Commission Orders Up Full Menu Of Business Tax Cuts

If the main question was which the Augustine Commission would choose between Corporate Income Taxes and Pass-Through Income Taxes as their preferred business-friendly tax cut… the answer appears to be “both.”

The Maryland Economic Development and Business Climate Commission – chaired by former Lockheed Martin CEO Norman Augustine – has issues its much-awaited report on tax incentives to promote Maryland competitiveness. Rather than selecting one item and rejecting others, the Commission has made some specific and some general endorsements, but appears to leave a range of options (and the task of deciding how to balance them against competing service pressures) to the General Assembly. (These items are according to advance copies of the Commission Report obtained by multiple media outlets)

From coverage in the Baltimore Sun:

A draft of the panel’s final report, obtained by The Baltimore Sun, shows that the group headed by former Lockheed Martin chief Norman R. Augustine will call for cutting the corporate income tax from 8.25 percent to 7 percent over three years.

Another panel recommendation that could affect more companies than the corporate tax is to lower the personal income tax on mostly small businesses that pass that liability to their owners. Without giving specific numbers, the report calls for income tax exemptions for some partners in such business. The recommendation is in line with the top priority of the Maryland Chamber of Commerce.

These two items, both with potentially substantial fiscal effects, were seen by many as competing priorities. The Commission also embraced an acceleration of the phase-in of estate tax cuts already in law, but rejected a proposal to impose “combined reporting” on multistate entities doing business in Maryland. The Commission’s full report will be formally revealed and discussed in the days ahead in the General Assembly.

When Do State Tax Changes Spill Over Into County Budgets?

As the 2016 session ramps up, talk of state tax changes have filled the headlines. A level deeper, though – what state tax decisions might have direct or carryover effects on county budgets?

A quick primer:

PERSONAL INCOME TAXES

The state income tax is the top source of general revenue, and the biggest overall target for policy changes. Since county tax rates are independent of the state rates – counties are affected by some state changes, but not all of them. In essence:

 

  • changes to state tax rates do not affect counties, since they don’t affect a taxpayer’s taxable income

 

  • changes to deductions (called “subtraction modifications”) affect the taxable income base, and do flow through to county revenues

 

CORPORATE INCOME TAXES

As the state discusses business competitiveness, the corporate income tax rate has also taken center stage. The corporate income tax is virtually all state revenue, with only a small sliver being shared through the Highway User Revenues distribution. There is no major direct sharing of corporate taxes, nor any counterpart county-level taxation of corporate profits.

REAL PROPERTY TAXES

Taxes on real property (land and buildings) are a fairly minor state revenue, with the revenue dedicated to the state’s annuity bond fund (to pay debt service). The state rate is 0.112 (or 11.2 cents per $100 of assessed value) – which is roughly a tenth of the typical county rate. Property taxes are a much larger part of county budgets than the state – both as a share of the county budget and in total dollars.

PERSONAL PROPERTY TAXES

Maryland’s taxation of business personal property (equipment and some inventory) is completely local, with most counties levying a tax but granting several major exemptions authorized (but not mandated) by the state. The state receives no direct revenue from personal property taxation.

In the discussion of small business tax relief during the 2015 session, the taxes due on personal property was dwarfed (for many small businesses) by the state-levied filing fee for corporate entities. Governor Hogan has proposed a reduction in those fees.

OTHER TAXES

Amidst the discussion of tax policy, other items come up – with details arising from case law, taxpayer concerns, or legislative proposals. Many of these are a mix of state and local revenues, but hardly any have the “carryover” effects that the income tax and property taxes do.

State “sin taxes” on products like alcohol and tobacco do not have a local component (local distributions were abolished in the early 1990s), and some functions like the hotel tax and admissions and amusements tax are exclusively local.

For more on the latest tax proposals offered in and around Annapolis, see the Washington Post coverage of the early sketches of Governor Hogan’s tax plan, and today’s Post write-up of the deliberations of a special Commission targeting tax competitiveness.

Moody’s Economist Holds Court on MD Economy

Well-known Moody’s Economist Mark Zandi joined the Senate Budget & Taxation Committee Thursday for a sprawling discussion on the Maryland and national economies. He discussed a wide range of topics, including tax rates, housing markets, infrastructure, education, and economic development. One topic he raised (in response to committee questions) was different incentive approaches to economic promotion, where he offered, “I would focus in infrastructure… rather than the tax code.”

Committee Chair Kasemeyer raised questions with income taxes, pointing directly to the county income tax rates as a component of the overall tax impression. One line of conversation was to shift the income tax structure and “place that burden someplace else.”

He also discussed preferred tax treatment of retirement income as an incentive, saying “the results don’t quite stand up… I would not go down that path.” He responded similarly to other narrow tax incentives.

Click here to view the full briefing from the General Assembly’s website. (video)

Moody’s Analytics was also hired to prepare an analysis of Maryland’s tax structure this fall – for more coverage of that report (referenced in this week’s briefing), see previous Conduit Street coverage: Moody’s Analytics: Maryland’s Business Taxes “Stack Up Well” Compared to Peers

Governor Outlines Framework of 2016 Tax Cuts, Fiscal Plan

Governor Hogan yesterday announced the framework if his fiscal agenda for the 2016 legislative session and the FY 2017 budget, including the dimensions of tax relief he expects to seek as part of his Administration priorities. More details are expected next week, and then will be more fully revealed as part of his “State of the State” address later in January.

The most visible component of the proposed changes are relaxing statutorily mandated spending, and providing space for tax reductions. The Baltimore Sun described these connected components:

Hogan paired his proposed cuts, which would take effect over five years and total $400 million, with a call for what he described as “mandate relief.” He said his top priority during the 90-day legislative session that begins next week would be to persuade the Assembly to reverse laws dating back to the 1950s that constrain how the governor can spend about 80 percent of state revenue.

“It’s completely absurd, it’s unsustainable and has to end,” Hogan said, blaming spending mandates for causing financial troubles during recessions.

Those mandates require the state to spend increasing amounts of money each year on education, health care and public safety. Democrats contend that paring back those spending requirements is tantamount to calling for larger class sizes, spotty health care and diminished public safety.

The Washington Post covered the press event as well, and described House Speaker Michael Busch’s initial reactions:

House Speaker Michael E. Busch (D-Anne Arundel) was skeptical of allowing automatic reductions in spending formulas but said he couldn’t take a position without more details.

“You have to be pretty specific about where that mandate relief would come from and what kind of savings you would get from it,” Busch said. “There’s a reason why those mandates are in place.”

Read the Governor’s Press release on the proposals.

Read the full Sun coverage.

Read the full Post coverage.

Anne Arundel Council Member Trumbauer Proposes Historic Preservation Tax Credit

Anne Arundel Council Member Chris Trumbauer introduced a bill to create a historic preservation tax credit for owners of historic homes or businesses. The tax credit, if successful, would cover up to 25 percent of an improvement project’s cost by deducting that amount from an owner’s property tax bill.

The Baltimore Sun article states,

If the credit is adopted, Anne Arundel will join most of the state’s major jurisdictions, including Montgomery, Prince George’s, Howard, Calvert and Baltimore counties, which already have historic preservation tax incentives in place.

Trumbauer’s proposal was inspired by a call from a constituent who was looking to renovate a historic home and wondered whether the county had any programs that could provide financial support.

“I looked into it and it turned out they did not,” Trumbauer said. So he drafted his bill, which he says is “a little bit of a helping hand for folks that want to do the right thing for their historically significant property.”

Under the legislation, residential and commercial properties deemed historically valuable by the county’s Office of Planning and Zoning would be eligible for a tax credit equal to 25 percent of a renovation’s cost, including interior improvements. New properties built within a historic district would be eligible for a tax credit equal to 5 percent of the cost of their construction, provided the new buildings are compatible with surrounding architecture.

The credit is capped at $50,000 per qualified property owner.

In order to qualify as historically valuable, a building must be at least 65 years old and have a high level of historical significance, based on its role in the county’s past, association with the life of a significant person or architectural value, among other criteria. Properties listed on the National Register of Historic Places, or properties determined to be eligible for the register, would also qualify.

Visit the Baltimore Sun online for more information on the proposed historic preservation tax credit bill.

Triennial Assessments Show Signs of Life

Assessments graphThe property assessments for the coming year reflect the continued modest growth in the local economy, as many areas of the state are starting to rebound from depressed sales figures. The statewide increase for this year’s cycle is 9.5%, reflecting the accumulated increase since they were last assessed in December of 2012.

The State Department of Assessments and Taxation released the revised assessments with a press release.

From their release:

The Department of Assessments and Taxation determines the values for both residential and commercial properties. The new assessments are based on the evaluation of 55,572 sales, which
occurred in Group 1 during the last three years; 17,429 of those sales occurring in 2015. Within Group 1 properties, 70% of residential properties saw an increase with an average increase of 9.5%, and commercial property values increased by 16.1%. Any increase in property value is phased-in equally over the subsequent three years. Any decrease in property value is fully implemented in the first tax year and remains at the reduced assessment for a full three year cycle.

Coverage in the Baltimore Sun reviewed relative growth in various areas of the state:

“The last time we assessed the properties was three years ago, and things had not quite started to recover,” said Joseph Glorioso, supervisor of assessments in Anne Arundel County. “It’s basically catching up.”

Prince George’s County — one of the areas hit hardest during the housing crash — had the highest increase of any jurisdiction in the state, with home assessments up nearly 30 percent. Counties on the Eastern Shore tended to lag, with residential tax evaluations in Somerset County, for example, falling 5 percent.

Baltimore County led the metro area. More than 87 percent of residential properties included in the new assessments saw values increase, for an average of 10.9 percent. The assessments covered the western part of the county, including Catonsville, Owings Mills and Glyndon.

Read the full report from the State Department of Assessments and Taxation.

Business Tax Relief Remains a Focus – But Specifics Still Elusive

An article in the Baltimore Sun echoes the prevailing sentiment from Annapolis stakeholders and from the recent MACo conference — that business tax relief will receive much attention in the coming session, but the specifics of any one plan are not evident.

From the Sun article:

Lowering taxes for business is likely to be a focus of Annapolis lawmakers in the new year, as Gov. Larry Hogan seeks to deliver on promises made during the election and Democrats look to burnish their credentials with business.

While momentum is gathering for reform, just what shape that tax relief may take — and how far it will go — remains unclear.

Lowering the corporate income tax rate of 8.25 percent in some way is likely to get backing from both the bipartisan panel organized by Democratic legislative leaders to address the state’s business climate and from the Hogan administration, said Del. Wendell R. Beitzel, a Republican who represents Garrett and Allegany counties and serves on the panel.

While that may serve as a strong symbolic move, lawmakers and economists said it will be far harder to address the state’s unusually high personal income taxes that — along with high utility bills — drive up the cost of doing business in Maryland.

County governments may or may not have a direct stake in the efforts being considered. County income tax and property tax rates are set independently by county elected officials, but in many cases the “tax base” is a function of state law. Income tax exemptions or subtraction modifications, or property tax exemptions or credits, would have a pass-through effect on county revenues without any local adoption process, which MACo has historically resisted.

Read the full Sun coverage online.

Augustine Commission Considers Both Tax Decreases and Increases As It Prepares Report

A December 7, 2015, Daily Record article reported that the Maryland Economic Development and Business Climate Commission (also known as the Augustine Commission) considered both tax cuts and increases as it explored how to make the state more business-friendly. The article stated that the chair of the Commission, Norman Augustine, is currently writing a preliminary draft of the Commission’s report. From the article:

The proposed increases to the state’s gas, tobacco and alcohol taxes are among the options weighed by the commission as well as reductions to some personal income tax rates and speeding up the rate at which Maryland re-couples its estate tax with the lower federal rate. …

“While our role is to address business climate in Maryland, the business climate is affected by taxes that are not directly on businesses,”  Augustine said. “We’ve addressed taxes in general.”

The article summarized proposed tax decreases and increases that were considered by the Commission:

Included on the list of tax cuts being considered as Augustine drafts a preliminary draft of the group’s final report include:

  • Cuts to the top marginal personal income tax rates — the rate most likely to affect small businesses.

  • Increasing the speed in which Maryland’s estate tax exemption is increased to match the federal exemption. The change was passed in 2014 and will be fully implemented in 2019 and could reduce state revenue by an estimated $140 million.

  • Tax-free repatriation of profits held overseas.

  • Tax cuts for so-called pass-through entities.

  • Moving Maryland to a one-factor corporate tax structure based on the proportion of sales attributed to Maryland. Currently, the state uses a three-factor approach that also takes into account property and payroll taxes, which some say unfairly penalizes businesses who are headquartered in the state.

As far as possible increases:

  • A proposed 10-cent gas tax increase to address transportation needs. Economists at Moody’s Analytics told the panel earlier this year that improvements are needed to address the state’s transportation infrastructure including improvements to the port system in Baltimore. The state last raised the fuel tax in 2013 which automatically increases the rate annually based on inflation. Hogan attempted to repeal the automatic increases in a bill that died in the legislature earlier this year.

  • A possible increase in the excise tax on alcohol from the current 9 percent, which was passed in 2011, to 12 percent. The additional money would be earmarked for a venture capital fund managed by the state.

  • Boosting the per-pack cigarette tax by $1 and earmarking the money for work force development programs, possibly at community colleges. The General Assembly approved a $1 per pack increase during a special session in 2007.

The article also reported on the chilly reception from several legislators and state officials to any proposed tax increases:

“A reasonable person would be skeptical that tax increases would make it into the report given this (political) climate,” said Del. C. William “Bill” Frick, D-Montgomery County and a member of the commission.

But Frick added it will be hard for “legislators to endorse, in the abstract,” tax cuts without identifying offsets to make them revenue neutral. …

“No legislators were willing to (support) a tax increase based on what I saw,” said [Sen. Steve Hershey, R-Upper Eastern Shore]. “It was very definitive that no one was on board from a legislative perspective.” …

“As Governor Hogan has repeatedly made clear, Maryland’s high taxes have hurt our economy and business environment,” said Douglass Mayer, a Hogan spokesman. “Raising them even higher defies common sense and is not something he will ever consider.”

A spokesman for [Comptroller Peter] Franchot issued a similar statement.

Congress Reaches Agreement on 5-Year, $305 Billion Transportation Bill

The U.S. House of Representatives and Senate reached agreement on a five-year $305 billion transportation funding package this week, the first long-term transportation funding bill that has moved forward in several years. The legislation is titled “Fixing America’s Surface Transportation Act,” or “FAST Act” for short.

As reported by Better Roads,

The bill is set to be paid for through the 18.4 cent gas tax as well as changes in custom fees and passport rules for those with delinquent taxes. The bill also will offset some costs by contracting out some tax collection services to private companies.

According to the summary of the bill from the House Transportation and Infrastructure Committee, the FAST Act would do the following to help roads and bridges:

  • Facilitates commerce and the movement of goods by refocusing existing funding for a National Highway Freight Program and a Nationally Significant Freight and Highway Projects Program
  • Expands funding available for bridges off the National Highway System
  • Streamlines the environmental review and permitting process to accelerate project approvals, without sacrificing environmental protections
  • Eliminates or consolidates at least six separate offices within the Department of Transportation and establishes a National Surface Transportation and Innovative Finance Bureau to help states, local governments, and the private sector with project delivery
  • Increases transparency by requiring the Department of Transportation to provide project-level information to Congress and the public
  • Promotes private investment in our surface transportation system
  • Promotes the deployment of transportation technologies and congestion management tools
  • Encourages installation of vehicle-to-infrastructure equipment to improve congestion and safety
  • Updates research and transportation standards development to reflect the growth of technology

Article Highlights the Complexity of Business Tax Reforms

There has been much discussion about providing tax relief to businesses since the gubernatorial election. Governor Hogan ran on providing tax relief and the presiding officers in the House and Senate have appointed a commission to examine the State’s business climate and recommend tax changes.

Now that the 2016 session is around the corner and the commission is formulating its recommendations, an article in the Washington Post highlights the complexity of providing tax relief for Maryland businesses.

Tax analysts have indicated that property tax and personal income taxes should be the focus of reforms.

The tax rates for personal property vary by jurisdiction, ranging from zero in Frederick County to 5.62 percent in the city of Baltimore. Baltimore’s tax rate on personal property is 50 times higher than the state rate on land.

Many experts say high rates on tangible personal property disproportionately affect start-ups and manufacturers, which are most in need of new machines, furniture and supplies. They say the rates can discourage companies from moving to or expanding within the state.

Maryland’s personal income tax rates also are among the highest in the country, which is a problem for the many small business owners who choose to count their business income as personal earnings, rather than filing a more complicated corporate tax return.

Maryland’s combined state and local taxes on personal income, which range from 2 percent to 6.07 percent, “are by far the most burdensome” compared with neighboring states, according to a recent Moody’s Analytics report for the state panel.

However, the fiscal ramifications in the short and long-term  make this difficult.

…reducing personal income taxes, which account for 38 percent of all revenue from Maryland’s local and state collections, would have little chance of advancing in either the Senate or the House of Delegates, both of which have strong Democratic majorities.

Some Republican lawmakers said they doubt Hogan will fight hard for tax cuts next year because he is negotiating ways to resolve the state’s looming structural deficit, which, according to the Department of Legislative Services, could reach $1 billion over the next four years.

Hogan’s office declined to discuss specifics about the governor’s legislative proposals for the next session, but spokesman Matt Clark said the administration will focus on holding the line on spending and standing firm against any tax increases.

The full Washington Post article, which includes the differing views of legislators and Maryland businesses, can be found here.