Maryland voters are paying close attention to the governor candidates’ ideas on taxes. In a recent Washington Post-University of Maryland poll, 30 percent of likely voters declared that taxes are the single most important issue in deciding which candidate for governor they would support on Election Day.
The two candidates have opposing ideas on the subject. In a Washington Post recap of their recent debate, Democratic nominee Lt. Gov. Anthony Brown pledged that he would neither raise taxes nor implement any new taxes. But he would not go so far as to say he would cut taxes. On the other hand, Republican challenger Larry Hogan supports a reduction in Maryland’s corporate income tax (CIT) rate from 8.25 percent to six percent.
Overview of Maryland’s recent tax-related economic performance
The Tax Foundation recently offered an overview of Maryland’s performance numbers:
- Overall, the state-local tax burden is 10.6 percent, the seventh highest of the 50 states;
- Since 2005, personal income has grown in Maryland by 42 percent;
- State spending has expanded by 61 percent;
- Since 2008, when current Governor O’Malley took office, personal income has grown 23 percent and state spending has increased 31 percent;
- Gov. O’Malley implemented a tax increase package that included four new top income tax brackets on high-income earners and a bump in sales tax from five percent to six percent;
- Spending stayed steady for Gov. O’Malley’s first term but has risen in his second.
In areas of taxation that impact business corporate taxes (corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and taxes on property, including residential and commercial property), the Tax Foundation puts Maryland at number 40 in its just- published 2015 Business Tax Climate Index, versus its number 41 rank in 2014.
Projected impact of a CIT reduction
In light of these statistics, a CIT reduction seems like a good thing. About a year ago, the Department of Legislative Services of the Maryland General Assembly produced a report titled "Economic Impacts of Reducing the Maryland Corporate Income Tax Rate" (Report), which concluded that a CIT could be beneficial, but was not necessarily so. The Report assessed the economic impact of reducing the Maryland CIT from 8.25 percent to just 7.25 percent (as opposed to the six percent goal that candidate Hogan proposed). Unsurprisingly, when looked at independent of other factors, the CIT rate reduction had a positive effect on the local economy in the form of additional jobs and increases in the region’s personal disposable income.
However, the Report shows that in order to accurately reflect the full economic impact, including the requirement that the state maintain a balanced budget, the CIT reduction must be offset by decreasing government spending and/or increasing revenue from other sources; a one percent CIT decrease yielded a reduction of net receipts in 2015 of $162.2 million. When carried through to 2024, the reduction grew to $186.7 million.
One simple way of offsetting the revenue reduction is to also cut government spending. This tends to have a negative impact in the short term on both government and private sector employment levels, and therefore personal income and spending. However, in the long term, the positive benefits outweigh the negative effects.
A second method is to increase other taxes, like sales taxes, instead of decreasing government spending. This has a more positive effect on employment and personal income than reducing government spending, but also reduces population through economic migration.
Ultimately, the Report concedes that the success of a CIT change is based on whether and how it encourages corporate spending. In addition, with respect to enticing businesses to settle in a particular location, a CIT is less important than other factors in corporate location decisions, such as those tax rates relative to other states, and the extent to which the government supports services that are valued by businesses, including education, training, and infrastructure systems. The effect of a CIT on hiring and investment decisions was unclear.