Tax Policy Issues in Maryland Montgomery County Chamber of Commerce Tax Committee Oct. 18, 2010 Douglas L. Lindholm Council On State Taxation (COST) Council On State Taxation

Policy Issues Facing MD How Can Maryland Compete? Combined Reporting v. Separate Filing Expansion of the Sales Tax Base to Services Council On State Taxation

Why Tax Business at All? Incidence of business taxes: Labor (wages) Owners (ROI) or Consumers (prices) Best rationale: Businesses should pay for benefits provided by governments How to account for education costs? Tax burden analysis 3

Council On State Taxation Designing State Tax Systems for Growth Considerations: Be wary of the false dichotomy of “business taxes vs. taxes on individuals,” and “big business v. small business” There is no “ideal” state tax system o Factors involved: demographic, historical, cultural, natural resources, state constitutional limitations; industry types All taxes are costs; look for least harmful 4

Council On State Taxation Taxes That Hinder Growth & Investment The Least: Property taxes on immovable property Value-added taxes Consumption taxes The Most: Corporate income & franchise taxes Transaction taxes on business inputs/services Property taxes on business property Personal Income taxes on business income Gross receipts taxes 5

Council On State Taxation COST/EY Tax Burden Study 6

Council On State Taxation State Taxes Paid by Business 7

Council On State Taxation How Does Maryland Compare? Business Tax Burden as a % of Total State & Local Taxes: MD – 30.5% PA – 41.2% VA – 39.4% DE – 51.0% NC – 36.5% NJ – 38.5% TX % US Avg % 8 Business Tax Burden as % of Gross State Product: MD – 4.0% PA – 4.7% VA – 3.8% DE – 3.6% NC – 3.3% NJ – 4.8% TX --5.2% US Avg - 4.8%

Council On State Taxation Maryland Reliance on Personal Income Tax

Maryland’s Corporate Income Tax Contributes only 2.75% of total state & local taxes in MD Only 9% of total MD business taxes Inherently unstable base by design: (no income, no tax) Economists find little or no justification for taxing corporate income Is the “fix” worse than the status quo? Council On State Taxation

% Change in state and local business taxes by state, FY2011-FY2012 1)North Dakota 48.7% 2)Alaska 25.8% 3)Oklahoma 14.0% 4)Hawaii 11.5% 5)Connecticut 10.3% 6)Texas 9.2% 7)Colorado 9.0% 8)Minnesota 8.8% 9)Iowa 8.2% 10)Oregon 8.1% 11)Dist. Columbia 7.9% 12)South Dakota 7.6% 13)Maryland 7.5% 14)Utah7.5% 15)Illinois 7.1% 11

Mandatory Unitary Combined Reporting Used by less than half of income tax states Judicial doctrine, vague definitions Complex compliance & audits; encourages costly litigation Does not provide a stable revenue source Fiscal estimates speculative; creates winners & losers Does not improve “fairness” of tax system Council On State Taxation

“What’s Wrong With Taxing Business Services?” COST/EY Study on Problems with Taxing Business Services: April 4, 2013 “Pyramiding” of the tax leads to arbitrary and hidden differences in effective sales tax rates on different goods and services that distort consumer choices; Lack of transparency in sales tax base creates higher “hidden” effective tax rates making it difficult to determine who bears the burden of the tax; Taxes on intermediate purchasers put companies at a competitive disadvantage and encourages them to relocate; Encourages companies to self-provide business services, reducing efficiency and competition; Detrimental impacts on a state’s business tax competitiveness; and Extremely difficult compliance, sourcing and definitional burdens for taxpayers and tax administrators alike. Council On State Taxation

Questions? Doug Lindholm Council On State Taxation