Business Relief and Tax Fairness Act Will Create a Fair and Effective Corporate Tax Structure

Given before the House Ways and Means Committee

Position Statement in Support of House Bill 615

House Bill 615 would create a fairer, more effective, and productive corporate tax system by establishing combined reporting for corporate income taxes in Maryland.

Combined reporting provides a more complete and accurate accounting of the profits corporations earn from their activities in Maryland than the current method. Combined reporting also closes the door to a range of currently legal accounting tactics businesses use to avoid paying taxes to Maryland. For example, a company may establish a subsidiary in a state with a lower tax and shift its earnings there on paper by purchasing goods from the subsidiary at artificially high prices. Combined reporting essentially treats a parent company and its subsidiaries as one corporation for state income tax purposes. Doing so prevents companies from reducing their taxable revenue by artificially shifting it out of state.

Combined reporting helps put smaller corporations with no presence outside of Maryland on a more equal tax footing with larger companies that operate in many states. Main Street businesses—which are responsible for most of the job creation in Maryland—cannot afford to spend millions developing these complicated tax avoidance structures, but their large competitors can, and in doing so gain an unfair advantage. This bill would level the playing field for local business, protecting local jobs. It would also provide some relief through the elimination of some annual filing fees for businesses with fewer than 10 employees.

Combined reporting is well-established around the country. Twenty-four of the 44 states with corporate income taxes and the District of Columbia use combined reporting. Because it is so common, most large corporations that would be subject to a Maryland combined reporting law already have significant experience complying with it elsewhere.[i] 90 percent of the largest employers in Maryland already operate—or are part of a corporate family that operates—in combined reporting states. Most of these companies operate in California, the strictest combined reporting state of all. Three fourths of them operate in multiple combined reporting states. These companies know how to thrive within a combined reporting model. Maryland will not be breaking any new ground with this proposal.

Furthermore, the attributes that make Maryland attractive to large corporations will not be diminished by this bill. We will still have a highly educated workforce, a strong intermodal transportation network, and high median income (which means Maryland customers have more money to spend). And we will still be close to the nation’s capital. Business cannot simply move out of the state and find the same combination elsewhere. Furthermore, according to the accounting firm Ernst & Young, Maryland businesses get a better return on their tax dollar than those in 47 other states or the District of Columbia.[ii]

House Bill 615 supports Maryland businesses by eliminating annual filing fees for small businesses and establishing combined reporting, leveling the playing field for our homegrown businesses. This bill would help Maryland become a more competitive business state.

For these reasons, the Maryland Center on Economic Policy respectfully requests that the House Ways and Means Committee make a favorable report on House Bill 615.

[i] Mazerov, Michael and Mark Enriquez, “Vast Majority of Large Maryland Corporations are Already Subject to ‘Combined Reporting’ in Other States,” Center on Budget and Policy Priorities, November 9, 2010, http://www.cbpp.org/cms/?fa=view&id=3317.

[ii] Ernst & Young, “Total state and local business taxes: State-by-state estimates for fiscal year 2015.” December, 2016. http://www.ey.com/Publication/vwLUAssets/EY-total-state-and-local-business-taxes-december-2016/$FILE/EY-total-state-and-local-business-taxes-december-2016.pdf.