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Maryland: Candidates for governor offer opposing strategies for taxing income

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
" (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.

Michigan: Professional gambler allowed to deduct her gambling losses

The economics of gambling

In 2012, national gross gaming revenues reached $37 billion, the second-highest annual total behind only 2007 (just before the recession hit), according to the 2013 State of the States report by the American Gaming Institute (AGA report). Companies returned $8.6 billion in taxes to state and local communities.

The AGA report shows that Detroit is the fourth largest casino market in the U.S. That city accounted for nearly all of the $1.41 billion in gross revenue and $319 million in tax revenue that Michigan collected in 2012, the latest year for which the AGA figures are available. Those taxes were spent on initiatives concerning public safety, capital improvements, youth programs, tax relief, neighborhood development and improvement, and infrastructure repair and improvement.

Because gaming is such a large industry, court cases that rule favorably for gamers can have a positive impact on a state’s commercial activities. One such case is Karen Dombrowski v. Department of Treasury, in which the Michigan Court of Appeals concluded that taxpayer Karen Dombrowski (Dombrowski) was a professional gambler, and thus entitled to deduct her gambling losses.

The issue

The case stemmed from the Department of Treasury’s assessments against Dombrowski of $164,482, $175,092, and $7,103 in taxes due for 2008, 2009, and 2010, respectively. The crux of the case was whether Dombrowski’s gambling activities in particular—playing and observing slot machines—constituted a trade or business such that she could deduct her losses.

The court’s conclusion

The court recognized the Internal Revenue Code’s provision that because gambling may be considered a trade or business, income and losses from gambling can be reported on a tax return. Even so, the court noted that its analysis turned on the specific facts of the case.

In support of its assessments, the Department of Treasury argued that because Dombrowski’s particular gambling activities involving slot machines did not require “skill,” she could not deduct her losses. Relying on United States Supreme Court precedent, the court disagreed, concluding that whether her gambling activities required skill was not determinative. Instead, the court found that Dombrowski had presented substantial evidence supporting the “continuity and regularity” with which she pursued gambling “for income and profit.” Thus, Dombrowski met her burden of proving her right to the tax deductions.


While this case standing alone may not have earth-shattering consequences, it makes the State of Michigan a more, not less, favorable place for gamblers to work.

Missouri: Department of Revenue rules that Bitcoins are intangible property not subject to tax

Bitcoin is like cash for the Internet, according to Both brick-and-mortar and online businesses accept Bitcoin as payment. And though it does not have a legal-tender status, tax liability can accrue as a result of income, sales, payroll, capital gains, or the like resulting from Bitcoin’s use.

The fact that tax liability can accrue prompted a provider of Automated Teller Machines (ATM Provider) to submit a query to the Missouri Department of Revenue (Department) to clarify whether its Bitcoin-related commerce is taxable.

In its application for the letter ruling (ruling), the ATM Provider established that it is not a Bitcoin exchange, nor does it produce Bitcoins. The ATM Provider further explained that Bitcoins are a form of digital currency that is created by software and stored electronically, and it merely holds them in an electronic wallet for purchase. A customer inserts paper currency in the ATM and the Bitcoins are transferred to the customer's electronic wallet. The ATM does not render any tangible product. The ATM Provider is neither a Bitcoin exchange nor a Bitcoin producer.

In the ruling, the Department determined that the ATM Provider, through which its customers may purchase Bitcoins, is not required to collect and remit sales or use tax upon the transfer of Bitcoins through its ATMs. Its rationale was that Bitcoin is intangible property, and as such, its transfer is not subject to sales and use taxes.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.