The Washington Post reports that Maryland Attorney General Doug Gansler, who is expected to announce his candidacy for governor soon, has suggested lowering Maryland’s corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate from 8.25 percent to 6 percent, equal to neighboring Virginia’s. It is worth remembering that Maryland’s corporate tax rate was only raised to its current level as recently as 2008, contributing to its poor score, 41st place, on our State Business Tax Climate Index. Maryland’s currently dismal position is not a long-term norm for the Old Line State, but is largely the result of one set of budget measures passed in 2008, which raised the corporate tax rate, the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. rate, added more income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s, and doubled the cigarette tax.
Concerns about Maryland’s tax competitiveness, then, are well-founded, and a rollback of the 2008 legislation that established the current high-tax system is a reasonable place to start. However, a close reading of our Index score for Maryland will reveal that, actually, Maryland’s corporate tax code is not too bad. We rank it 15th in the nation because it is a flat rate without any graduation through brackets, and because it is actually a corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. instead of a more complicated and damaging gross receipts taxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. , as we explain at some length in the Index.
Rather, Maryland’s poor score is largely a product of its individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. system, which is a major detriment to its competitiveness with other nearby states. As the Chesapeake Conference of CEOs correctly noted in their “Compact for Competitiveness” report:
A key potential goal of such restructuring [Maryland’s tax structure] could be to find a way to reduce the state's personal income tax rates, as applied to small business entities including sole proprietorships, Sub-chapter S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s, LLCs and other business entities whose earnings are "passed through" on the income tax returns of individuals owning the businesses.
A lower corporate tax rate in Maryland would most certainly be a positive change and would help make it more competitive with better-ranked Virginia (21st overall, 6th on corporate taxes), as Tax Foundation economist Liz Malm explained in testimony before Maryland’s House of Delegates Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. given early this year. But if Maryland’s Democratic gubernatorial candidates want to debate Maryland’s tax competitiveness, they should also look at the taxes that are truly exceptional and distortionary: Maryland’s high and progressive income taxes. Increases in these taxes are a major part of why Maryland’s score fell, and thus fixing them should be a part of the solution.
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