After Multiple Rounds of Revisions, Business Tax Breaks Still Fall Short

May 2, 2017 by Christopher Meyer in Blog

A package of manufacturing tax breaks favored by Gov. Hogan was one of the highest-profile bills passed by the General Assembly on its final day in session this year. Ultimately, the new law is likely to have little effect on manufacturing employment in Maryland, while making it harder for the state to invest in essential services like schools, hospitals, roads, and transit.

The bill went through multiple iterations on its way to passage, so it’s worth taking a look at what made it into the final law, and what it will mean for Maryland’s economy.

At the heart of the package are six newly created business tax breaks—three that are available only to new (or new to Maryland) manufacturing businesses located in certain economically distressed counties, plus three with broader eligibility. Qualified businesses can claim the tax breaks for 10 consecutive years. These businesses would also qualify for property tax credits, a waiver of the annual $300 filing fee charged to Maryland businesses, and a sales and use tax refund, which allows businesses setting up operations in economically distressed communities to claim a refund of all sales and use taxes paid on equipment.

Other tax breaks in the package include a manufacturing income tax credit, through which eligible businesses receive a credit equal to 5.75 percent of the wages paid to new employees; a provision that allows manufacturers to deduct a larger share of the cost of equipment in the year it is purchased, rather than as the equipment loses value over time; and a credit that is available to any Maryland business (not only manufacturers) that employs apprentices to receive a credit equal to $1,000 for each first-year apprentice it employs. Amendments incorporated into the final package increased the law’s emphasis on workforce development and phased out some of the tax breaks after several years. (See more details about these tax breaks below.)

The new law comes with a high price tag and questionable benefits. It adds additional tax preferences to a system that already favors Maryland manufacturers, thanks to the single sales factor formula that these businesses have benefited from since 2001. It also builds on tax break models that have been tried in Maryland, other states, and the federal government—and generally found ineffective.

Maryland currently has three tax break programs intended to encourage businesses to invest and create jobs in economically distressed parts of the state—Enterprise Zone Property Tax Credits, the One Maryland Program, and the Job Creation Tax Credit. These programs cost millions each year that could otherwise be used to support essential public services, and the Department of Legislative Services has found that Maryland gets little in return—the programs are poorly coordinated with one another and are largely ineffective in expanding economic activity. Similar programs in states like New York have had similarly disappointing results.

The accelerated depreciation tax break created by the bill mimics federal programs that were originally intended as temporary stimulus to soften the blow of the Great Recession, then extended without economic justification. Analyses by the Congressional Research Service and Moody’s Analytics have found this form of no-interest business loan to be an ineffective form of economic stimulus.

The package is not entirely without merit. The Workforce Development Sequence scholarships created by the bill will provide needed help to students who invest in skills as they get started in the job market or transition to a new career. However, these scholarships account for a miniscule portion of the $117 million five-year cost projected by the Department of Legislative Services in its analysis of a similar, earlier version of the bill. Moreover, while the requirement that businesses offer training programs to qualify for tax breaks—a requirement that was added through amendment—is an improvement over the original bill, it is still a relatively inefficient way to expand workers’ access to training.

There is no mystery about what policies are needed to bring high-quality jobs to Maryland. By investing in education, we can build the skilled workforce employers need. This includes well-designed investments in workforce development—investments that do not require corporate tax breaks to be effective. Investing in infrastructure also makes Maryland attractive to business. Finally, strong labor standards ensure that the jobs we create pay enough to support a family and do not compromise workers’ health. Expanding an already-generous suite of tax breaks for businesses is at best a distraction from these effective policies, and will make it harder to make the investments that make our economy strong.

A Detailed Look at New Tax Breaks for Maryland Businesses

Tax Breaks for New Manufacturers

The package creates three tax breaks for newly established manufacturing facilities in so-called Tier I counties—counties that qualify as economically distressed due to high unemployment or low per-capita income—plus up to three counties to be designated by the Department of Commerce. To qualify for these tax breaks, a business must have no previous presence in Maryland, must intend to hire at least five workers, and must offer skills training or postsecondary education to employees. Once a business is determined eligible for these tax breaks it can claim them for 10 consecutive years. These tax breaks are written to sunset in June 2020, so that no new businesses can be authorized to receive them after that time without additional legislation.

  • Property tax credit: This credit wipes out an eligible business’s state property tax responsibility.
  • Filing fee waiver: Eligible manufacturers are not required to pay the annual $300 filing fee charged to Maryland businesses.
  • Sales and use tax refund: Eligible manufacturers can claim a refund of all sales and use taxes paid on equipment purchased for use in a Tier I county. Each year through 2020, the Department of Commerce may authorize up to $1 million in sales and use tax refunds to newly eligible businesses.

Other Tax Breaks

In addition to the three tax breaks for new manufacturers, the bill creates three other tax breaks:

  • Manufacturing income tax credit: This credit is available to manufacturers that expand and create at least 10 new positions (or five in Tier I counties). Eligible businesses receive a credit equal to 5.75 percent of the wages paid to these new employees, making it effectively a wage subsidy. Like the tax breaks for new manufacturers, this credit sunsets in 2020 (although existing beneficiaries can continue to claim it for a total of 10 years) and is available only to businesses that offer skills training or postsecondary education. Each year through 2020, the Department of Commerce may authorize up to $9 million in income tax credits to newly eligible businesses.
  • Manufacturing accelerated depreciation: This provision allows manufacturers to deduct a larger share of the cost of equipment in the year it is purchased, rather than as the equipment loses value over time. This shifts companies’ tax responsibilities forward in time, amounting to a no-interest loan. It would apply to all equipment purchased by manufacturers that do business in Maryland, including equipment purchased and used in other states.
  • Apprenticeship credit: This credit is available to any Maryland business (not only manufacturers) that employs apprentices. An eligible business receives a credit equal to $1,000 for each first-year apprentice it employs. Credits paid through this program are capped at $500,000 per year.

Other Provisions

In addition to these tax breaks, the bill mandates funding for two job training programs:

  • $1 million per year for the Partnership for Workforce Quality, a match funding program created in 1989 to encourage manufacturing and technology companies to provide employee training.
  • $1 million for a newly created Workforce Development Sequence Scholarship program, which provides scholarships of up to $2,000 for students enrolled in non-degree job training courses at Maryland community colleges.