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Research & Commentary: Maryland Corporate Income Tax Reform

March 15, 2016

Research shows new taxes have a stronger effect on a state’s economy than corporate income taxes, and high corporate income taxes are a deterrent to economic development, discouraging new businesses and high-income earners from moving into a new market

tax documents

Research shows new taxes have a stronger effect on a state’s economy than corporate income taxes, and high corporate income taxes are a deterrent to economic development, discouraging new businesses and high-income earners from moving into a new market while incentivizing current businesses to leave. High taxes also discourage new capital from coming to a state. To address these problems, legislators in Maryland are now considering a significant cut in the state’s corporate income tax, along with changes that would streamline the tax. 

Maryland’s corporate income tax is set at a flat rate of 8.25 percent. According to the Tax Foundation, Maryland’s corporate tax rate is 12th highest amongst those states that levy a corporate income tax. 

Over the past two years, a commission of legislators and business people appointed by the Maryland General Assembly have discussed methods to improve Maryland’s business climate. The commission determined one of the best ways to turn the state’s economy around is to cut the state’s corporate income tax rate. In response to this recommendation, the legislature is now considering a bill that would cut the corporate income tax rate from 8.25 percent to 7 percent. This rate would move the state corporate tax closer to the rates imposed by Maryland’s neighbors, including Virginia, which has a 6 percent tax rate and is Maryland’s biggest competitor for attracting new businesses. 

The legislature is also considering having the state adopt a single sales factor apportionment formula for Maryland corporations. A single sales factor is a method of tax collection that streamlines the tax process so companies pay corporate income taxes only on in-state sales, instead of the normal three categories: sales, payroll, and property. Supporters of the new method point out Maryland manufacturers are already paying taxes using the single sales factor, and they say expanding this method to additional businesses could make the state more attractive to newly created companies or relocating businesses. 

Maryland currently lags far behind most states in creating a welcoming business climate. Maryland ranks 40th in the Tax Foundation’s State Business Tax Climate Index (SBTCI). SBTCI compares state taxes in multiple areas that impact businesses, including corporate taxes. Maryland’s ranking is well behind its neighbors: Businesses in Delaware (14th), Pennsylvania (34th), Virginia (27th), and West Virginia (21st) all enjoy more favorable business policies. 

The Maryland Public Policy Institute has long championed a cut in Maryland’s corporate income tax rate. In a study examining this burdensome tax in Maryland, Pavel Yakovlev and Kanybek Nur-tegin argue corporate income taxes are an inefficient way to generate revenue for the government, and they say these taxes take a toll on the state’s economy: “Despite being levied at one of the highest rates in the world, it generates relatively little revenue due to myriad loopholes, which tend to benefit the largest of corporations.” 

Yakovlev and Nur-tegin also argue corporate taxes create a misallocation of physical and human capital, create higher prices for consumers, lower wages for workers, and lower investors’ savings. 

The Maryland Public Policy Institute study recommends the state decrease the corporate income tax rate to 6 percent, which it predicts would elevate the state’s competitiveness, overall economic activity, and would increase tax revenue. Christopher Summers, president of the Maryland Public Policy Institute, referred to the corporate income tax rate as “one of the most daunting obstacles to economic growth right now in the state,” according to a story in the Capital Gazette

Recent studies show states with no income tax or with a lower income tax rate perform better economically and achieve greater job and population growth than those with higher taxes. The proposed corporate income tax cuts would be a step in the right direction, but lawmakers should go even further. Lowering income taxes dramatically improves a state’s economy and generates new jobs. The ideal reform for state corporate income taxes would be to eliminate them altogether. Short of this, legislators should strive for a tax system that is not progressive and contains as few tax brackets as possible. 

The following documents examine income tax reform in greater detail.
 

A Case for Lowering Maryland’s Corporate Income Tax
http://www.mdpolicy.org/research/detail/a-case-for-lowering-marylands-corporate-income-tax
Pavel Yakovlev and Kanybek Nur-tegin of the Maryland Public Policy Institute make a case for lowering Maryland’s corporate income tax. “Evidence from academic literature and our own estimates in this study suggest that Maryland’s SCIT rate is likely to be on the revenue-losing side of the Laffer curve. Our estimates indicate that bringing the SCIT rate down to 6 percent would elevate the state’s competitiveness, overall economic activity, and probably Maryland’s SCIT tax revenue as well,” wrote Yakovlev and Nur-tegin. 

State Leaders Home in on Tax Relief: What Proposals will Hogan, Democrats Agree On?
http://www.mdpolicy.org/research/detail/state-leaders-home-in-on-tax-relief-what-proposals-will-hogan-democrats-agree-on
Amanda Yeager writes in the Capital Gazette about the efforts made by the Maryland General Assembly to address corporate tax reform.

Maryland Legislative Testimony on the State Corporate Income Tax
http://taxfoundation.org/article/maryland-legislative-testimony-state-corporate-income-tax
Elizabeth L. Malm of the Tax Foundation testifies before the Ways and Means Committee of the Maryland House of Delegates about corporate income tax reform in Maryland. 

Ten Principles of State Fiscal Policy 
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy 
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”  

Policy Tip Sheet: Spending Reforms 
https://www.heartland.org/policy-documents/policy-tip-sheet-spending-reforms 
The Heartland Institute outlines several reforms state legislators can undertake to address spending problems, including privatization, tax and expenditure limits, and retirement reforms.  

Rich States, Poor States 
http://www.alec.org/publications/rich-states-poor-states/ 
The eighth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.  

What Is the Evidence on Taxes and Growth? 
http://heartland.org/policy-documents/what-evidence-taxes-and-growth 
In this Tax Foundation study, William McBride examines the effects of tax policy on economic growth. He finds the literature on the topic demonstrates long-term economic growth is to a significant degree a function of tax policy. If governments seek to spur investment, he writes, they should lower taxes on the earnings of capital. If they seek to increase employment, they should lower taxes on workers and the businesses which hire them. The report also includes a discussion of the effects of progressive tax systems.  

America Will Pay More in Taxes in 2015 than it Will Spend on Food, Clothing, and Housing Combined 
http://taxfoundation.org/blog/america-will-pay-more-taxes-2015-it-will-spend-food-clothing-and-housing-combined 
Americans will pay $3.3 trillion in taxes to the federal government and an additional $1.5 trillion to state and local governments in 2015, notes Kyle Pomerleau of the Tax Foundation. “America’s total tax bill of $4.8 trillion is about 31 percent of the nation’s total income. This is a significant amount and is more than America will spend on food, clothing, and housing combined,” he writes. 

State Budget Reform Toolkit 
https://www.heartland.org/policy-documents/state-budget-reform-toolkit 
The American Legislative Exchange Council outlines a set of budget and procurement best practices to guide state policymakers as they work to solve the budget shortfalls. The toolkit will assist legislators in prioritizing and more efficiently delivering core government services by advancing free markets, limiting government, and promoting federalism and individual liberty.  

State Income Taxes and Economic Growth 
http://heartland.org/policy-documents/state-income-taxes-and-economic-growth  
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth within the framework of an endogenous growth model. They used regression analysis to estimate the impact of taxes on economic growth in the states from 1964 to 2004, and they found higher marginal tax rates significantly suppress economic growth.  

The Historical Lessons of Lower Tax Rates 
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates Examining the historical results of income tax cuts, Daniel Mitchell of the Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase. 

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org. 

The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at jnothdurft@heartland.org 312/377-4000.

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Taxes Government Spending
Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR