Maryland’s Shadow Budget Gave $1 Billion in Subsidies to Business Over Past 15 Years

Over the past 15 years, the state of Maryland has handed out  close to $1 billion  in subsidies for businesses. Coming in various forms (tax breaks, grants, and low interest loans with deferred payments), these subsidies result in a direct reduction in  the resources available for the state to provide essential services for Marylanders-education, healthcare, infrastructure, and human resources.

Both the total number and amount of credits claimed has increased dramatically over the past 20 years. Prior to 1995, there were just two business tax credits (enterprise one and Maryland-mined coal credits). Since then, lawmakers have established 28 business tax credits.

Tax credits make up what we like to call Maryland’s shadow budget, since they are akin to spending. But unlike spending through the state’s operating budget, most tax credits are not subject to an annual appropriation. This means that they don’t get the same level of scrutiny as other state spending. While the revenue lost to tax credits is reflected indirectly in the budget process, the way they are treated makes it very difficult to accurately estimate how much the state is spending through the shadow budget.

To understand the extent to which the public has had to pay for business tax credits in recent years, the  Enterprise Zone Tax Credit (available to  businesses that invest or create jobs in targeted areas) is a good example. The amount the state reimbursed business through this credit grew 456 percent  from fiscal years 2001-2014.

The increasing number of businesses that take advantage of these taxes, coupled with the fact that there is very little oversight, results in a growing cost for the taxpayer each year. A lack of oversight resulted in $700,000 in improper Enterprise Zone property tax credits granted to properties in Baltimore City, a recent Department of Legislative Services (DLS) audit revealed.

The Enterprise Zone Tax Credits are not effective in creating employment opportunities for enterprise zone residents, the DLS concluded. In addition, Enterprise Zones have become more prevalent in recent years, the agency said, diluting their impact and increasing state and local credit costs.

This year state leaders have been working hard to pass a balanced budget that overcomes a $700 million  deficit for fiscal year 2016, which starts July 1. Yet the  cost of business tax credits remains largely hidden from view. Maryland gave up approximately $50 million in tax credits last year to businesses.

As legislators are being pressured by the governor to cut spending on education, transportation, health care and other pillars of our economy, the shadow budget will continue to grow if current trends continue.

The passage of the 2012 Tax Credit Evaluation Act, which established evaluations of a handful of tax credits by the Legislative Evaluation Committee in conjunction with DLS, was a good first step to providing the public with more information about the tax credits  and a higher standard of accountability for businesses that receive them to determine whether the credits are worthwhile. Maryland needs more action just like that,  providing lawmakers the ability to evaluate whether  the true cost of providing business tax credits is  worth the annual losses to the state.