Maryland Ranks Bad for Business: Even This Left-Leaning Study Can’t Save It

On CNBC’s 2026 Top States for Business list released last week, Maryland ranks #36 overall for best business climate in the nation for business, worse than it ranked last year at #32 (1st=best for business; 50th=worst). The study evaluates all 50 states using 138 metrics across 10 categories of competitiveness.

Maryland has long struggled in similar business climate rankings (many of which CNBC incorporated into its scoring for this year). For example, on the Tax Foundation’s State Tax Competitiveness Index, Maryland ranked #46 in FY26. And on Cato Institute’s 2023 Freedom in the 50 States index, Maryland ranked #47 regarding regulatory freedom and #35 regarding fiscal freedom.

What stands out about the CNBC study is that its scoring leans "left" in several categories. Even with this progressive scoring boost, Maryland still stands at a mediocre overall (#36). Maryland avoids the bottom 10 ranking thanks primarily to "Quality of Life," "Technology and Innovation," "Education," and "Infrastructure" – categories with some of the heaviest weighting for progressive and market-interventionist policies.

For example, the Quality of Life category rewards states with more federal research funding, “livable wage” laws, union and collective bargaining protections, and even pro-abortion policies.

Maryland’s weak #36 overall ranking stems primarily from its dismal #49 ranking in the study’s "Economy" category – calling Maryland out for having one of the worst economies in the nation. In the "Economy" category, Maryland fell behind West Virginia (#48) and beat only Rhode Island (#50).

This near-last ranking on "Economy" (#49) is because Maryland scored poorly on factors like GDP growth, job growth, and overall budget picture including spending, revenues, and reserves. The "Economy" category also includes factors like the number of major corporations headquartered in each state and health of the residential real estate market. Maryland also ranks poorly on the "Cost of Doing Business" category at #44, which includes things like tax climate and related costs.

Most nearby states rank better overall: Virginia (#3), Pennsylvania (#13), and Delaware (#32). So, it’s no surprise that Marylanders are voting with their feet – a problem I wrote about here.

The General Assembly and Governor Moore need to get serious about improving Maryland's ability to attract and grow businesses. They must remember that at the end of the day, it’s everyday residents – Maryland's consumers – who benefit from a stronger economy and lower costs of doing business.

Maryland Has a Long Way to Go on Taxes

With Maryland's new budget going into effect in July for FY 2027, Governor Wes Moore has touted the plan as fiscally disciplined, citing no new taxes or fees. But one year without new increases doesn't reverse Maryland's problematic budgetary trajectory.

Maryland residents and businesses are still living with the tax increases enacted in the current FY 2026 budget, which included a 3% sales tax on IT services; an increase in the vehicle excise tax rate from 6% to 6.5%; an increase in the vehicle emissions inspection fee from $14 to $30; a 3.5% rental vehicle tax; and a new $5-per-tire fee, among others.

Maryland has traditionally been among the least tax-competitive states in the country, and it’s only gotten worse under the Moore administration. According to a Tax Foundation analysis of its State Tax Competitiveness Index, Maryland ranked 42nd on the index in FY 2020 and has since fallen to 46th in FY 2026, where 1st is most competitive and 50th is least.

Neighboring states have also seen their tax-competitiveness rankings slip over that period, but they all remain substantially more competitive than Maryland, according to the Tax Foundation report. In FY 2026, Delaware ranks 24th, Pennsylvania 36th, and Virginia 30th.

The income tax is a big part of why. Maryland’s low tax competitiveness is driven in large part by high income taxes, as the Tax Foundation's full report details, a topic I covered last month. As part of the FY 2026 budget, Maryland created a new top marginal rate for personal income tax at 6.5%, compared to 3.07% in Pennsylvania, 5.75% in Virginia, and 4.82% in West Virginia. Maryland’s corporate income tax rate is also high at 8.25%, compared to 7.99% in Pennsylvania, 6% in Virginia, and 6.5% in West Virginia.

This matters especially because Maryland is an expensive, high-cost-of-living state competing for businesses and workers who have options regarding where they choose to live. Maryland is making itself a harder and harder sell.

Governor Wes Moore needs to get serious about improving Maryland's budgetary situation. As part of that effort, the "Free State" definitely needs to treat improving its tax competitiveness ranking as an economic priority.

Tax Day Reminds Us That Marylanders Are Voting With Their Feet

Ahead of Tax Day, a new report from personal-finance company WalletHub ranks Maryland as 7th in the nation for the highest state tax burden on personal income – Maryland residents send 9.7% of their personal income to state coffers. And that's on top of the money residents pay in federal income taxes and in various state service fees, such as recent increases for vehicle requirements.

Income taxes, specifically, are the main driver of Maryland's high tax burden ranking, according to WalletHub. Maryland places 3rd in the nation for the highest income tax burden, with 4.3% of residents' personal income going to the state through that channel alone. WalletHub also examined property taxes and sales and excise taxes, where Maryland scored better. Maryland places 29th for property taxes (2.5% of personal income to the state) and 40th for sales and excise taxes (2.9% of personal income to the state), meaning it's the income tax load that pushes the overall state’s overall personal tax burden so high.

Maryland’s high tax burden is a major reason for Maryland’s outmigration problem. Even an analysis by the Maryland Chamber of Commerce last year featured Maryland’s troublesome outmigration, explaining that Maryland ranks near last in domestic migration – 45th in the nation. Maryland did have net positive migration in the year examined (July 2023 - July 2024), but that was because of international arrivals (53,100), which masked Maryland residents moving to other states (18,500).

The Chamber of Commerce analysis explained the state’s serious situation: "High taxes, rising living costs, housing affordability challenges and regulatory complexity are pushing residents to states with lower costs, better growth prospects, and more business-friendly climates." The top destinations include Florida, Texas, Virginia, North Carolina, and Pennsylvania – all states that offer lower or no income taxes.

If residents continue leaving for lower-tax, lower-cost states, Maryland may find itself caught in a fiscal cycle or downward spiral that's difficult to reverse – fewer taxpayers and even less room to reduce the burden on those who stay.

Report Ranks Maryland Highest in Mortgage Debt

A March 21 report by WalletHub financial writer Adam McMann ranks Maryland as the top state for mortgage debt increases. The report, "States Adding the Most Mortgage Debt,” is based on WalletHub's comparison of proprietary data for the 50 states from the third to the fourth quarters of 2023.

According to the WalletHub report, Maryland had the largest increase in average monthly mortgage between the third and fourth quarters of last year. During that time span, the average mortgage debt balance in Maryland rose 1.23% to $283,092. Underscoring the significance of that mortgage debt increase, is the report's finding that "no other state had an increase above 1%" and average mortgage debt actually decreased in 17 states during the fourth quarter of 2023.

 

The report states that “Maryland residents also have one of the biggest mortgage balances in general" and that "[t]heir average monthly payment is very high as a result, $2,145." On top of very high monthly mortgage debt, the report points out that "Maryland residents also have to deal with a relatively high property tax rate on their homes." A February 2024 ranking of state property tax rates by WalletHub found that Maryland had an effective real estate tax rate of 1.02%.

 

One common-sense takeaway from Maryland's high average monthly mortgage debt and its real estate tax burden is that Maryland's legislature should resist any future real estate tax rate hikes and it should instead consider providing real estate tax relief for Maryland residents.  

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.

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.

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.

Baltimore Sun Op-Ed Urging Veto of MD Digital Ad Tax

Today's edition of the Baltimore Sun features an op-ed that Free State Foundation President Randolph J. May and I wrote regarding the ill-conceived, and first of its kind, tax on digital advertising recently passed by the Maryland General Assembly.

In a blog post on March 13, we addressed the shortcomings of what at the time was pending legislation. An effort to generate additional revenues for education based upon a proposal conceived to discourage targeted advertising, Senate Bill 2 inappropriately singled out one form of commercial speech – digital, but not traditional – advertising, in violation of both specific federal law and the First Amendment.

It targeted large platforms (e.g., those that generate more than $100 million in annual gross revenues) with a tax ranging from 2.5 to 10 percent of annual gross revenues derived from "digital advertising services," unduly burdening interstate commerce – and implicating the Commerce Clause – by sweeping in revenues generated both in other states and globally.

And it relied upon an unworkable mechanism to determine when digital advertising is provided within Maryland's borders.

Nevertheless, on March 18, Maryland's legislature adopted an amended version of S.B. 2, House Bill 732. H.B. 732 responds to that last critique – S.B. 2's failure to identify accurately in-state digital advertising – by punting the question to a future rulemaking by the Comptroller. Otherwise, it suffers from all of the flaws we identified in S.B. 2.

The FSF op-ed, which urges Maryland Governor Larry Hogan to veto this misguided bill, can be found here. 

Proposed Maryland Tax on Digital Advertising Is Problematical

As the Maryland General Assembly gets geared up for its 2020 legislative session, a bill has been introduced by the current and former Senate majority leaders to tax online ad revenues. The sponsors say that such a digital advertising tax could raise $100 million a year.

It's true that Maryland's fiscal situation could use shoring up to reduce the perennial "structural deficit" that characterizes Maryland budget. But the proposed digital advertising tax is problematical for several reasons relating to sound tax policy.

For a good discussion, see this piece by the Tax Foundation's Ulrik Boesen.

We'll likely have more to say about this as the legislative session progresses.  

Governor Hogan Should Reestablish the Regulatory Reform Commission

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

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

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

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

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

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

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

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

Maryland and Other States Must Reduce Wireless Tax Rates

On October 11, 2016, the Tax Foundation published a report entitled “Wireless Tax Burdens Rise for the Second Straight Year in 2016.” According to report authors Scott Mackey and Joseph Henchman, wireless tax rates have increased to a record high 18.6% for the average U.S. consumer. Wireless consumers are paying an estimated $17.2 billion in taxes, fees, and government surcharges. And while average wireless bills have been dropping since 2008, consumers have been unable to enjoy the benefits because “taxes are growing at a rate twice as fast as average wireless prices have been falling.”

Wireless services have raised living standards for low-income Americans, offering them flexible low-cost connections to the rest of the world. Wireless communications provide low-income Americans cost-effective means for accessing health, transportation, and education services. However, burdensome state and local tax rates on wireless connections increase costs for low-income Americans who access these valuable services.

At the end of 2015, more than 64% of all low-income adults subscribed only to wireless voice services, whereas more than 48% of adults overall were wireless only. Wireless taxes and fees disproportionately harm low-income consumers because the taxes they pay represent a higher percentage of their income compared to middle and high-income consumers. With a federal Universal Service Fund rate of approximately 6.64%, state and local governments account for the remaining 11.93% of tax burden for the average American wireless consumer. These heavy taxes make it more likely that low-income consumers will drop wireless services. State and local governments must alleviate these disproportionate harms affecting low-income wireless consumers. For low-income adults who currently have no connection, a reduction in state and local wireless tax rates likely would encourage them to connect wirelessly.

Of course, all wireless consumers are harmed by record-high wireless tax rates. Artificial price increases from taxes reduce consumer demand and thereby reduce network investment. As Mr. Mackey and Mr. Henchman explain: “The reduced demand impacts network investment because subscriber revenues ultimately determine how much carriers can afford to invest in network modernization.” The authors add, “Higher taxes on wireless service, coupled with increased taxes on wireless investments, may lead to slower deployment of wireless network infrastructure, including fourth generation (4G) and fifth generation (5G) wireless broadband technologies.”

In Maryland, the wireless tax burden is severely harmful to consumers. Maryland and its localities charge up to five different taxes on a consumer’s monthly wireless bill. All combined, average wireless consumer tax burdens in Maryland far exceed the state’s general sales tax rate of 6%. Including Washington, DC and Puerto Rico, Maryland has the 15th highest combined wireless tax rate at 19.47%. But among Maryland’s neighboring states, Delaware ranks only 48th with a 12.98% combined rate. Meanwhile, Virginia is 47th highest with a 13.36% combined rate, and West Virginia is 46th highest with a 13.36% combined rate.

In particular, Baltimore has notoriously high wireless taxes. Baltimore charges a $4 tax per line per month. Therefore, the taxes on a basic $100 per month family plan of 4 lines would add almost $30 extra a month. (See chart below.) With the second highest combined wireless tax rate in the country – only Chicago ranks higher – Baltimore should reduce its wireless tax rates immediately in order to improve opportunities for its residents to cost-effectively access wireless services. More generally, Maryland should lower wireless tax rates to enhance opportunities for wireless providers to invest in statewide networks.

Table 6: Wireless Taxes and Fees on Multi-Line Plan in Selected Cities, July 2016
Federal, State, and Local
City	Tax on 4 line plan @ $100 per month	Tax Rate
Chicago, IL	$36.24	36.24%
Baltimore, MD	$29.84	29.84%
New York, NY	$27.11	27.11%
Philadelphia, PA	$26.24	26.24%
Omaha, NE	$26.06	26.06%
Seattle, WA	$25.94	25.94%
Providence, RI	$23.68	23.68%
Tallahassee, FL	$22.58	22.58%
Kansas City, MO	$21.49	21.49%
Los Angeles, CA	$21.19	21.19%

(Source: Scott Mackey and Joseph Henchman, “Wireless Tax Burdens Rise for Second Straight Year in 2016”)

In an October 17 blog post, Free State Foundation President Randolph May discussed ways that Maryland Governor Larry Hogan can improve his fiscal record. Governor Hogan’s two-year record of reducing taxes and fees and proposing to eliminate unnecessary regulations provides a strong start. The time is now right for the Governor to work with the Maryland General Assembly to reduce the tax burdens that wireless consumers experience on a monthly basis.

All state and local governments that burden their wireless consumers with heavy taxes should think twice about the harms being visited disproportionately on low-income consumers. State and local governments – including Maryland’s – should also recognize the negative impact that excessive and discriminatory taxation has on consumer demand and on network investment. High taxing states and localities should significantly decrease wireless tax rates to encourage more wireless connections for consumers of all income levels and more investment from wireless providers.

Maryland Has Relatively Low State and Local Sales Tax Rates, But…

On July 5, 2016, the Tax Foundation released a report entitled “State and Local Sales Tax Rates, Midyear 2016.” The authors, Jared Walczak and Scott Drenkard, ranked states (and the District of Columbia) by their combined state and local tax rates of the first half of 2016.

Five states do not impose statewide sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of those that do, Louisiana has highest combined sales tax rate at 9.98%. Maryland ranks towards the bottom at 38^th with a combined sales tax rate of 6.00%.

Maryland’s sales tax ranking should be applauded. FSF scholars have been critical of long-standing Maryland tax and regulatory policies for several years, so it’s good to be able to commend this particular element of Maryland policy. However, as the Tax Foundation’s report states, sales taxes are fairly transparent revenue collections because consumers can see their tax burden on the receipt of every purchase they make, while the real impact of income and corporate taxes can be much more complex and murky.

The Tax Foundation published a report earlier this year ranking Maryland with the 7^th highest overall state and local tax burden due to a combination of personal income tax rates, corporate tax rates, and “sin” tax rates. In other words, Maryland’s state and local sales tax rates are not the problem, although this does not mean that they could not be reduced. But in order to improve its general fiscal health and economic climate in a way that fosters growth, Maryland needs to reduce its personal income and corporate tax rates. If it did this, it would improve its ranking among the states with regard its overall tax burden – thereby incentivizing more entrepreneurial activity and economic growth within the state.

Facts & Figures Regarding Maryland’s Tax Rates

On February 29, 2016, the Tax Foundation released a new dataset called “Facts & Figures 2016: How Does Your State Compare?” The dataset is a one-stop-shop for much of the state-level data on tax rates and spending that the Tax Foundation collects and releases over the course of the year.

Here are some interesting facts about Maryland’s tax rates:

• Maryland ranks 7^th highest in the United States with a state and local tax burden of 10.9% of income. That means that the average Maryland resident pays $5,920 in state and local taxes each year. (See FSF President Randolph May’s January 2016 blog for more on this.)

• Maryland ranks 16^th highest in the U.S. with a 6% state sales tax rate. However, Maryland localities do not charge a sales tax, so combining state and local sales tax rates, Maryland ranks 37^th in the country.

• Although Maryland has a flat corporate income tax rate, it is one of the highest in the country at 8.25%. (Because some states apply a progressive corporate tax rate, there are no rankings for these.)

• Despite low gas prices recently, they could be lower. Maryland adds 32.60 cents in taxes and fees to every gallon purchased within the state. That is the 13^th highest amount in the U.S.

• Maryland imposes relatively high “sin” taxes, which are taxes on items that are considered more or less harmful. Maryland’s $2.00 excise tax rate per 20-pack of cigarettes is the 11^th highest in the country, while its $4.05 excise tax rate per gallon of spirits is 31^st highest in the country. Maryland’s wine tax rate is $1.35 per gallon, which ranks 12^th highest in the country, and its beer tax rate is 9^th in the country at $0.49 per gallon.

• Lastly, Maryland’s cell phone tax rate is a whopping 12.67%. This rate ranks Maryland 14^th highest in the U.S.

During the first year of his term, Governor Larry Hogan did a commendable job of beginning to address unnecessary barriers to economic growth in Maryland, including by reducing over 100 state fees which will save Marylanders an estimated $51 million over five years. Additionally, Governor Hogan’s proposed budget for fiscal year 2017 includes an estimated tax savings of $480 million over the next five years. However, there still is a lot of work to be done towards lowering tax rates, reducing regulatory barriers, and creating a more efficient state government.

Also, see the January 2016 Perspectives from FSF Scholars by FSF President Randolph May and me entitled “Achieving Efficient Government and Regulatory Reform in Maryland.”

Maryland Needs to Improve Its Business Tax Climate Ranking

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

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

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

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

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

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

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

Maryland Needs to Improve Its Fiscal Health – July 9, 2015

Maryland Needs to Improve Its Regulatory Climate – July 13, 2015

Maryland's Small Business Regulatory Climate Ranks Poorly – July 22, 2015

Maryland Needs to Improve Its Regulatory Climate - Part II – August 23, 2015

Reforming Maryland Business Licensing Regime – October 5, 2015

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

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