Corporate Tax Break Would Be Bad For Business

By Benjamin Orr and Jim Racheff

This week, the Maryland Economic Development and Business Climate Commission suggested that Maryland should follow the bad policy decisions that some other states have made and give a tax break to large, profitable corporations.

Instead of joining this race to the bottom on corporate tax rates, Maryland should be in the race to the top. Let’s compete to see who can offer the best schools, transportation options, health care, and public safety services – things that actually contribute to a strong economy.

Giving massive tax breaks to large, profitable corporations doesn’t lead to economic growth. As we have seen in several states that cut taxes for corporations and the wealthy over the past few years, the result for average taxpayers is that their taxes go up and they get worse services in return.

The idea that Maryland just has to endure a little short-term budget pain to see economic gains, as some have suggested, is a pipe dream based on discredited economic theory.

Reducing the state’s corporate tax rate to 7 percent would cost roughly $133 million per year.

One only has to look to states like Kansas, where legislators bought into this too-good-to-be-true idea and slashed income tax rates in mid-2012. They’re still waiting for the promised economic gains. Meanwhile Kansas went from leading its region to trailing neighboring states on most measures of economic growth.

At the same time, Kansas has hiked its sales tax, local governments have been forced to raise property taxes and there have been sharp reductions in state funding for schools, libraries, jails and other basic services.

Maryland doesn’t need to go down the path of larger class sizes in schools, more potholes in the roads and longer waitlists for services.

As multiple experts told Commission earlier this year, taxes represent only one item on the list of many things company owners and CEOs take into consideration when making business decisions. A report to the commission by Moody’s Analytics said business taxes “prove not especially onerous in Maryland” and that such other factors as utility costs are more important.

Maryland does have a lot of assets that are important to businesses: a highly educated workforce, affluent customers, good quality of life for employees, and transportation connections to other markets. These would all be at risk if we stop asking large corporations to pay their fair share.

Further, Maryland businesses get a great return for their tax investment in the value of services they receive. An analysis by Ernst & Young for the Council on State Taxation found Maryland businesses get $1 of benefit for every 80 cents they pay in taxes.

There are steps the legislature can take to boost the state’s economy without putting vital state services at risk.

To level the playing field for small businesses, Maryland could adopt “combined reporting,” a fairer, more effective, and productive corporate tax system used in 24 other states and the District of Columbia. Each year Maryland’s small businesses pay their fair share and meet their tax responsibilities while large, multi-state enterprises use a tax loophole to limit their corporate taxes by shifting income – on paper – out of state. Combined reporting closes this loophole.

Lawmakers could also help workers who struggle to make ends meet on low pay by expanding the reach of the state’s Earned Income Tax Credit.

And, they could strengthen small business job-creation by making credit more obtainable and supporting efforts like the recent proposal by Johns Hopkins to connect Baltimore residents with healthcare jobs.

Maryland is a great place to live and do business today because of the public investments we make in schools, roads and safe communities. Those investments are more important than ever as we slowly recover from the Great Recession. Cutting taxes for large, profitable companies will undermine that effort.

Benjamin Orr is the Executive Director of the Maryland Center on Economic Policy. Jim Racheff is the chair of Maryland Business, an advocacy organization for small businesses, and the chairman and CEO of DMS Inc.