(December 11, 2018 – ANNAPOLIS, Md.) Following the historic changes enacted by Congress in 2017 with passage of the Tax Cuts and Jobs Act, Maryland is positioned to experience a potential increase—to the tune of $570 million—in business tax revenues over the next five years.
Believing there needed to be a discussion at the state level to identify and rectify the deficiencies in Maryland’s corporate tax structure, the Maryland Chamber of Commerce created the Business Tax Task Force to take on this challenge in July 2018. This Task Force was charged with reviewing Maryland’s existing corporate tax structure and policy to determine what recommendations could be presented to the Office of the Governor, Office of the Comptroller, and the Maryland General Assembly to enhance and improve Maryland’s tax climate.
Comprised of numerous policy and tax professionals from within its membership, the Maryland Chamber’s Tax Task Force spent the summer and fall reviewing a number of potential approaches that could improve Maryland’s business tax climate and, in turn, increase Maryland’s attractiveness and competitiveness for business. Part of that review included looking at the recommendations from the Report of the Maryland Economic Development and Business Climate Commission, otherwise known as the Augustine Commission Report. After substantial examination and analysis, which included discussions with leaders from Maryland’s political, financial, and policy communities, the Tax Task Force identified two potential changes— recommendations which had their origins as Recommendation One and Three within the Augustine Commission—that could have a very beneficial impact on business survival and job growth in Maryland.
Provide an individual income tax exemption for certain income of members of pass-through entities.
Legislative efforts to push this recommendation came even before the Augustine Commission, and there has been no movement on this concept in a number of years. SB 858, or Income Tax – Subtraction Modification – Nonpassive Income of a Pass-Through Entity, was heard in 2014 but never made it out of committee.
The Task Force will be recommending that Maryland adopt language similar to what is contained in the TCJA. Under section 199A of the federal law (“Qualified Business Income Deduction”) small businesses (sole proprietorships, partnerships, limited liability companies, and “S” corporations) are permitted to receive a 20 percent deduction against qualified business income that is below $315,000 (joint filing). The Task Force will also be recommending that that this be codified as a “stand-alone” tax credit, to hedge against potential federal changes down the road.
Reduce, over three years, the corporate income tax rate from 8.25 percent to seven percent.
In 2007, Maryland raised its corporate tax rate from seven percent to 8.25 percent. There have been several legislative initiatives since then to reduce the corporate income tax in Maryland, none of which advanced out of their assigned committees. Most recently, HB 818 of 2018, sponsored by Delegate Christopher West (R-42B), sought to reduce the corporate income tax from 8.25 percent to six percent over a nine-year period.
Virginia, long viewed as Maryland’s biggest competitor for regional business, has a six percent rate.
Currently, corporate income taxes in Maryland account for approximately five percent of general fund revenues.
The Regional Economic Studies Institute of Towson University, in analyzing the 2016 recommendation by the Augustine Commission to adopt this return to the seven percent rate, noted:
“This cut in the corporate tax rate would reduce tax burdens on individual businesses, while actually leading to an increase in total tax collections by the state due to the attraction and retention of more businesses, investors, and employees. To support the recommendation to reduce corporate tax rates, the Commission noted that total corporate tax collections in Maryland were lower in 2016 than in 2013, despite the enduring economic recovery, claiming that this trend indicates that Maryland’s high corporate tax rates work to restrict business growth. Similarly, the Augustine Commission also recommended a reduction in Maryland’s personal income tax rates in order to spur economic growth by attracting entrepreneurs and investors to the state, while retaining investment from current residents with a high net worth.”
Since the recommendations of the Augustine Commission, there have been changes made to Maryland’s tax structure. However, there has been no progress made on these two recommendations.
In order to increase competitiveness with surrounding states, it is imperative that Maryland improve its business tax climate, as our neighboring states are more competitive in many additional areas of taxation. Now is the time to move these recommendations from theory to reality.
To join the Task Force, email Sam Schlaich at firstname.lastname@example.org.