce Clause of the United States Constitution by burdening and penalizing purely out-of-state conduct and interfering with foreign affairs."

A copy of the complaint can be found here.

Maryland's Digital Ad Tax to Become Law After Veto Override

Maryland's first-in-the-nation gross revenues tax on digital advertising services will take effect in less than 30 days. Legal challenges likely will follow soon thereafter.

H.B. 732, passed by the General Assembly at the end of the pandemic-shortened 2020 legislative session, was vetoed by Governor Larry Hogan. On Friday, the State Senate voted 29-17 to override that veto. The House of Delegates did the same the day prior, by an 88-48 margin.

H.B. 732 imposes a gross revenues tax on digital advertising services provided by companies that earn more than $100 million globally. Gross annual revenues will be taxed at rates that begin at 2.5 percent (for companies with revenues between $100 million and $1 billion) and increase to 5 percent (revenues between $1 billion and $5 billion), 7.5 percent (revenues between $5 billion and $15 billion), and 10 percent (revenues over $15 billion).

As Free State Foundation President Randolph J. May and I described last spring in a post to the FSF Blog and an op-ed in the Baltimore Sun, this tax will harm both consumers and businesses in Maryland. The higher marketing costs that result inevitably will lead to higher prices for the goods and services advertised, lower consumption, and reduced tax revenues. It also is vulnerable to legal challenges under the Permanent Internet Tax Freedom Act, the Commerce Clause, and the First Amendment.

S.B. 787 and companion bill H.B. 1200, introduced on February 5 and 8, respectively, would modify H.B. 732 by (1) exempting the "digital interfaces" (that is, websites and apps) of television and radio broadcasters and news media entities, and (2) prohibiting those subject to the tax from passing on its costs directly via a separate fee, surcharge, or line item. However, the proposed legislation would not bar providers of digital advertising services from recouping those costs indirectly via higher prices.

State Digital Advertising Taxes Threaten the Economic Recovery

Today is Black Friday. In a normal year, throngs of eager bargain hunters would have started to form lines outside of brick-and-mortar businesses early this morning/late last night. As we all know well, however, 2020 is no ordinary year. Fortunately, online commerce is here to save the day.

But as I wrote in an April 30 Perspectives from FSF Scholars, taxes that single out digital advertising threaten the Internet-based activity that buoys our economy during these challenging times.

Nevertheless, states continue to eye e-commerce as a potential new revenue source.

In March, Free State Foundation President Randolph J. May and I criticized Maryland's digital ad tax in a blog post and Baltimore Sun op-ed. Governor Larry Hogan vetoed that bill in May, but "[t]he General Assembly, where Democrats hold a veto-proof majority, will take up whether to sustain or overturn the veto when it reconvenes in January."

2021 could see similar attempts in other states. In Washington, the not-yet-introduced H-0028.1 would increase taxes on digital advertising services by treating them as "digital automated services" rather than "advertising services." Other states considering similar bills include Nebraska, New York, and West Virginia.

We will continue to monitor and provide updates on such efforts.

Maryland Governor Hogan Announces Rural Broadband Funding

Maryland Governor Larry Hogan has announced $9.9 million in available funding as part of the first wave of a five-year plan to provide 225,000 Marylanders in rural communities with reliable, Internet access.

Read the press release here announcing the funding and the details of Maryland's five year plan for expanding broadband access in rural areas.

Maryland Should Reduce Regulations and Fees That Inhibit Broadband Deployment

On January 2, 2018, I published a blog suggesting that Maryland Governor Larry Hogan should reestablish the Regulatory Reform Commission and should specify as one of its tasks identifying unnecessary taxes and fees. More specifically, the Commission and the Maryland General Assembly, which convenes this week for its 2019 legislative session, should focus on reducing regulatory and tax burdens that stifle broadband deployment and slow the delivery of next-generation wireless services. According to two recent reports, Maryland has one of the most burdensome regulatory processes with regard to broadband deployment and some of the highest wireless tax rates in the country.

A new report by the R Street Institute ranks Maryland 45^th out of 50 in terms of how conducive its laws are to broadband deployment. Importantly, Maryland presently does not require localities to adopt "shot clocks" to ensure timeliness for the processing of applications or to employ hard caps on fees pertaining to accessing public rights-of-ways, acquiring construction permits, or installing pole or collocation attachments. For example, the fees localities charge for public rights-of-way access are not required to be non-discriminatory or based on an estimation of costs, meaning local governments can charge whatever they want and can charge different prices to different providers despite granting the same level of access. Whether a wireless or wireline provider of broadband access, building and upgrading a network requires a significant number of permits from the local government. Without shot clocks and without hard caps on fees, the regulatory costs imposed by impediments associated with the local government approval process slows broadband deployment.

Deploying communications networks includes heavy capital investments from broadband providers. If fees are excessively high, it will discourage competition from small providers who cannot afford access. Also, if the regulatory costs differ significantly among jurisdictions, it could discourage providers from upgrading networks in certain localities. Although there is high demand in a relatively densely-populated, wealthy state like Maryland, the margin between profit and loss is very small in the dynamically competitive broadband market.

In May 2015, Governor Hogan signed House Bill 541, which required the Public Service Commission to convene a workgroup to study attachments to utility poles in Maryland. The workgroup found in a January 2016 study that the “terms and conditions for pole attachments are adequate” and the “rates charged to pole attachers are reasonable.” But with the emergence of the 5G revolution, small cell deployment in a populated locality will require hundreds if not thousands more pole attachments than 4G, meaning the existing terms and conditions likely are outdated. With 5G deployment, wireless providers will deploy small cells on already existing buildings or utility poles, a practice called “collocation.” Without shot clocks for the review of collocation applications and without hard caps on the fees localities can charge, the regulatory uncertainty will slow 5G investment in Maryland. In 2018, Maryland policymakers introduced small cell legislation to minimize these regulatory barriers and streamline 5G deployment, but the Senate and House bills failed to pass.

If Maryland wants to continue to be considered a prime location for innovative businesses, it should adopt rules that give guidance to local governments regarding streamlining the application and approval processes and charging cost-based fees that properly compensate the local governments without slowing 5G deployment.

Moreover, according to a recent report by the Tax Foundation, Maryland, at an average rate of 13.89%, has the 15^th highest combined state and local wireless tax rate in the United States. This means its wireless tax rate is 2.31 times the size of its general sales tax of 6%, which is the 9^th highest disparity multiple in the U.S.

Of course, some localities impose higher tax rates than others. In Baltimore, residents pay an effective tax rate of about 25% for wireless services. At the end of 2017, over 68% of all poor adults had wireless-only voice service and nearly 24% of Baltimore’s population falls below the poverty level. Additionally, more and more consumers are substituting mobile wireless broadband for fixed broadband. And while this trend is occurring across all demographics, it is particularly prevalent among low-income and minority consumers. About 31% of U.S. adults making less than $30,000 a year are wireless-only with regard to broadband service. And 35% of Hispanic adults and 24% of black adults also are wireless-only. Maryland’s relatively high wireless tax rates unnecessarily raise the price of wireless services and harm all consumers, but they disproportionately harm low-income and minority consumers.

The Regulatory Reform Commission’s December 2015 report recommended streamlining application review processes, reducing fees and payment frequency, and expanding minority and disadvantaged business opportunities. These recommendations have not been implemented yet with regard to the taxation and regulation of broadband and wireless communication services.

As stated in last week's blog, Governor Hogan’s regulatory reform efforts have improved Maryland’s business climate and its overall fiscal condition. To continue this progress, Governor Hogan should reestablish the Regulatory Reform Commission and task it with identifying more regulations, taxes, and fees that discourage economic activity. The communications and broadband marketplace would be a good place to start.

Governor Hogan Should Reestablish the Regulatory Reform Commission

At the beginning of each year, for the past three years, Free State Foundation President Randolph May and I have published a Perspectives from FSF Scholars addressing the meaningful progress made by Governor Larry Hogan’s Regulatory Reform Commission (RRC). In December 2017, the RRC published its final report identifying 844 outdated or unnecessary regulations over its three-year term, which Governor Hogan ultimately eliminated or altered in some way. Now that Governor Hogan has been reelected for a second term, he should reestablish the Commission with the goal of achieving further regulatory reform over the next four years.

In January 2016, Randolph May and I commended Governor Hogan for creating the RRC, and we suggested ways Maryland could reform its regulatory process. Specifically, we proposed that Maryland consolidate its twenty departments into just eight. We also suggested creating a “sunset” date for all new regulations. This would require that regulations expire after a certain period of time if they are not affirmatively readopted by the sunset date.

In January 2017, we applauded the RRC for identifying 187 regulations that it found “redundant, unreasonable, unnecessary, unduly burdensome or obsolete.” We also recommended that Maryland adopt a central office within the executive branch to review regulations before they are promulgated to determine whether the projected benefits outweigh the costs – similar to the Office of the Information and Regulatory Affairs (OIRA) at the federal level. The office certainly doesn't need to be large, but it should be led by an economist with expertise in cost-benefit analysis.

In January 2018, we highlighted the RRC’s final report, which recommended 657 changes to outdated or unnecessary regulations that Governor Hogan ultimately accepted. And we took the opportunity to repeat some of our earlier proposals for process reform in Maryland.

Governor Hogan made a worthy effort during his first term to eliminate unnecessary or outdated regulations as part of his effort to stimulate Maryland's economy and improve its business climate. As I noted in an October 2018 blog, Governor Hogan’s tax and regulatory reform had a positive impact on Maryland’s overall fiscal condition. And according to some studies, Maryland’s business climate has improved over the past several years relative to other states. (See here and here.)

Although the Regulatory Reform Commission did a good job identifying nearly 850 regulations that were outdated or unnecessary and Governor Hogan wisely accepted the Commission’s recommendations, there certainly are areas where Maryland can further improve, like reducing occupational licensing requirements. Now that Governor Hogan will be returning to Maryland’s gubernatorial seat for another four years, he should reestablish the Regulatory Reform Commission and direct the Commission to continue its work searching for unnecessary and costly regulations to eliminate or modify.

The RRC also should be tasked with identifying unnecessary taxes and fees that stifle competitive entry and artificially raise prices for consumers. Given the positive impact that broadband and wireless services have on Maryland’s economy, the RRC particularly should focus on eliminating or reducing excessively high taxes and fees that slow broadband deployment and harm consumers.

In a forthcoming blog, I will discuss how Maryland’s burdensome regulations and fees stifle broadband deployment and how its exorbitantly high wireless tax rates negatively impact consumers.

Federal Court Rules Maryland 6th District Violates Constitution

On Wednesday, a three-judge federal court panel ruled that Maryland unconstitutionally drew the boundary lines for the 6^th Congressional District. The decision, which comes one day after the midterm elections, requires Maryland to submit new boundary lines for the 6^th and contiguous districts by March 7, 2019.

Governor Larry Hogan, who was reelected for a second term on Tuesday, made the following statement about the decision:

This is a victory for the vast majority of Marylanders who want free and fair elections and the numerous advocates from across the political spectrum who have been fighting partisan gerrymandering in our state for decades. With this unanimous ruling, the federal court is confirming what we in Maryland have known for a long time — that we have the most gerrymandered districts in the country, they were drawn this way for partisan reasons, and they violate Marylanders’ constitutional rights.

Maryland's Fiscal Condition Improves Under Governor Hogan

Earlier this month, the Mercatus Center at George Mason University released its 2018 edition of "Ranking the States by Fiscal Condition," which analyzes each state’s financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pensions and healthcare benefits. 

In the 2018 edition, Maryland ranks 33rd among the states in overall fiscal condition. This is an increase of 13 spots from 46th overall in 2017. Importantly, this report uses data from fiscal year 2016, which is the first full year of Maryland Governor Larry Hogan's term. As Free State Foundation President Randolph May and I have discussed in three different Perspectives from FSF Scholars, Governor Hogan has made commendable efforts to improve Maryland's business climate by eliminating or reducing unnecessary regulations and taxes. (See here, here, and here.)

In the Mercatus report, assessment of fiscal condition is broken down into five categories:

• Cash solvency. Does Maryland have enough cash on hand to cover its short-term bills? Compared to other states, Maryland is cash insolvent, ranking 41st but moving up five spots from 46th in 2017.

• Budget solvency. Can Maryland cover its fiscal year spending with current revenues? Yes, Maryland revenues cover 102% of expenses. This ranks Maryland 27th in the country, moving up twelve spots from 39th in 2017.

• Long-run solvency. Can Maryland meet its long-term spending commitments and will there be enough money to cushion it from economic shocks or other long-term fiscal risks? No, Maryland’s net asset ratio is -1.69 and Maryland ranks 44th in long-run solvency, which is the same as its 2017 rank.

• Service-level solvency. How much “fiscal slack” does Maryland have to increase spending if citizens demand more services? Maryland ranks in the top half of U.S. states at 17th in the country, falling just one spot from last year.

• Trust-fund solvency. How much debt does Maryland have and how large are its unfunded pension and healthcare liabilities? Maryland ranks 17th, moving down three spots from 14th in 2017.

One significant issue Maryland policymakers should address is the state's looming unfunded liabilities. Maryland has nearly $21 billion in unfunded pension liabilities and has a funded ratio of 71%. This means the value of the state’s assets are 71% of the value of the state’s pension obligations. The most effective plan for decreasing Maryland's long-term debt and fixing its fiscal condition goes hand-in-hand with Governor Hogan’s efforts to improve the state's business climate.

By reducing the burdens of taxes and regulations, Governor Hogan's reforms are intended to continue to attract more businesses into Maryland. In turn, this will expand Maryland's tax base, increase tax revenue, and improve Maryland's fiscal condition by diminishing the amount of unfunded liabilities overtime. Moreover, lessening the burden on current and future taxpayers by decreasing long-term debt will stimulate the economy and create more jobs throughout Maryland.

It is fairly clear that Governor Hogan's tax and regulatory reforms are having a positive impact on Maryland's overall fiscal condition. In the first full fiscal year of Governor Hogan's term, Maryland moved up 13 spots in the Mercatus ranking. Based on the achievements that the Hogan Administration has made over the last couple of years in terms of eliminating outdated and unnecessary regulations, Maryland's fiscal health ranking should continue to improve.

In the meantime, the Maryland General Assembly should work harder to collaborate with Governor Hogan's efforts to decrease tax and regulatory burdens. This will have a positive impact on Maryland's long-term fiscal condition.

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.

Maryland Should Reform Its Occupational Licensing Regime

This week, the Mercatus Center at George Mason University published a new study titled “Changes in Occupational Licensing Burdens across States.” Authors Matthew Mitchell and Anne Philpot used data from 2012 to 2017 to measure the breadth – the number of occupations that each state licenses – and the burden – the stringency of occupational licensing requirements in each state – to determine how occupational licensing has changed over the last five years. Unfortunately, Maryland had the greatest increase in the breadth and burden of occupational licensing over that span.

Maryland’s breadth and burden of occupational licensing increased 29% from 2012 to 2017 and the state regulates five more occupations than it did in 2012: animal breeders, athletic trainers, and three types of gaming occupations. Maryland's occupational licensing fees increased by an average of 6%, and the days lost to education and experience requirements by Maryland entrepreneurs increased by 3%.

As I wrote in a July 2015 blog, Maryland’s occupational licensing regime harms consumers by restricting competition, which subsequently leads to higher prices. Importantly, unnecessary occupational licensing harms the poorest residents in the state, who are unable to afford the fees and training required with such licensing, therefore stifling upward mobility for poor entrepreneurs. 

In the blog, I stated:

Because consumers ultimately pay higher prices as a result of the restricted competition, the increase in prices is disproportionately harmful to the poorest consumers. The higher a person’s income, the more willing that person is to adapt to price increases. Therefore, artificial increases in prices through occupational licensing have a large negative marginal impact on the poorest consumers. For example, pawnshops in Maryland, which can provide inexpensive goods, additional income, or short-term loans to poor individuals, are charging higher prices and interest rates than they would be able to charge if workers were not required to have an occupational license.

But the poorest individuals also experience the greatest burden on the other side of the market – as workers. Poor people often do not have the resources to acquire the mandated training, take the required tests, or pay for the licensing fees. This pushes them out of a labor market in which they may be skilled enough to compete. For example, a licensed plumber in Maryland must complete 3,700 hours in training. But a poor person with only 1,000 hours of training may be perfectly capable of fixing a toilet. It is not illegal for him/her to do so, but it is illegal to accept money for the service.

The Hogan Administration has done a good job reducing the overall burden of regulations over the last few years. As FSF President Randolph May and I noted in a January 2016 Perspectives from FSF Scholars, the Regulatory Reform Commission’s initial report recognized that Maryland’s occupational licensing regime was overly burdensome and was not protecting consumers. In a January 2017 Perspectives from FSF Scholars, we commended the Regulatory Reform Commission for identifying many occupational licenses that were unnecessary, outdated, or overly burdensome. And Governor Larry Hogan accepted all of the recommendations put forth by the Commission.

However, the data presented in the Mercatus Center study shows that there is more work to be done in Maryland. Although the 2018 legislative session has ended, occupational licensing reform should be a goal for the 2019 Maryland General Assembly. If Maryland wants to continue to produce economic growth and business investment throughout the state, it should lessen the burden of occupational licenses and enable more entrepreneurs to enter the labor market.

The Maryland General Assembly Should Livestream Floor and Voting Sessions

Earlier this year, Maryland Governor Larry Hogan announced the Legislative Transparency Act of 2018, which would require all sessions of the Maryland General Assembly to be livestreamed to the public via both audio and video. Although Maryland residents currently can stream audio broadcasts of floor and voting sessions, without a video stream the broadcast is difficult to follow and does not provide Maryland residents and taxpayers with the transparency they deserve.

In February 2016, Governor Hogan supported a $1.2 million proposal to deploy cameras within the State House so the public could watch debates as they unfolded in the House of Delegates and the Senate. The proposal also would have archived the videos. Unfortunately, the proposal did not pass, and now two years later, the State House still is unequipped with modern technology and Maryland residents are unable to watch important policy debates that potentially could impact their day-to-day lives.

According to the National Conference of State Legislatures, Maryland is one of seven states that does not provide a livestream video of floor and voting sessions in either chamber of its state legislature. Fortunately, the Maryland General Assembly does livestream videos for all committee hearings and archives them for later reference. By passing the Legislative Transparency Act, Maryland residents will be able to stay informed in a timely manner about the important debates and votes taking place within the Maryland General Assembly.

When Governor Hogan announced this legislation back in January 2018, he stated:

“I believe very strongly that the public has a right to know what their lawmakers are saying and doing during the debate on these important issues which are directly affecting the citizens and taxpayers of Maryland. Legislators should be deliberating out in the open, in the light of day, instead of behind closed doors. Our hope is that this year will finally be the year that this common sense measure is signed into law.” 

As we enter the final month of Maryland’s 2018 legislative session, the Maryland General Assembly should act soon to pass the Legislative Transparency Act. Therefore, when the Maryland General Assembly convenes in 2019, Maryland residents and taxpayers will be able to watch committee hearings, policy debates, and voting sessions, and elected members will be more transparent and accountable moving forward.

Repealing SALT Deduction Should Improve Maryland’s Economy in the Long-Run

The House of Representatives and the Senate passed different versions of the Tax Cuts and Jobs Act. Both versions of the tax reform bill would repeal the state and local tax deduction (SALT) for income and sales taxes. Although this repeal might hurt some Maryland taxpayers in the short-run, it should be a spur to create greater fiscal responsibility in Maryland. If so, this ultimately would benefit Maryland taxpayers and help grow the state’s economy.

“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.

Many Maryland residents benefit from SALT because it allows them to pay less taxes. According to a Tax Foundation study, residents in Maryland receive the 5^th highest SALT deduction as a percentage of adjusted gross income, behind residents in New York, New Jersey, Connecticut, and California. But SALT encourages Maryland policymakers at the state and local levels to spend even more than they otherwise would absent the SALT deduction because many residents will not be as adversely impacted.

In this way, over time, the SALT deduction promotes more fiscal prolificacy, less accountability regarding government spending, and diminished economic growth. So while many Maryland residents may think they are better off because of SALT, the longer-term negative effects of SALT may slow economic growth, ultimately making those same residents worse off.

As I stated in a July 2017 blog, Maryland’s fiscal health, ranking 46^th in the country in fiscal solvency in one study, remains poor. But the moral hazard of the SALT deduction only tends to exacerbate Maryland’s excessive spending problem. Regarding SALT, Jared Walczak of the Tax Foundation says:

The residents of some localities are willing to accept higher levels of taxation in exchange for greater government service provision; others prefer a smaller government which necessitates lower rates of taxation. Taxpayers may be supportive of increased levels of spending if part of the cost is borne by others; conversely, they may reduce expenditures if they believe that some of the benefit of that spending will be conferred on others. Federal subsidies thus place a thumb on the scale, distorting local decision-making.

Interestingly, the Congressional Budget Office (CBO) published a November 2013 blog titled “Eliminate the Deduction for State and Local Taxes.” The CBO said: “The deduction for state and local taxes is effectively a federal subsidy to state and local governments; that means the federal government essentially pays a share of people’s state and local taxes. Therefore, the deduction indirectly finances spending by those governments at the expense of other uses of federal revenues.” The CBO also stated:

Another argument [against SALT] is that the deduction largely benefits wealthier localities, where many taxpayers itemize, are in the upper income tax brackets, and enjoy more abundant state and local government services. Because the value of an additional dollar of itemized deductions increases with the marginal tax rate (the percentage of an additional dollar of income from labor or capital that is paid in federal taxes), the deductions are worth more to taxpayers in higher income tax brackets than they are to those in lower income brackets. 

If and when SALT is repealed, whether in whole or in part, the positive economic effects will not happen overnight. In fact, an October 2017 report published by The Heritage Foundation states that repealing SALT will only boost economic activity if it is also “accompanied by more efficient state tax-and-spending policies.” As of my January 2016 blog, Maryland had the 7^th highest state and local tax burden in the United States.

Governor Larry Hogan has made it his mission to reform Maryland’s burdensome regulatory and tax climates, and he already has succeeded to some extent. A recent CNBC study, “America’s Top States for Business 2017,” found that Maryland moved up eleven spots from 36^th to 25^th, since Governor Hogan took office.  However, more support is needed from the Maryland General Assembly for lowering tax rates and cutting spending in order to improve Maryland’s fiscal climate. If the SALT deduction is repealed, Maryland legislators will have a greater incentive to reduce excessive taxes and spending, stimulating economic growth in the long-run.

Senate Tax Bill Will Stimulate Maryland’s Economy

Earlier this month, the Tax Foundation published a study on the Senate’s version of the Tax Cuts and Jobs Act, finding that the plan would grow the economy while simplifying the tax code and reducing marginal tax rates.  Using the Tax Foundation’s Taxes and Growth macroeconomic model, the study finds that the proposed tax plan will create 925,000 new full-time equivalent jobs and will increase GDP by 3.7% over the next decade. Accounting for the increase in GDP, after-tax incomes will rise by 4.4%.

The Tax Foundation also published a state-by-state impact analysis of the Senate’s proposed plan. In Maryland, the study projected 17,322 new full-time equivalent jobs over the next decade and an average increase in after-tax income for middle-income families of $3,245. Lower marginal tax rates will complement Governor Larry Hogan’s efforts to reform Maryland’s business climate. This will further stimulate Maryland’s economy and improve its long-term fiscal health.

Maryland Joins FirstNet and AT&T for Public Safety Network

On September 18, 2017, Maryland Governor Larry Hogan announced that the state will partner with FirstNet and AT&T to deliver a wireless broadband network to Maryland's public safety community, creating faster, more informed and better coordinated responses.  During the announcement Governor Hogan said: 

Keeping Marylanders safe is our top priority, and our first responders need to be equipped with every tool possible to protect our citizens. By adopting this plan, our first responders will now have the ability to efficiently and effectively work together not just within the state, but across the region and at the national level. This innovative initiative will also spur investment into Maryland's economy, helping to create jobs and enhance mobile broadband coverage in rural parts of the state.

This partnership will transform the way Maryland's fire, police, emergency medical services, and other public safety personnel communicate and share information. The enhanced wireless broadband coverage will reduce response times, mitigate damage, and save lives.

Maryland Could Be Future Hub of Data Economy

The Center for Data Innovation recently published a report entitled “The Best States for Data Innovation,” ranking the U.S. states on their ability to foster data innovation. The report also discusses how technological advancements, like faster computing, better algorithms, and more robust communication networks, have made it easier to collect, store, analyze, use, and disseminate data. These advancements have led to the emergence of the data economy: an economy in which success depends on how effectively firms can leverage data to generate insights and unlock value.

Maryland ranks third overall among the fifty states and leads in several categories. Given Maryland’s high ranking, if Governor Larry Hogan – with the General Assembly’s help –continues his efforts to improve Maryland’s business climate and fiscal situation, Maryland could become the national hub of the data economy.

Here are some notable categories where Maryland ranks in the top 10:

• Enabling technology platforms: Maryland ranks 1^st.

• Broadband access: Maryland ranks 3^rd.

• The availability of machine-readable data on public-transit systems: Maryland ranks 3^rd.

• Using data to develop human and business capital: Maryland ranks 6^th.

• Maryland has one of the highest percentages of science, technology, engineering, and math (STEM) degrees, ranking 7^th overall.

• Maryland has the highest number of jobs in the country related to statistics and the second highest number of jobs related to data-science.

• Maryland also was one of the first states to enact an open-data policy, allowing residents and businesses to have access to government datasets.

The report says: “The widespread adoption of data analytics and artificial intelligence is expected to contribute hundreds of billions of dollars to U.S. GDP in the coming years in sectors such as finance, transportation, and manufacturing, while unlocking new opportunities to improve outcomes in fields such as education and health care.” For Maryland, fostering data innovation will continue to attract more economic activity and job creation into the state, establishing Maryland as a hub of the data economy and providing innovations in medicine, education, and transportation for its residents.

As I stated in a July 2017 blog, Maryland has struggled with achieving fiscal responsibility in the past. But new leadership under Governor Hogan has started to reform Maryland’s business climate. If successful, efforts to eliminate unnecessary regulations and lower burdensome taxes and fees will attract jobs and economic activity into the state, increase Maryland’s tax base, and reduce its long-term debt. Alleviating the burden of long-term debt for residents and businesses will spur additional economic activity within Maryland and attract more data-intensive businesses that value Maryland’s emerging data economy.

As the report states:

While data-driven innovation is a global phenomenon, some regions are better poised to enjoy the resulting benefits because they have invested in and supported the conditions necessary to succeed in the data economy. This is also true within the United States, where some states are actively building the necessary foundation for a thriving data economy and others are lagging. Decisions made today that affect the extent to which a state participates in the data economy will have long-term implications for its future growth, as data plays an increasingly larger role in many different sectors across the economy. Early adopters will benefit more quickly from using data to address a multitude of challenges, and by positioning themselves at the forefront of data-driven innovation; they also will be able to grow and attract data-driven companies in a wide range of sectors that will make them the future hubs of the data economy.

The Center for Data Innovation’s report says that some of Maryland’s high-level statisticians and data-scientists may reside in the state for federal government employment. Nevertheless, with this valuable resident workforce, Maryland’s data economy already has an advantage over other states. Governor Hogan and the Maryland General Assembly should continue to reduce regulatory and tax barriers that could inhibit data-intensive businesses from locating in the state.

Governor Hogan and other state leaders should be commended for their efforts to foster data innovation within the state. State leaders should be proud, but not content, with Maryland’s 3^rd overall ranking. There is no reason why Maryland cannot become the United States’ future hub of the data economy.

Maryland’s Fiscal Health Is Poor Even as Business Climate Improves

On July 11, 2017, the Mercatus Center at George Mason University released its 2017 edition of “Ranking the States by Fiscal Condition,” which analyzes each state’s financial health based on short- and long-term debt and other key fiscal obligations, such as unfunded pensions and healthcare benefits. And CNBC recently released “America’s Top States for Business 2017,” which ranks each state by the attractiveness of its business climate.

Despite Governor Larry Hogan’s thus far commendable efforts to reform Maryland’s business climate, the state nevertheless ranks 46^th in overall fiscal solvency in the new Mercatus Center study, falling five spots from 41^st in 2016. The data used in the Mercatus study comes from fiscal year 2015, which only covers the first six months of Governor Hogan’s administration. So his reform efforts will not be recognized in this study. But it is still important to see how Maryland ranks relative to other states.

In the Mercatus study, fiscal solvency is broken down into five categories:

• Cash solvency. Does Maryland have enough cash on hand to cover its short-term bills? Compared to other states, Maryland is cash insolvent, ranking 46^th and falling three spots from 43^rd in 2016.

• Budget solvency. Can Maryland cover its fiscal year spending with current revenues? Yes, Maryland revenues cover 101% of expenses. This ranks Maryland 39^th in the country moving up seven spots from 46^th in 2016.

• Long-run solvency. Can Maryland meet its long-term spending commitments and will there be enough money to cushion it from economic shocks or other long-term fiscal risks? No, Maryland’s net asset ratio is -1.83 and Maryland ranks 44^th in long-run solvency, moving down one spot from 43^rd in 2016.

• Service-level solvency. How much “fiscal slack” does Maryland have to increase spending if citizens demand more services? Maryland ranks in the top half of U.S. states at 16^th for the second year in a row.

• Trust-fund solvency. How much debt does Maryland have and how large are its unfunded pension and healthcare liabilities? Maryland ranks 14^th, moving up four spots from 18^th in 2016.

Maryland’s unfunded liabilities may be small relative to other states, but they are large relative to Maryland’s current assets. Maryland has a funded ratio of 74%. This means the value of the state’s assets are 74% of the value of the state’s pension obligations. Although 74% is consistent with the national average, Maryland has over $20 billion in unfunded liabilities.

Despite Maryland’s poor ranking in the new Mercatus study, Governor Larry Hogan has done a commendable job starting to transform Maryland’s business climate. As Free State Foundation President Randolph May stated in a January 2017 Perspectives from FSF Scholars, Governor Hogan’s Regulatory Reform Commission has identified specific areas where Maryland can reduce regulatory barriers. Also, in May 2016, Governor Hogan reduced or eliminated over 155 fees, claiming to save businesses and taxpayers over $60 million over the next five years.

These efforts have helped propel Maryland upward in CNBC’s new ranking “America’s Top States for Business 2017.” Since Governor Hogan took office in January 2015, Maryland has moved up eleven spots to 25^th in CNBC’s 2017 ranking. Notably, Maryland currently ranks 4^th in technology and innovation, 7^th in overall economy, 11^th in workforce, and 15^th in access to capital.

Despite the positive direction of Maryland’s business climate, the Mercatus study shows how the decisions of past administrations, along with past legislatures, have created long-term debt and left Maryland with one of the worst fiscal situations in the country. In a couple of years when the data used in the Mercatus study takes into account the reforms made by the Hogan administration, it will be interesting to see whether the improvements to Maryland’s business climate have positively impacted Maryland’s fiscal health.

The most effective plan for fixing Maryland’s fiscal health should go hand-in-hand with Governor Hogan’s reformist goals when he first took office. The Maryland General Assembly should work with Governor Hogan to reduce tax and regulatory burdens. This would enable Maryland to attract economic activity that has migrated over state lines in past years. Creating an economy more conducive to “permissionless innovation” will incentivize entrepreneurs to open up shop in Maryland. This will expand Maryland’s tax base, increase tax revenue, and improve Maryland’s fiscal health by reducing the amount of unfunded liabilities. Reducing the burden on current and future taxpayers by decreasing long-term debt will stimulate the economy and create more jobs throughout the state of Maryland.

The Maryland General Assembly should support Governor Hogan’s efforts to reform Maryland’s tax and regulatory environment and attract more businesses into the state.