Reality Crashing on Maryland Post-Northrop Rejection

April 30, 2010

What a difference a week makes. On April 22, the Baltimore Sun editorial board mused about Maryland’s business climate, arguing that reports like our State Business Tax Climate Index present a gloomy picture of the state that don’t reflect positive trends on job creation, schools, open space, and transportation. Key to their thinking was:

“If all that mattered was that Maryland’s corporate tax rate is 8.25 percent and Virginia’s is 6 percent, it would be hard to explain why Maryland is still in the running for the headquarters of Northrop Grumman, the aerospace firm that’s looking to relocate to this region.”

The reason Maryland stayed in the running, as we said here, here, and here, was to leverage their desperation so as to extract unnecessary subsidies from Virginia. That played out this week, when Virginia won the new headquarters but still coughed up $12 million+ in subsidies and tax credits (more than Maryland’s $22 million offer).

The Maryland Gazette sums up the “morning after” feeling post-Northrop’s predictable rejection:

“On occasion leaders do extraordinarily foolish things” that make the state appear less attractive to company executives considering relocations, said Anirban Basu, chairman and CEO of Baltimore economic and policy consulting firm Sage Policy Group.

He cited the 6 percent sales tax on computer services passed in 2007 by the legislature and signed by Gov. Martin O’Malley (D) that was repealed a year later after much business opposition.

Other examples are the so-called millionaire’s tax; the Wal-Mart bill, which was passed by the legislature but struck down by the courts and would have required employers with more than 10,000 workers to spend at least 8 percent of their payroll on employee health benefits; and the delays in implementing slots facilities, Basu said.[…]

Maryland has more than an image problem when it comes to attracting corporate relocations, said Peter Morici, a business professor at the University of Maryland, College Park. Corporate, sales and other taxes are definitely higher than in states such as Virginia, which Maryland competes against, he noted.

Maryland’s corporate tax rate is 8.25 percent to Virginia’s 6 percent, while its sales tax is 6 percent compared to 5 percent.

State leaders have “given lip service” in saying they support job creation and the private sector, but then turn around and pass new tax hikes and increase the size of government, Morici said.

I’d only add that incentive packages are a sign that the everyday tax code is broken, necessitating exemptions from it for business to be viable. The solution is fundamental tax reform.

More on Maryland and its woes here.

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