Statement in Support of Senate Bill 34

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

Position Statement Supporting Senate Bill 34

Given before the Senate Budget and Taxation Committee

The Maryland Center on Economic Policy supports Senate Bill 34 because it would create a fairer, more effective, and productive corporate tax system by establishing combined reporting for large, multi-state restaurant and retail chains 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 does. Combined reporting also closes the door to a range of accounting tactics some large, multi-state businesses use to avoid paying taxes to Maryland. For example, a company may establish a subsidiary in a state whose tax rates are lower, and shift its earnings there on paper by purchasing goods from the subsidiary at artificially low prices. In doing so, companies end up contributing less than their fair share to providing the state services from which they benefit. 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 also puts smaller Maryland-based companies with no presence outside the state on a more equal tax footing with larger companies that operate in many states. Main Street businesses cannot afford to spend millions developing these complicated tax avoidance structures, but their large competitors can, and in so doing gain an unfair advantage. This bill would level the playing field for local business, protecting local jobs. It also would provide some efficiency by eliminating some annual filing fees for small businesses.

As written, Senate Bill 34 applies only to businesses in the retail and restaurant industries. However, many small businesses that would benefit from combined reporting fall outside of those two industries. If an amendment were added to apply combined reporting to all industries, many more small Maryland businesses would gain a much greater ability to compete with large corporations.

Maryland would be joining many other states with this proposal. Combined reporting is well established around the country. Today, 24 of the 44 states with corporate income or similar business taxes, plus the District of Columbia, use combined reporting. Connecticut joined that list in 2015. 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]  Ninety 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 comply and thrive within a combined reporting model.

Furthermore, the attributes that make Maryland attractive to large corporations will not be affected 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 national capital. Businesses cannot simply move out of the state and find the same combination elsewhere. According to the accounting firm Ernst & Young, Maryland businesses get a better return on their tax dollar than those in any other state.[ii] And nothing about combined reporting would change that.

By eliminating annual filing fees for small businesses and establishing combined reporting for chain restaurants and retailers Senate Bill 34 would help Maryland become an even more attractive state for businesses.

The Maryland Center on Economic Policy respectfully requests that the Senate Budget and Taxation Committee make a favorable report on Senate Bill 34.

[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 2013.” August, 2014. http://www.ey.com/Publication/vwLUAssets/EY-total-state-and-local-business-taxes-august-2014/$FILE/EY-total-state-and-local-business-taxes-august-2014.pdf