Maryland House of Delegates, Senate Approve Data Privacy Bills

On Saturday – just ahead of yesterday's "crossover day" deadline – the Maryland House of Delegates voted 105-32 to approve HB-567, comprehensive data privacy legislation. The cross-filed Senate bill, SB-541, passed unanimously last Thursday.

Should the Maryland Online Data Privacy Act of 2024, which has been referred to conference, become law, it would represent the sixteenth contribution to the state-level "patchwork" of comprehensive data privacy laws that has emerged in the face of Congress's continuing failure to act.

For an overview of the law's specific provisions, please see "Free State Lawmakers Debate Data Privacy Legislation," a February 2024 post to the FSF Blog.

Free State Lawmakers Debate Data Privacy Legislation

Maryland soon could join the not-so-exclusive club for states that have forged divergent data privacy regulatory paths. Last month, New Jersey became the fourteenth state (and the first this year) to enact a comprehensive data privacy law, a development that I highlighted in a January 2024 post to the Free State Foundation's blog. Yet another bill awaits the signature of New Hampshire Governor Chris Sununu.

As I detailed most recently in "More States Compound the Dreaded Privacy 'Patchwork' Problem," a July 2023 Perspectives from FSF Scholars, the longstanding lack of a federal data privacy regime – specifically, one that preempts inconsistent state-specific approaches – has fostered an unworkable situation that creates compliance headaches for companies and confusion for consumers.

Hearings on the Maryland Online Data Privacy Act of 2024 (the Act) were held on February 13, 2024, by the House Economic Matters Committee (House Bill 567) and on February 14, 2024 by the Senate Finance Committee (Senate Bill 541).

The Act establishes a familiar set of consumer rights: to know that personal data is being collected; to access, correct, delete, and receive a copy of personal data; to obtain a list of the categories of third parties to which personal data is disclosed; to opt out of the processing of personal data for targeted advertising and automated profiling; and to opt out of its sale.

Perhaps most notably, the Act goes further than other state laws in limiting the personal data that companies may collect – that is, "data minimization" ("A controller shall … [l]imit the collection of personal data to what is reasonably necessary and proportionate to provide or maintain a specific product or service requested by the consumer to whom the data pertains.")

On its face, the Act does not create a private right of action. As was the case with the New Jersey law reference above, however, the Act's draft language has prompted concerns that it "do[es] not explicitly provide for exclusive Attorney General enforcement" (emphasis added). Specifically, Section 14-4613, which defines a violation of the Act as "[a]n unfair, abusive, or deceptive trade practice … [s]ubject to the enforcement and penalty provisions contained in Title 13 of this article," also ambiguously asserts that it "does not prevent a consumer from pursuing any other remedy provided by law."

Breaking from the approach embraced by other states, and thus further complicating compliance for companies, the Act does not provide businesses with an opportunity to cure alleged violations.

If enacted, the Act would go into effect on October 1, 2024.

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.

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.

MD Governor Hogan Vetoes Digital Ad Tax

On May 7, Maryland Governor Larry Hogan vetoed the first-of-its-kind state digital advertising tax passed by the General Assembly on March 18. House Bill (H.B.) 732 was part of a package ushered through during the last days of a coronavirus-shortened legislative session in order to implement and fund costly education reforms recommended by the so-called Kirwan Commission. In doing so, Governor Hogan declared that:

These misguided bills would raise taxes and fees on Marylanders at a time when many are already out of work and financially struggling. With our state in the midst of a global pandemic and economic crash, and just beginning on our road to recovery, it would be unconscionable to raise taxes and fees now. To do so would further add to the very heavy burden that our citizens are already facing.

 The Free State Foundation could not agree more.

In a March 13 blog post and March 30 op-ed in The Baltimore Sun, FSF President Randolph May and I explained why H.B. 732 would be bad policy under the best of circumstances. More recently, in an April 30 Perspectives, I argued that H.B. 732 (as well as similar bills that have been introduced in New York) would undermine the central role that online commerce can play as we endure, and recover from, the economic impact of COVID-19.

H.B. 732 at passage enjoyed sufficient support to override Governor Hogan's action yesterday, but much has changed since. The General Assembly should acknowledge the radically altered economic reality that exists today and allow this veto to stand.

Maryland Should Not Adopt a Net Neutrality Law

Today there is a hearing in the Maryland General Assembly on SB 287, a bill which would impose net neutrality mandates on Internet service providers doing business with the state. The hearing is before the Senate Committee on Education, Health, and Environmental Affairs. The prepared testimony of FSF President Randolph May and Research Fellow Michael Horney is here. The testimony explains why the adoption of this Maryland law is problematical as a matter of law and policy.  

‘Til Death Do Us Part? Maryland “Death” Taxes and Interstate Migration

The Tax Foundation recently released a report comparing state inheritance and estate taxes for 2014. In addition to federal estate taxes, individual states can choose to levy their own estate and inheritance taxes. Estate taxes are levied against the estate of the deceased regardless of who inherits the assets (except for property left to a surviving spouse, which is exempt). However, inheritance taxes are charged on the transfer of assets to heirs based on the relationship of the deceased to the inheritor.

Estate taxes impose a higher tax burden on state residents than federal estate taxes, and state inheritance tax laws may have a significant effect on the way a person chooses or is able to transfer assets upon his or her death. States that impose these “death” taxes drive residents out of state to retire in states with “warmer” estate and inheritance tax climates. 

According to the Tax Foundation’s report, fifteen states and the District of Columbia currently levy an estate tax in addition to federal estate taxes, and six states impose an additional inheritance tax. Maryland is one of only two states that levy both an estate and inheritance tax on its residents (the other state is New Jersey).

However, there is some good news. In March, the Maryland General Assembly passed and the governor signed a measure that gradually raises the amount exempt from the state’s estate tax to coincide with the more generous exemptions allowed by federal estate taxes. The reform increases the amount exempt from the state estate tax from $1 million this year, to $1.5 million in 2015, $2 million in 2016, $3 million in 2017, and $4 million in 2018. By 2019 it will match the federal exemption which is projected to be $5.9 million, up from $5.34 million today (indexed for inflation).

The Maryland legislature should be applauded for initiating this reform process. But there are still more reforms to Maryland’s state tax policies that should be undertaken. First, Maryland legislators should repeal or reduce the state’s 10% state inheritance tax. Even if no state estate tax is due thanks to the exemption or other factors, Maryland residents may owe a separate inheritance tax depending on the relationship of the parties inheriting assets with the deceased.

As the Tax Foundation’s map below shows, neighboring states like Pennsylvania and Delaware only impose either a state estate or a state inheritance tax on residents. Delaware alleviates this tax burden by allowing the second highest exemption threshold in the country -- over $5 million (trailing only Hawaii). And Virginia and West Virginia do not impose either state estate or inheritance taxes.

According to the Tax Foundation “state and inheritance taxes have large compliance costs, have been shown to suppress entrepreneurship, and are among the most harmful taxes to economic growth.” In addition to whatever other more direct negative economic effects they cause, high inheritance and estate taxes have another negative effect: they spur migration out of the state.

I have previously written about the effect of state tax policies on interstate migration on the FSF blog. In high-tax states like Maryland as well as New York, Illinois, and Connecticut, taxes were a major factor in residents’ decisions to leave the state according to a Gallup poll. Maryland’s poor business tax climate is partially to blame for this effect, since the state ranked number 33 in ALEC’s 2014 annual state economic outlook “Rich States, Poor States.” And, Maryland ranked near the bottom of the Tax Foundation’s State Business Tax Index at number 47. But estate and inheritance taxes are clearly a factor as well.

This type of thinking is also common in other states that levy a high estate or inheritance tax on residents. For example, the Illinois Policy Institute recently reported that state “death” taxes “chase wealthy retirees out of state.” Illinois loses a large number of residents who migrate to states with no “death” taxes. Commonly, Illinois residents are drawn to Florida, Texas, Indiana, and Wisconsin, which have no estate or inheritance taxes and also have a better business tax climate and no state income taxation.

The reforms to state estate taxes recently adopted by the Maryland legislature, commendably, are a step in the right direction. But, clearly more work needs to be done to improve Maryland’s tax climate. Policymakers in Maryland should consider state tax reforms that encourage entrepreneurs to start and keep business in state, foster a healthy business climate, and discourage wealthy residents from retiring elsewhere. Doing so will help keep investment, consumer spending and wealth in state for the benefit of present and future residents of the Free State. 

Growing Tax Bills Burdening Wireless Subscribers

Wireless consumers are under a pile of federal, state, and local taxes, fees, and surcharges. Regrettably, in recent years that costly pile has grown heavier. State and local governments bear responsibility for the burdens on wireless consumers resulting from their own misguided tax policies.

For its part, Maryland should halt – and reverse -- its state and local wireless tax hike trend. It should reduce the special burden it puts on wireless consumers through multiple taxes, fees, and surcharges. Ideally, Maryland tax policy should treat wireless services just like any other service, taxing them no higher than general sales tax rates and limiting any imposed fees to actual costs.

Trenchant analysis of wireless tax trends is provided in Scott Mackey's study "Wireless Taxes and Fees Continue Growth Trend." According to Mackey, "[t]he average burden on consumers increased from 16.26 percent in July 2010 to 17.18 percent in July 2012, a 5.5 percent increase in just two years." The single largest share of the growing tax burden on wireless consumers is attributable to increasing federal universal service fund (USF) surcharges. But this burden is also explained by the fact that "[s]tate and local wireless tax and fee burdens rose modestly from 2010 to 2012, from 11.21 percent to 11.36."

As Mackey explained, "[o]ne of the long-standing arguments for reform of wireless taxation is the disparity in the tax burdens on wireless services compared with the tax burdens on other goods and services subject to state sales and use taxes." Unfortunately, this disproportionate taxation of wireless continues. "Wireless customers now pay taxes, fees, and surcharges nearly two and a half times higher than the average 7.33 percent general sales tax rate imposed on other taxable goods and services."

Consider now Maryland's system of multiple taxes, fees, and surcharges, and the disproportionate burden they put on wireless services compared to other services. Maryland grants its local governments authority to impose high tax rates on wireless. The City of Baltimore and Montgomery County impose $4 charges per line per month. Monthly wireless bills for consumers in Maryland also include 911 fees, set both at the state and county levels. The state 911 fee is $.25 cents per month per line, while county 911 fees run to $.75 cents per month per line in Baltimore and Anne Arundel counties. And Maryland's new state universal service fund took effect on July 1, 2012. Maryland's USF surcharge grabs another $.18 cents per month.
 
Maryland consumers bear the eleventh highest wireless tax burden in the nation according to Mackey's analysis. While the state applies its regular 6 percent sales tax to wireless services, Maryland's wireless consumers face an average state and local tax rate of 12.77 percent thanks to the additional taxes, fees, and surcharges.

Unlike higher taxes, say, on cigarettes, which are imposed at least in part to discourage consumption, the government should not want to discourage consumption of wireless services. It's debatable whether taxing power should ever be used to directly alter consumer behavior. But discouraging consumption of the targeted service is what higher taxes do, of course.

Aside from higher prices that discourage consumer adoption of wireless, there are broader economic consequences stemming from this kind of heavy and disproportionate taxation. "Higher taxes on wireless service coupled with increased taxes on wireless investments," pointed out Mackey, "may lead to slower deployment of wireless network infrastructure, including 4G wireless broadband network technologies that an increasingly mobile workforce relies on for economic success."

Burdensome and distortionary tax policy poses particularly significant harm to marketplace investment in next-generation wireless networks. It results in forsaken business productivity gains resulting from technological upgrades, not to mention lost job creation opportunities. Observed Mackey: "If wireless service were subject to the same tax treatment as other taxable goods and services, increased carrier revenue could make as much as $3 billion more per year available to invest in network expansion and improvements."

The most economically sound, efficient long-term tax policy for states like Maryland to pursue includes a broad-based tax set at a low rate. A simplified approach makes for easy compliance by businesses that assess taxes owed to the relevant taxing authorities. It better ensures that all consumer services are taxed fairly, encouraging efficient economic activity in the market and ensuring that the tax system does not become a mechanism for distorting or changing consumer buying choices. In the context of wireless and other communications services, this approach means taxing such services at the same rate as any other kind of service and limiting any fees to costs that the relevant services actually impose on the public.

In 2012 the Maryland General Assembly established the Maryland Communications Tax Reform Commission. The Commission is tasked with assessing the "feasibility and fiscal implications for the State and local governments of a modernized, competitively neutral communications tax and fee system that eliminates disparate treatment of similar communications service providers" as well as the "efficacy of tax and other incentives to encourage investment in broadband networks and emerging technologies." The Commission will issue an interim report recommending tax reforms to the Governor and the State Assembly by the end of this year, with a final report due by June 30, 2013.

Maryland's tax policy toward wireless and other communications services is ripe for reform. The heavy and disproportionate tax burden shouldered by Maryland's wireless consumers needs to be lifted. Obstacles to wireless broadband adoption and expanding economic opportunities arising from next-generation networked technologies must be removed. A streamlined, broad-based, low-rate tax policy is in Maryland's long-term best interest.

Hopefully, the Maryland Communications Tax Reform Commission will seize the opportunity it has been given. Maryland's wireless consumers need tax relief from a haphazard tax system that needs reform.

Maryland Must Make Its Business Climate More Competitive

In Volume 2 of his Law, Legislation and Liberty trilogy, economist Friedrich Hayek explained that the everyday term "economy" doesn't adequately encapsulate the dynamics of functioning free markets. Hayek described "the order brought about by the mutual adjustment of many individual economies in a market." And he used word "catallaxy" to define this order of competing economies.

"Catallaxy" never captured public consciousness, of course. But the idea that economic competition takes place not only within particular regions or markets but also between different markets surely resonates with us. Living, as we do, in a Union of 50 states, we recognize that states compete with one another for opportunity, jobs, and business enterprise. A state's quality of life depends on its maintaining an economy that can effectively compete with the other 49 states, with a state's economic competitiveness vis-à-vis its immediate neighbors an imperative.

Now a special report just issued by CNBC offers Maryland a timely reminder about the state's pressing need to boost its business-friendliness and overall economic climate. In "America’s Top States for Business 2012," CNBC placed Maryland at #42 in "Cost of Business." Maryland also ranks #43 in "Cost of Living," making it the 8th most expensive state to live in. 

CNBC ranks Maryland higher according to some other important indicators. But for business start-ups or existing enterprises looking to grow, bottom-line business costs are a critical determinate of where to locate or migrate operations. Moreover, where Maryland's score fares better, neighboring Virginia scores better still. Maryland's #24 ranking in "Business Friendliness" pales next to Virginia's #3 ranking.

CNBC's Special Report should clue Maryland policymakers to the work they have cut out for them. As we've blogged about previously, steps for Maryland to improve its economic climate and attract new jobs and business opportunities include: getting its continuing budget deficit and public pension liability problems under control, reducing its business tax rate to more competitive levels, avoiding new taxes and regulations that punish technology and entrepreneurship. Otherwise, the best economic opportunities will take place outside of Maryland's borders.

More Reforms Needed to Relieve Maryland's Pension Liability Problems

The Pew Center On States' June 2012 Issue Brief, "
Widening the Gap Update" spotlights the problem of states' unfunded liabilities for public sector pensions and retiree health care. According to the Issue Brief:

In fiscal year 2010, the gap between states' assets and their obligations for public sector retirement benefits was $1.38 trillion, up nearly 9 percent from fiscal year 2009. Of that figure, $757 billion was for pension promises, and $627 billion was for retiree health care. 

Count Maryland among the many states whose irresponsibility in state budgeting practices puts them into pension liability predicaments. The Pew Center's
Fact Sheet on Maryland points out that Maryland has failed to pay in full its annual pension contributions since 2005. As of fiscal year 2010, Maryland's pension deficit was $20 billion, and the state had only funded 1 percent of its $16 billion obligation for retiree health care.

Also count Maryland among those states that have recently undertaken a number of reforms to shore up their pension and health care funding shortfalls. As the Fact Sheet explains:

Maryland lawmakers approved pension cuts in 2011, including increasing contributions from current and future employees and reducing annual cost-of-living increases for retirees. Lawmakers also reduced retiree health care benefits by requiring higher co-payments for prescription drugs.

But like many other states, Maryland has more reforming work to do. As the Issue Brief puts it, "continued fiscal discipline and additional reforms will be needed to put states back on a firm footing."

Next steps for Maryland to shore up its unfunded obligations should include:

• Adjusting its annual return on investment assumptions. Maryland's pension system assumes a rosy 7.75 percent annual return on investment. True, investments enjoyed high returns over the last two fiscal years. But with stocks tumbling in 2008 and 2009, that same investment return assumption is responsible for significant funding shortfalls. A May 27 New York Times article, for instance, cites a National Association of State Retirement Administrators' finding of an average 5.7 percent return for state pensions over the last ten years.
• Increasing and meeting its annual pension contribution amount. As explained in a June 20 MarylandReporter.com article, Maryland continues to rely on the "corridor methodology" as a means of avoiding full pension funding for each year. Under this method, the state can make annual pension contributions equal to the prior year's contributions plus 20% of the difference between the prior year's contributions and what it otherwise would have had to contribute in the current year. By eliminating the corridor method and increasing its annual payments, Maryland should meet its obligations in full, every year.
• Transitioning to a defined contribution or hybrid plan. As we've explained in prior blog posts, Maryland should transition future employees from a defined benefit pension (where benefits are determined by a set formula) to a defined contribution pension (where benefits are determined by investment returns). The Issue Brief points out that thirteen states have hybrid plans, with neighboring Virginia adopting a hybrid plan in 2012. Such plans combine features of defined benefit and defined contribution plans. A transition to a defined contribution or hybrid plan would more closely tie benefits to market performance, reducing the state's obligation to provide additional pension funding when markets experience economic downturn.

Further delay by Maryland in reforming its pension system will make it that much harder to achieve fiscal responsibility. 

Saying NO to Maryland's New Tech Tax

Remember Maryland's ill-fated computer services tax? State officials wanted to cover the state's budget deficit by tapping a new revenue source. The tax was unpopular and never took effect.

But the idea of taxing innovation and economic efficiency has now been brought back to life in the Maryland legislature. The newest tech tax targets? Online remote sales and digital downloads.

Back in 2007, the Maryland legislature stuck computer services with a 6% sales tax rate. The tax was quickly rammed through the legislature in a special session, without public debate, and signed into law by Governor Martin O'Malley. This triggered an immediate backlash from businesses and everyday citizens. Public officials who supported the computer services tax backpedaled and soon caved. It was repealed just a handful of months later.

Unfortunately, the Governor and some in the Maryland legislature seem to have forgotten the lesson. This month bills containing Governor O'Malley's proposed budget were introduced in the Maryland Senate and House (SB 152 and HB 87). If enacted, the proposed budget would extend the 6% sales tax rate to downloaded "digital products" of several stripes, such as music, videos, books, ringtones, and more. It would also impose sales tax collection obligations on remote (that is, out-of-state) online retailers that have website ad commission sales arrangements with Maryland residents. This means that online retailers with no physical presence in Maryland would charge the 6% sales tax rate on purchased goods and remit the money collected to Maryland tax officials.The lesson of the computer services tax is that policymakers shouldn't harm businesses and consumers with tax burdens on hi-tech services that are crucial to optimizing beneficial solutions and cost efficiencies. By enabling businesses and consumers to order goods from remote retailers through the Web or to download products directly through the Internet, broadband networks offer the benefits of convenience and increased speed. Such technology also reduces delivery and transaction costs. This makes digital e-commerce platforms economic force multipliers.

These tech tax provisions in the proposed budget will, of course, place direct and indirect burdens on all those using Internet-related technologies. But there are some particularly problematic aspects to the current budget proposal's targeting of e-commerce.

For starters, language included in the current budget proposal is overbroad. Definitions and provisions relating to "digital products" appear to subject to taxation, not just digital products downloaded in business-to-consumer transactions but also digital products downloaded in business-to-business transactions. This would create multiple taxation problems that tax laws typically protect against. Here, the result of compounding taxable events would be increased costs to businesses for inputs. And those costs surely will be passed on to consumers in the form of higher prices for outputs.

As a matter of tax policy, the budget proposal's treatment of remote online sales is counterproductive. It would likely generate little revenue, and it could cause Maryland residents to lose business.

The budget proposal would impose sales tax collection obligations on remote online retailers that have website ad commission sales arrangements with Maryland residents.

More specifically, it would attach tax collection obligations to remote online retailers that have web advertising affiliate agreements with in-state residents. Under such agreements, online affiliates typically place ad banners on their websites for goods sold by retailers like Amazon and Overstock.com. The affiliates receive a small commission when buyers click on the ads and purchase such goods.

But if this provision regarding online remote sales is adopted by the Maryland legislature and signed by the Governor, it would likely backfire. Significant numbers of Maryland residents with ad banners for remote retailers on their websites would find their ad affiliate agreements cancelled. As a study released by the Maryland Comptroller in November states, "[r]eportedly over 200 companies including Overstock.com and Backcountry.com have terminated their affiliates in one or more states that have enacted affiliate-nexus laws." And so the state would lose its trigger for imposing sales tax collection obligations on online remote sellers. (For more detail, see my FSF Perspectives paper from November, "Taxing Ad Affiliate Internet Sales Would Be Maryland's Mistake.")

For that matter, imposing tax collection obligations on out-of-state retailers likely violates the U.S. Constitution’s interstate Commerce Clause. Current U.S. Supreme Court jurisprudence recognizes Congress as the authority to address interstate e-commerce taxation matters.

Even if these glaring defects of the Governor's proposed budget were to be corrected, there are still good prudential reasons for Maryland to think twice before imposing sales taxes on digital downloads and on purchases from remote online retailers. Consider, for instance, the adverse effects of such taxes on Maryland's business climate. The just-released Tax Foundation's 2012 State Business Tax Climate Index once again places Maryland near the bottom compared to other states with respect to its business climate. Maryland (#42) must avoid doing further damage to its competitiveness vis-à-vis its neighboring states, such as Virginia (#26), Delaware (#12), and Pennsylvania (#19). According to the Comptroller's study, none of those three neighboring states currently impose taxes on digital goods. And both Virginia and Delaware already have lower general sales tax rates than Maryland.

Characteristics of digital age technologies only heighten the need for Maryland to make itself a competitive place for businesses to start-up or relocate to. Such technologies are highly portable. Therefore, it is not difficult of purveyors of digital goods to relocate to states without growth-inhibiting taxes and regulations.

The Governor and the Maryland legislature shouldn't repeat the sorry history of the computer services tax. Making up for budget deficits by taxing innovation and economic efficiency doesn't make sense. Putting a priority on fiscal responsibility and cutting wasteful spending does.

Maryland Must Fix Its Business Tax Climate To Bring Jobs and Investment

On October 26, the Tax Foundation issued its State Business Tax Climate Index. Authored by economist Kail Padgitt, the Index evaluates and provides a competitive ranking of all fifty states according to how they tax businesses. Maryland ranks near the bottom. Officials and citizens in Maryland should consider the state's abysmal Index ranking a pointed reminder of the need to foster an economic atmosphere more conducive to innovation, investment, and jobs. Right now, Maryland needs some business tax climate change.

Just as businesses compete with other businesses for customers, states compete with other states for businesses and job creation. By creating economic climates favorable to start-ups and business migrations, states benefit from increased investment, jobs, and, ultimately, state tax revenues. One significant way that states compete with each other economically is through their respective tax systems. As the State Business Tax Climate Index puts it, "[t]ax competition is an unpleasant reality for state revenue and budget officials, but it is an effective restraint on state and local taxes." Interstate tax competition, including business tax competition, is especially important in difficult economic times: "[t]his means that state lawmakers must be aware of how their states' business climates match up to their immediate neighbors and to other states."

The State Business Tax Climate Index is based on five weighted components: state corporate tax, state individual income tax, state sales tax, state unemployment tax, and state property tax.

Overall, Maryland ranks 44th in the Index for state business tax competitiveness. Although Maryland's corporate tax and sales taxes put it in a relatively competitive position relative to other states, Maryland's individual income tax index puts it near the cellar, at 49th place. A state's individual income tax factors into a state's overall business climate, as the Index relates, because "a significant number of businesses, including sole proprietorships, partnerships and S-corporations, report their income through the individual income tax code." And, "[t]axes can have significant impact on an individual's decision to become a self-employed entrepreneur." Also, "[c]omplex, poorly designed tax systems that extract an inordinate amount of tax revenue are known to reduce both the quantity and the quality of the labor pool," thereby raising business costs. Maryland likewise lands near the bottom of the pack due to its unemployment insurance tax burdens (#47) and its property tax burdens (#40).

The need for Maryland to establish and maintain a competitive position is particularly challenging considering the relative positions of its neighboring states. Virginia, for instance, stands at #12 in the state business tax climate standings. As the title of an October 21 Baltimore Business Journal op-ed reads, "Maryland will keep losing business to Virginia if lawmakers don't change." Tax reform is crucial for Maryland to attract or keep businesses that have recently opted for Northern Virginia. Overall, #44 Maryland also falls behind Delaware (#8), Pennsylvania (#26), and West Virginia (#37). And while Maryland does compare favorably to New Jersey (#48), it should be kept in mind that New Jersey may be poised to become more competitive in the future. Recent state income tax reforms in that state have moved it out of last place on the Index list—a distinction New Jersey had held for a handful of years running.

The State Business Tax Climate Index does provide a positive point for Maryland to build on:

In 2008, Maryland added four individual income tax brackets, one of which will expire at the end of 2010. With expiration of the 6.25% rate on income over $1 million, Maryland's top state-level income tax rate in 2011 will be 5.5% on income over $500,000. In combination with its highest in-the-nation county-level income taxes, Maryland's personal income tax system will still rank poorly, but its Individual Income Tax Index score will improve.

Maryland will want to do better than a poor ranking if it hopes to prevent business relocations as well as job and other economic investment opportunity losses to its more competitive neighbor states. The path to a more favorable business tax climate, however, should not be based on special tax breaks and exemptions for select companies or industry segments. Unfair favoritism and manipulation of the tax system could bring some short-term benefits to well-lobbied interests, but it can also make a state's tax system more complex, increase compliance costs, and – most importantly – do nothing to address the underlying business tax climate problem. As the Index puts it:

The ideal tax system—whether at the local, state or federal level—is simple, transparent, stable, neutral to business activity, and pro-growth. In such an ideal system, individuals and businesses would spend a minimum amount of resources to comply with the tax system, understand the true cost of the tax system, base their economic decisions solely on the merits of the transactions without regard to tax implications, and not have the tax system impede their growth and prosperity.

Maryland should keep that ideal tax system in mind when evaluating its own tax system. For the sake of Maryland's economic future, the Legislature needs to take a serious look at bringing further reforms to the way it taxes individual incomes, and also take a hard look at reforming its unemployment insurance and property tax systems. Maryland shouldn't be satisfied with losing out on jobs and economic growth because of a bottom-tier business tax climate.

Maryland Pension Problems Need To Be Addressed, Not Avoided

An excellent editorial in Wednesday’s Washington Post hit all the right notes regarding Maryland's steep public pension funding deficits. Once upon a time—that is, in 2002—Maryland's state pension was fully funded. But as the editorial points out, Maryland's financial shortfall in funding former state employee pension liabilities now exceeds $18 billion, with unfunded health-care obligations piling on another $15 billion.

With that dire $31 billion deficit in mind, the editorial provides highlights of how Maryland made a financial mess for itself when it comes to public pension funding:

• beginning in 2003, state lawmakers reduced annual payments into the pension fund
• in the latter half of the 2000s, state lawmakers increased spending on programs without attempting to meet increasing pension obligations
• in 2006, state lawmakers by increasing pension payouts to retired teachers and state workers retroactively to 1998, adding $1.8 billion to state pension liabilities over 25 years
  state pension equity investments underperformed without state lawmakers making pension fund adjustments
• the economic downturn beginning in 2008 that included steep declines in stock values without any corresponding fixes by state lawmakers to state payments further steepened the pension fund's financial imbalance

And so Maryland faces a $31 billion public pension funding shortfall. Now what?

The editorial goes on with some straight talk for state lawmakers and the commission recently tasked with studying Maryland's pension funding problem (see the blog post "Maryland's Slow-Moving Sustainability Commission"). The recommended remedial steps for Maryland include:

• moving future employees away from a defined benefit pension system (where the benefit on retirement is determined by a set formula rather than investment returns) onto a defined contribution pension system (where the ultimate pension benefit is determined by investment returns)
• phasing in over the next decade a that full payments be made for public pensions
• transferring a portion of retired teachers' pensions to local governments that incur long-term debts for the state through negotiated agreements between local school boards and teachers unions

One can also add that nothing should stop Maryland lawmakers from considering those steps—particularly modest increases on annual state payments to public pension funds—even before the Sustainability Commission issues its reports. If it's too much to ask lawmakers to solve Maryland's public pension problems, can't they at least be expected to hold the line on public pension liabilities and keep the situation from growing worse?

The editorial acknowledges that “[a]ny or all of these steps will be difficult and require leadership." But that is precisely what leaders are elected to provide. And the steps will only more difficult if Maryland lawmakers continue to avoid the state's pile of pension debts.

Model Transparency Act Should Point the Way for Maryland

The American Legislative Exchange Council (ALEC), a free market-oriented member organization of state legislators, recently adopted new model legislation that sets some baseline government transparency standards. Maryland should consider either adopting ALEC's Transparency and Government Accountability Act or measuring its current open public records practices against ALEC's model and making changes to state law to bring greater governmental transparency.

The focus of ALEC's Transparency and Government Accountability Act is on having state governments make more records available to citizens online in a free and accessible format. Although states have their own Public Records or Freedom of Information Acts (FOIA) – such as Maryland's Public Information Act – those statutes essentially place the burden on citizens to make requests for records and pay appropriate fees in order to obtain access to public information.

And records requests sometimes encounter government officials' stonewalling that includes state-claimed exemptions or privileges from disclosure that ultimately require repeated requests or even litigation to resolve. When states require public disclosure of information as their default practice they provide citizens with easier access records from the outset. This reduces the frequency of citizens having to request records, and also reduces the administrative costs of government in responding to individual requests.

The Sunshine Standard, a website providing tools for improving government transparency, has made the model legislation available at its website. In particular, the ALEC model requires states to maintain an official, searchable website using a consistent domain that makes available a variety of information, including: open public meetings laws, schedules, and agendas; budget information, including spending and revenue information and state payments, elected official and administrative official information; state ethics laws and ethics commission process and enforcement information; state auditing information; government contracting and procurement information; lobbying registration and state agency lobbying contractual information; and state FOIA information.

Maryland transparency laws already make a lot of this information available. For instance, the Maryland Attorney General's office has a page dedicated to the Open Meetings Act, providing access to the laws, information about the Open Meeting Law Compliance Board, and an Open Meetings Act Manual. Likewise, the Maryland Department of Budget and Management provides access to considerable state budget information as well as government contracting and procurement information. And Maryland's Office of Legislative Audits provides information online. For instance, the website of the Maryland's State Ethics Commission is not especially user- or information-friendly, with a confusing advisory opinions section. What's more, whereas the ALEC model calls for information to be posted online about the status of investigations and enforcement actions, Maryland law requires that such investigations and enforcements be strictly confidential until final orders are issued. So no status updates can be found on the State Ethics Commission's site. In any event, Maryland does not currently make the information it already provides available at or linked from a consistent website domain as called for in the ALEC Model.

What's more, providing search indexes could also allow citizens to better analyze disclosed data. Insights can often be drawn from cross-referencing existing records, in particular. For example, a searchable site could provide an easy way to gain information about how much money a government contractor donated to the campaign of an elected official. Consideration of the ALEC model should also prompt states such as Maryland to consider not only making additional information more easily obtainable but also to revising their agency practices to become more transparent and open.

Of course, any comprehensive approach to government transparency should also include local governments. Citizens have often encountered enormous obstacles to obtaining access to government information at the local level. (See, for instance, this Washington Post op-ed from earlier this year, "Maryland's Fake Open Government.") Since counties, cities, and other governmental subdivisions are routinely delegated taxing, condemning, zoning and other regulatory powers, those local governments should adhere to standards of transparency too. States seeking to revamp and expand government transparency in light of ALEC's model should at the very least also consider applying it to local governments where relevant and where possible.

Transparency and open government should be an easy issue for bi-partisan and cross-ideological agreement. ALEC's Transparency and Government Accountability Act provides an excellent framework for states to consider. Maryland citizens could stand to benefit from a re-examination of their state's transparency laws and practices in light of the new ALEC model legislation.

Maryland's Slow-Moving Sustainability Commission

With the State of Maryland now facing some $18 billion in unfunded liabilities for state pension benefits plus another $15 billion in unfunded retiree health benefits, the commission created to examine state employee and retiree pensions and benefits is finally set to meet. Almost.

According to an article in yesterday's MarylandReporter, staffers will meet today to set out a meeting schedule for the Public Employees' and Retirees' Benefits Sustainability Commission. A first meeting is slated for later this month—or next month. As MarylandReporter also details, Sustainability Commission members actually hope to complete their interim report by their year's end deadline.

The new Sustainability Commission was created as part of the 2010 budget conference committee compromise. But as pointed out in an April blog post by Cecilia Januszkiewicz ("A Fig Leaf For Maryland's Fiscal Folly"), this isn't the first time the Maryland legislature has dodged the decisions that ultimately need to be made by turning the issue over to an outside commission for further study. The Maryland Legislature's evasion of responsibility on the issue goes back at least as far as its decision in the 2005 session to create a Task Force to study the state's pension liability problems. Anyway, the 2010 compromise ultimately rejected the Maryland Senate's proposal to make some changes to pension and benefit funding. The Maryland Senate's proposal, in turn, came in the wake of a report from the predecessor Sustainability Commission about ways to ensure the long-term viability of the state's pension system. So here they go again.

That said, MarylandReporter's coverage highlighted public employee unions' opposition to any possible increases in employee contributions or cuts in benefits. Curiously, one public employee union representative asserted the need for a long-term perspective instead of a snap-shot view and downplayed the seriousness of Maryland's multi-billion dollar pension deficit. But this sounds like little more than a "the-problem-will-fix-itself" approach that no responsible Maryland official or taxpayer should take seriously. And it was reliance on a snap-shot view from an earlier time that included a more robust economy and a full state treasury that played a big role in the overspending and overly-optimistic rate-of-return projections that led to the budget and pension liability woes that the state now faces.

The Sustainability Commission's presumable interim report would be followed up by another report…in 2012. Should the final report be prepared and delivered on time, then the Maryland Legislature would finally be faced once again with making changes to the state pension system for fiscal year 2013. Don't expect Maryland's pension liability problem to fix itself before then.

A Fig Leaf for Maryland’s Fiscal Folly

Once again, the General Assembly has hidden behind a fig leaf by consigning the issue of pension and health benefit liabilities to the Public Employees’ and Retirees’ Benefit Sustainability Commission. Senate Bill 141 passed during the 2010 session charges the Commission with making recommendations as to “all aspects of State funded benefits and pensions provided to State and public education employees and retirees.”

In light of past experience, the General Assembly knows that such a Commission will certainly delay, or even prevent, any solutions. This Commission is a huge victory for proponents of the status quo.

A recap of the recent history of commissions relating to public employee benefits will demonstrate why those opposed to changing the status quo have little to fear.

During the 2005 session, the General Assembly created a Task Force to Study Retiree Health Care Funding Options. This Task Force completed its work and issued a report in November 2005. The primary recommendation of the Task Force was to create a second Commission to study the topic further. During the 2006 session, the General Assembly showing its timidity in dealing with multi- billion dollar promises of health benefits for retirees created the Blue Ribbon Commission to Study Retiree Health Care Funding Options – the Blue Ribbon part was meant to distinguish it from its predecessor of the same name.

The law creating the 2006 Blue Ribbon Commission required a final report by December 31, 2008, allowing two and a half years of analysis and deliberation. The Commission did not hold its first meeting until August 2, 2007, fifteen months after it was created. After squandering more than a full year of the time prescribed to deliver recommendations, the Blue Ribbon Commission was granted a one year extension to December 2009 to make a final report. Despite the additional year granted for the final report, the Blue Ribbon Commission was unable to comply with the law.

Instead, the Blue Ribbon Commission once again needed an extension and the General Assembly granted it with little opposition. House Bill 771 and Senate Bill 444 passed by the General Assembly during the 2010 session – the same one at which the Sustainability Commission was created - extends the time for a final report by the Blue Ribbon Commission to December 2011, delaying the final report for three years from the originally scheduled due date and five years from the creation of the Blue Ribbon Commission.

This history provides little comfort that anything will result from the Sustainability Commission, except more delay. Two years ago I detailed the extent of the then-existing unfunded pension and health benefits liability problem in a commentary in the Gazette – and the problem has only grown worse while the politicians have dithered.

Perhaps what the General Assembly is hoping for is the return of a booming economy to eliminate the need for any action. Or perhaps, the General Assembly hopes to use the escalating costs of these obligations as support for tax increases after the election.

Whatever the hopes of the General Assembly, this much is certain: the increasing liabilities for public employee pension and health benefits are not issues that it wishes to address.