Governor Moore Fails to Improve Maryland’s Tax Competitiveness

On October 31st, the Tax Foundation released the 2025 State Tax Competitiveness Index, which ranked states’ overall tax systems and certain individual taxation categories. The index considered several criteria for ranking states, including tax system complexity, aggressiveness, and structure. Additionally, the index considers corporate income, individual income, sales, property, and unemployment insurance taxes in the overall rankings.

In August 2023, Governor Wes Moore said, “Maryland has some of the best talent and assets in the world. But our economy is not reaching its full potential [...] The time for discipline is now.” Throughout his tenure as governor, Moore has continued claiming the state needs to make “difficult fiscal decisions.” Still, while he has continued to tout the need for budgetary discipline, Maryland’s government continues to fail to have enough discipline to create a competitive tax environment. This is why it is the fifth worst state in the nation in terms of “tax competitiveness.”

Maryland’s poor ranking is not entirely new, as it has been considered one of the ten least competitive state tax environments since 2020. However, according to the Tax Foundation's new analysis, Maryland’s score has worsened since then, so that it is now ranked 46th in the nation. For some states, being uncompetitive on taxation may be acceptable. For example, Hawaii is also poorly ranked, but few states compete for people and businesses with Hawaii. Maryland, however, has four states bordering it, as well as the capital. Except for DC, every state bordering Maryland is ranked at least 12 spots higher for tax competitiveness.

Virginia, in particular, is a competitor for businesses and people looking to live in the extended DC area. Its overall state taxation competitiveness ranking is 28th, 18 places better than Maryland's. Unlike some states with few or no bordering states to compete with, Maryland’s competitiveness with other states will heavily impact how many people and businesses vote with their feet.

Examining the index, it is clear that Governor Moore must do more than he has thus far if he wants to improve Maryland’s very poor tax competitiveness ranking.

Because the index considers so many taxes, Maryland’s overall scoring is poor for a multitude of reasons. Firstly, Maryland’s income tax is very progressive, with a high maximum tax rate of 5.75%, meaning higher income earners will want to live elsewhere. Additionally, standard deductions and personal exemptions are relatively small in Maryland, and there are no tax adjustments for inflation. Thus, as the U.S. dollar’s value declines due to inflation and wages are adjusted to match that, even working-class Marylanders will slowly move into higher tax brackets.

Maryland’s corporate tax rate is 8.25 percent, significantly higher than Virginia, West Virginia, or North Carolina’s. Maryland’s inclusion of a global intangible low-taxed income in its corporate tax base makes it rare among the states. This means that even profits from non-U.S. companies owned by Marylanders are taxed at the state corporate tax rate, which many other states do not require, including Virginia and Pennsylvania.

Lastly, Maryland’s tax complexity is much higher than other states. It is the only state in the country to impose digital advertising taxes, which are difficult to navigate and comply with. Although this tax only went into effect in 2022, multiple lawsuits have already been filed contesting the law behind it. Maryland is also the only state in the country with both estate and inheritance taxes, with high maximums, further incentivizing wealthy taxpayers to leave the state.

While many of these tax policies existed before Gov. Moore entered office, a governor showing proper fiscal “discipline” should fight to reduce these taxes. Moore should pursue the fiscal discipline he advocated for at the start of his administration and increase Maryland’s tax competitiveness. Otherwise, the state will continue to lag behind its neighbors economically.

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 Plunges to a New Low: It Ranks 46th in the State Business Tax Climate Index

The Tax Foundation just released its 2022 State Business Tax Climate Index—and, unfortunately, Maryland continues its downward slide. It now ranks 46^th overall among the states and the District of Columbia due to bottom-half ratings in each of the measured subcategories. This is Maryland's lowest ranking since at least 2014 and possibly marks its all-time low. It should be a clarion call of the need for tax reform in the state.

States compete with other states for businesses, residents, investment, jobs, and revenues by implementing business-friendly tax policies, and Maryland's rank as 46^th shows serious room for improvement. As the Tax Foundation explains, a business-friendly tax environment does not mean tax-free anarchy. It means structuring major taxes with "low rates and broad bases." The broader the "base," meaning the total amount of economic activity subject to a specific tax, the lower the rate a state needs to impose to achieve its revenue target.

The Tax Foundation's State Business Tax Climate Index assesses a state's overall performance based on five major areas of taxation that affect business: corporate tax, individual income tax, sales tax, property tax, and unemployment insurance tax. Some states do not assess all of these taxes, but that fact does not guarantee strong performance on the Index. Utah and Indiana, both of which rank in the top 10, impose all of the major taxes as Maryland does, but they avoid "complex, nonneutral taxes with comparatively high rates" that detract from Maryland's economy.

Maryland could improve in virtually every area, because its 46^th overall rank reflects its bottom-half performance in every category:

• Unemployment insurance tax (46^th)
• Individual income tax (45^th)
• Property tax (43^st)
• Corporate tax (33rd)
• Sales tax (26^th)

Over the years, Maryland has been a consistent bottom-tier performer with unemployment insurance taxes, because it does not have "rate structures with lower minimum and maximum rates and a wage base at the federal level," which cause uneven burdens on employers. Maryland has the highest minimum unemployment insurance tax rate in the country at 2.2% and one of the highest maximum rates at 13%. It also relies on a wage base above the federal level. These factors lead to non-neutrality in the unemployment tax by assessing more tax on struggling businesses and industries with endemic turnover, like retail. It makes little sense to burden struggling businesses with high unemployment taxes when doing so risks more unemployment.

Maryland also has a high progressive individual income tax that places it in the bottom 10% of states in this category. This is a problem for Maryland's business climate because "a significant number of businesses, including sole proprietorships, partnerships, and S corporations, report their income through the individual income tax code." Progressive taxes disincentivize labor over leisure for high income earners, which means Maryland's tax code encourages wealthy individuals to spend money on activities like travel and entertainment instead of hiring workers and investing in Maryland's economic growth. This disincentive is especially concerning at the state level, where individuals can "vote with their feet" by relocating to lower tax jurisdictions. Maryland's income tax also ranks poorly because it is not indexed to inflation, includes a marriage penalty, and double-taxes capital gains and dividends. Maryland could improve its business environment by eliminating or reducing the extent of these problems.

Maryland's property tax regime falls in the bottom-10. Property taxes are not just taxes on ownership of real property—they also include any tax assessed to tangible or intangible property, such as business inventory taxes, real estate transfer taxes, estate taxes, and inheritance taxes. Maryland's poor performance on the Business Tax Climate Index is largely attributable to its property taxes that distort business decisions. For example, Maryland taxes business inventories, a tax that has the effect of discriminating against retailers and forcing businesses to factor tax minimization into sales and procurement strategies. Maryland also taxes real estate transfers, which increases compliance costs and distorts decisions when businesses or individuals seek to transfer non-liquid assets, including small business and family-owned property. Maryland is also the only state in the country to levy both an estate tax and an inheritance tax, often causing double-taxation of inherited property. These taxes cause businesses and individuals in Maryland to make decisions about property based on tax strategy rather than economics, so they should be eliminated.

Maryland's corporate tax ranking is not quite as abysmal as it is in the previous three categories but it still needs work. High corporate tax rates with progressive bracketing discourage businesses, especially when nearby states have lower taxes. In Maryland, corporations pay an 8.25% tax rate on business profits. Imposing a single rate is positive. But 8.25% is a relatively high rate compared to other states, so businesses may be deterred from locating in Maryland, especially when nearby Virginia has a lower 6% rate. Additionally, Maryland does not conform with federal policy for deducting depletion, which adds complexity for businesses that deal with natural resources. Maryland should reduce its corporate rate and conform with federal depletion policy to attract business.

Maryland's sales tax regime earned the state's best subcategory ranking, but this ranking was still relegated to the bottom-half thanks to "including too many business inputs, excluding too many consumer goods and services, and imposing excessive rates of excise taxation." For example, Maryland's 6% sales tax rate could be reduced if it didn't provide a wide variety of sometimes seemingly arbitrary exemptions for various goods and services. Meanwhile, Maryland taxes business production inputs like leases, information services, and office equipment. Businesses likely pass taxes imposed on these items to end users of finished products, on whom the sales tax might apply again. Maryland could improve its ranking by eliminating exemptions for consumer goods and services while exempting inputs—creating a broader base that allows for overall lower sales tax rates.

The harmful effect of Maryland's 46^th place overall ranking becomes clear when you consider the more competitive rankings of adjacent states. All of the states bordering Maryland have better Business Climate Index rankings, except for the District of Columbia. These states include Delaware, Pennsylvania, Virginia, and West Virginia. Delaware's 16^th place ranking is the best, and this might help explain why Delaware has the highest population growth rate among Maryland and its neighboring states. Virginia ranks 25^th on the Index and also has a higher population growth rate than Maryland. While Maryland has faster population growth than Pennsylvania (29^th) and West Virginia (21^st), the potential for these states to outcompete Maryland for business and residents solely because of Maryland's unduly high tax rates and overly burdensome tax policies should alarm lawmakers.

The 46^th place ranking on the State Business Tax Climate Index should be a wakeup call to Maryland's government officials and its citizens. This bottom-dwelling ranking suggests that Maryland's tax code pushes investment, job growth, and revenue, as well as jobs and potential new residents to other states. And because Maryland's ranking has continually declined over the last decade, it appears other states are taking the benefits of tax reform more seriously.

Adoption by the legislature of the tax reforms suggested above, and others discussed in the Index, would stop Maryland from losing further ground to other states, including its neighbors, and would help spur more economic growth that would benefit all of Maryland's residents.

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's Proposed Digital Advertising Tax Would Do Harm

By Randolph May and Andrew Long

The so-called Kirwan Commission, established by the Maryland General Assembly in 2016, recommended a number of rather expensive reforms that it contends would improve the quality of public education in the state. To fund the Kirwan Commission proposals, the legislature is considering a tax on digital advertising services that singles out large online platforms. Such an approach is more likely to result in legal bills than increased funding for education. Considering that the proposed legislation is based upon a proposal apparently designed to force online providers to abandon ad-supported business models – rather than generate actual revenue – perhaps that is not surprising.

On January 8, 2020, incoming Maryland State Senate President Bill Ferguson (D-Baltimore) and President Emeritus Thomas V. Mike Miller (D-Calvert) introduced SB 2, legislation that targets digital advertising services with a tax on annual gross revenues. Delegate Alonzo T. Washington (D-Prince George's County) sponsored similar legislation in the House of Delegates, HB 695.

The first bill of its kind in the nation, SB 2 would impose a tax – ranging from 2.5 percent up to 10 percent – on annual gross revenues derived from "digital advertising services" provided via a "digital interface" within the state. It would not apply to traditional forms of advertising (print, TV, and radio, etc.). In addition, companies with less than $100 million in annual global gross revenues would be exempt. The focus thus is on large digital platforms (for example, Google and Facebook).

SB 2 is riddled with impracticable language. For example, the definitions of both "digital advertising services" and "digital interface" are broad and vague: the former includes "advertisements in the form of banner advertising, search engine advertising, interstitial advertising, and other comparable advertising services," while the latter applies to "any type of software, including a website, part of a website, or application, that a user is able to access."

Similarly, as originally drafted, SB 2 would have applied to any digital advertising service (1) when a user's device is assigned "an Internet Protocol address that indicates that [it] is located in the State," or (2) the user "is known or reasonably suspected to be using the device in the State" (emphasis added). (To our knowledge, companion bill HB 695 still includes this language.) As the Association of National Advertisers has explained, however, "consumers' IP addresses don't always reveal their locations," particularly when they are on mobile devices, and "the 'reasonably suspected' test for use … would be very difficult, if not impossible, to apply." Recent amendments to SB 2 have eliminated these problematic attempts to define the geographic application of the tax. Unfortunately, their replacement – an apportionment fraction that defines the amount of annual gross revenues to which this state-specific tax applies – inappropriately uses nationwide digital advertising revenues for its denominator.

Legislative analysts estimate that SB 2 could generate as much as $250 million per year in tax revenues. That assumes, however, that SB 2 survives judicial challenge, which, under a number of legal theories, is doubtful. For example, the Permanent Internet Tax Freedom Act prohibits discriminatory taxes on electronic commerce – but SB 2 would apply only to online advertising, and solely the largest providers. In addition, the U.S. Supreme Court on more than one occasion has struck down industry-specific taxes on First Amendment grounds. Similarly, the Maryland Court of Appeals in 1958 held that a tax on TV, newspaper, and radio was unconstitutional under the First Amendment. Given its focus on companies with annual gross revenues over $100 million, SB 2 also is vulnerable to a challenge under the Commerce Clause: a significant portion of those revenues likely are derived from activity outside of the state, therefore the tax could be found to discriminate impermissibly against interstate commerce.

Even if it withstands judicial scrutiny, SB 2 is a bad idea that would harm both consumers and businesses in Maryland. Digital advertising is a significant contributor to the economy, generating $130 billion in annual revenues. However, SB 2 would jeopardize that success by imposing a second levy, in addition to the sales tax, on goods and services marketed via digital advertising. A double tax would increase prices for consumers. As a consequence, demand – and sales tax revenues – would decline. That is why the Association of National Advertisers calls SB 2 "one of the most serious threats to advertising in the United States that we have encountered in decades."

In addition, SB 2 would encourage companies to redirect advertising expenditures to other states. That, along with increased costs, would lead to a reduction in total spending on digital advertising in Maryland, which would harm local businesses, in particular those that depend on advertising revenues. Were it to go into effect, SB 2 would subject consumers to higher costs, reduce sales tax revenues, and generate less funding for education than anticipated by disincentivizing participation in Maryland's digital advertising marketplace. Considering the immodest proposal that inspired it, this last harm, in particular, is to be expected.

Senate President Ferguson told the Washington Post that the draft legislation builds upon a May 6, 2019, article in the New York Times by economist Paul Romer. In that opinion piece, Romer advocates for a tax on digital advertising – specifically targeted advertising – not because of the revenue it would generate, but rather due to his objection to targeted advertising generally.

But this is misguided. Targeted advertising is the lifeblood of the Internet as we know it. Consumers willingly provide personal information (browser history, etc.). In return, they receive "free" content and services. Exposure to targeted ads – which, incidentally and importantly, provide information on specific offerings that, by definition, they are likely to find compelling – is the non-monetary price that they agree voluntarily to pay. This voluntary exchange enhances consumer welfare, and even more so for low-income individuals.

Romer makes clear, however, that he would prefer that digital platforms abandon this win-win business model and switch to ad-free subscription (pay) services. A tax on targeted advertising is the stick he would use to force them to do so. In fact, when Romer testified in late January at a hearing before the Maryland State Senate's Budget and Taxation Committee hearing on SB 2, he reportedly stated that he wants targeted advertising to stop and that he would be happy if the tax resulted in no revenue.

A tax on digital advertising services would reduce consumer welfare by imposing on ad-supported services additional costs, in the form of taxes, specifically and primarily designed to modify providers' behavior. According to its architect, that harm is a feature, not a bug.

Maryland should reject this highly flawed digital advertising tax and look elsewhere for a source of additional revenue for education if it wants to fund some or all of the Kirwan Commission recommendations. All told, SB 2 would require the state to expend substantial sums on legal fees; likely never go into effect; lead to higher prices if it did; shift advertising spending to other states; harm both consumers and businesses, in particular those dependent upon ad revenue; and undermine popular ad-supported business models. In other words, it would do more considerably harm than good.

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 Ranks Low in Freedom Index

Earlier this month, the Cato Institute published the 2016 edition of “Freedom in the 50 States,” coauthored by William Ruger and Jason Sorens. This study ranks each state with regard to its overall “freedom” by measuring the restrictions the state has placed on both personal and economic choices. For the purposes of this blog, I will use the authors’ analysis to discuss Maryland’s rankings among a number of economic freedom categories.

I note at the outset that since taking office in January 2015 Governor Larry Hogan has taken some actions, and proposed others not adopted by the Maryland General Assembly, which have and would improve Maryland’s ranking. But there is still much more work to be done.

Overall, Maryland is in the bottom five states in the “freedom” index, ranking 46^th in the country. Maryland also happens to rank 46^th in terms of “economic freedom.” This low ranking is attributable to the state’s combination of high taxes rates, unnecessary regulations, and burdensome occupational and business licenses that create barriers regarding how Maryland’s citizens can earn and spend money. Maryland’s regulatory and fiscal policies are the biggest reason for why its overall ranking is so low.

Free State Foundation President Randolph May and I have criticized Maryland’s regulatory policies and discussed areas where the state could improve in a January 2016 Perspectives from FSF Scholars entitled “Achieving Efficient Government and Regulatory Reform in Maryland.” In the “Freedom in the 50 States” study, regulatory freedom measures a number of different specific categories, including land-use requirements, labor market restrictions, and occupational licensing. Maryland ranks 49^th in regulatory freedom. Here are some more specific findings relating to Maryland’s poor showing:

• Land-use freedom measures restrictions on rent control, how much a state uses eminent domain, and the number of permits and zoning regulations that burden property owners. Maryland has very restrictive land-use regulations, ranking it 48^th in terms of land-use freedom. The authors state that if Maryland were to eliminate rent control, by itself, the state would move from 49^th to 45^th in terms of regulatory freedom.

• Labor market freedom considers a state’s right-to-work laws, minimum wage laws, disability insurance requirements, and worker’s compensation regulations. Maryland ranks 37^th in labor market freedom.

• Maryland ranks 49^th with regard to occupational freedom. As I discussed in a July 2015 blog, Maryland has overly restrictive occupational licensing requirements. These regulatory requirements burden entrepreneurial activity and create barriers for upward mobility, especially for low-income citizens.

“Fiscal freedom” is another important component of economic freedom. Maryland ranks 34^th in the fiscal freedom index, which measures the tax burden placed on state residents, the amount of state spending, the amount of state debt, and the percentage of employment in the public sector. The authors say Maryland’s overall tax burden is average among the states, which is a more positive assessment than the most recent report from the Tax Foundation. However, the authors do say that state-level taxes have risen steadily over the last six years. One of Maryland’s most problematic components of its fiscal freedom ranking is its excessive business subsidies. The authors state that if Maryland were to end all business subsidies and cut taxes equivalently, its fiscal freedom ranking would rise from 34^th to 24^th.

For years, FSF scholars often have discussed Maryland’s burdensome tax and regulatory policies and the impact those policies may have on businesses and residents considering leaving the state. The state and local economy is one of the main reasons individuals migrate among states. According the study, Maryland had a net migration rate (NMR) of -2.4% in 2014. All of Maryland’s neighboring states not only rank higher overall, but also have a more favorable NMR. Delaware ranks 31^st with an NMR of 7.6%, Pennsylvania ranks 26^th with an NMR of -1%, Virginia ranks 21^st with an NMR of 2.4%, and West Virginia ranks 39^th with an NMR of 0.9%. While high tax rates and unnecessary regulations may not be the only reason why Maryland experienced a net population loss, reducing tax rates and eliminating burdensome regulations could incentivize individuals and businesses to remain in the state.

Governor Larry Hogan has done a commendable job since taking office in January 2015 to take actions that move Maryland in a favorable direction. He has worked to lower licensing fees, transportation tolls, and tax rates. Governor Hogan also established a Regulatory Reform Committee with the mission of eliminating unnecessary regulations and streamlining administrative processes. But, as Maryland’s poor showing in Cato’s “Freedom” index indicates, there is much more work to be done, and the Maryland legislature needs to act in way that is consistent with improving the state’s “freedom” ranking.