Maryland Gubernatorial Candidate Considers Corporate Tax Cut

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 tax 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, 41^st 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 tax rate, added more income tax brackets, 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 15^th in the nation because it is a flat rate without any graduation through brackets, and because it is actually a corporate income tax instead of a more complicated and damaging gross receipts tax, as we explain at some length in the Index.

Rather, Maryland’s poor score is largely a product of its individual income tax 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 corporations, 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 (21^st overall, 6^th on corporate taxes), as Tax Foundation economist Liz Malm explained in testimony before Maryland’s House of Delegates Ways and Means Committee 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.

More on Maryland here.