Friday 5 | February 7, 2020

Did you know that Annapolis was known as the “Athens of America” for its wealth of cultural activities in the 17th century, and once served as the capital of the United States?

1. “The state of our state has never been stronger.” On Wednesday, Governor Larry Hogan delivered his annual State of the State address to the Maryland General Assembly. During his opening remarks, the governor touted Maryland policymakers’ ability to find middle ground in the face of bitter partisanship in Washington. He stated that Maryland has experienced one of the greatest economic turnarounds in the country, with more businesses open and more people working.

Additional highlights from the State of the State address include:

• Retirement Tax Reduction Act | The governor noted that there is one problem that cannot be fixed without the help of the legislature: retirees leaving the state due to high retirement taxes. He asked the legislature to support his Retirement Tax Reduction Act of 2020, which will cut retirement taxes for Marylanders by more than $1 billion over five years.
• On Education | Governor Hogan touted Maryland as having some of the best and most highly funded schools in America, with record funding being steered toward education each year he has been in office. He highlighted the $350 million in his budget to fully fund the recommendations laid out by the Kirwan Commission, without raising taxes. He also asked for support for his Building Opportunity Act of 2020, which would appropriate $3.9 billion for school construction and rehabilitation. The governor also addressed accountability in education spending. He asked legislators to ensure that dollars end up where they belong, instead of debating how much more to spend, to achieve better results for Maryland students.
• Infrastructure | The governor highlighted all the work his administration has done to improve infrastructure around the state, including expansion of the Howard Street Tunnel and support for WMATA and the American Legion Bridge.
• Environment | He discussed efforts to reduce greenhouse gas emissions and improve clean air standards to levels higher than those even laid out by the Paris Climate Agreement. He also touted work done on bay restoration and noted that his administration will continue to put pressure on Pennsylvania and the EPA to hold them accountable for the pollution entering Maryland via the Conowingo Dam.
• Ethics Reform | Governor Hogan asked for support for his Ethics and Accountability in Government Act with the goal of increasing transparency and restoring public trust in government.
• Redistricting Reform | The governor discussed Maryland’s heavily gerrymandered districts and encouraged the legislature to finally consider redistricting reform.
• Violent Crime | He urged the legislature to pass his crime package—Violent Firearm Offenders Act, Witness Intimidation Prevention Act, Judicial Transparency Act—in the name of reducing violent crime and improving public safety.

In the Democrats’ response, Senate President Pro-Tempore Melony Griffith addressed the following key policy areas as priorities for the caucus:

• Public Safety | Senator Griffith urged support for the Democrats’ own crime package.
• Education & Workforce | Senator Griffith said that in order for the state to truly be “open for business,” businesses must have access to a well-trained workforce. She urged support for Democrats’ school construction legislation, which would provide $2.4 billion for school construction and repairs. She also encouraged long-term investments in education, including the adoption of evidence-based practices like access to universal pre-k and competitive teacher salaries.
• Senator Griffith also addressed climate change and its health impact, access to affordable health care, and ethics legislation to address corruption in government.

2. Mfume wins Democratic primary in race for Maryland’s 7^th Congressional seat | On Tuesday, former U.S. Congressman Kweisi Mfume won the Democratic primary in the race for Maryland’s 7^th Congressional district to succeed the late Congressman Elijah Cummings. Mfume, who held the seat prior to Cummings, is running on a platform that includes lowering the cost of prescription drugs, banning assault weapons and preserving Social Security. Mfume also supports the Green New Deal and believes that Congress should take more steps to mitigate the effects of climate change. He will advance to a special general election to be held on April 28 to fill the remainder of Cummings’ term. Mfume will face the winner of the Republican primary, Kimberly Klacik, a nonprofit founder whose video and tweets about conditions in West Baltimore garnered attention from President Trump last summer.

3. Paid family and medical leave legislation is introduced | Both the House and Senate have introduced legislation establishing a paid family and medical leave mandate. SB 539 / HB 839 would establish a Family and Medical Leave Insurance (FAMLI) program to be administered by the Division of Unemployment Insurance. The program generally provides up to 12 weeks of benefits to an employee who is taking partially paid or unpaid leave for the following reasons: 1) to care for a child during the first year after the child’s birth or after the placement of a child through foster care or adoption, 2) to care for a family member with a serious health condition, 3) the employee has a health condition that results in their being unable to perform the functions of their job, 4) to care for a service member who is the employee’s next of kin, or 5) because the employee has an exigency arising out of the deployment of a service member who is a family member.

The bill establishes the FAMLI Fund, which will consist of contributions from employees, employers and self-employed individuals. Beginning January 1, 2021, each employee, employer and self-employed individual shall contribute to the fund. The total rate of contribution: 1) may not exceed 0.5% of an employee’s wages, 2) shall be applied to all wages up to and including the Social Security wage base, 3) shall be shared equally by employers and employees, and 4) shall be sufficient to fund the benefits payable.

There are any number of additional nuances and complexities outlined in the language, and the Chamber is very concerned that the implementation of this legislation will result in additional costs and administrative burden to employers and particularly small businesses. Through our MDCC Paid Family & Medical Leave Workgroup, the Chamber has attempted to work with the advocates of this program to outline our concerns and encourage changes to the bill. Unfortunately, these changes, some of which align the bill more closely with federal law and seek to address some of the challenges for small businesses, were not accepted. The Chamber will continue to work with stakeholders toward a better outcome on this issue.

SB 539 has a hearing scheduled for Thursday, February 27, at 1 p.m. in the Senate Finance Committee. If you wish to share your concerns with the committee, please contact Ashley Duckman (aduckman@mdchamber.org).

4. Pimlico pushback | This week, Senate Budget & Taxation Committee Chairman Guy Guzzone introduced the Racing and Community Development Act of 2020.If passed, the bill would authorize up to $375 million in debt to rebuild Maryland’s largest racetracks and secure the Preakness Stakes’ home in Baltimore. The bill provides at least $180 million for Pimlico and $155 million for Laurel Park to be issued by the Maryland Stadium Authority, and subject to approval by the Board of Public Works.

The legislation reflects a deal reached last fall between the city of Baltimore and the Stronach Group, whereby the latter pledged to donate the track’s land in Northwest Baltimore to the city for development. It requires the state to pay $17 million per year from video lottery terminals for the repayment of the bonds—unlike the original deal, which would’ve switched the use of casino funds dedicated to horse racing to pay for the bonds. If the bill passes, the casino money set aside for horse racing would sunset and those funds would be steered to the state’s Education Trust Fund.

For his part, Governor Hogan has been critical of any plan that would divert education money to horse racing but has also said that he would like to see the Preakness stay in Baltimore.

5. Bill hearings next week | Next week will feature a marathon of bill hearings on tax issues that the Chamber is monitoring closely. Six of the most important are outlined below.

SB 397: Sales-and-Use Tax and Personal Property Tax—Exemptions—Data Centers

• Data centers are secure facilities that house the computer and network equipment that store, process and distribute large amounts of data. They are considered the foundation of today’s digital economy and the backbone of the rapidly growing technology sector.

• The economic impact—both direct and indirect—of data centers is substantial. According to a report by the U.S. Chamber of Commerce Technology Engagement Center, during construction, a typical data center employs roughly 1,700 workers, provides $77.7 million in wages for those workers, produces $243.5 million in output along the local economy’s supply chain and generates $9.9 million in revenue for state and local governments. Every year thereafter, the same data center supports roughly 160 local jobs, pays $7.8 million in wages, injects $32.5 million into the local economy and generates $1.1 million in state and local revenue.
• However, the positive economic impact of data centers does not stop there. The incremental local taxes paid by data centers directly and indirectly support schools and law enforcement, as well as local public infrastructure, including the expansion of broadband.
• Senate Bill 397 would provide a sales-and-use tax exemption for the sale of qualified computer technology—including computer equipment, software, servers, routers, connections and other enabling hardware—for use at a qualified data center. Today, 35 states provide data centers with some sort of sales-and-use tax exemptions for the purchases of required equipment. In 2019, Illinois, Indiana and Alabama passed significant legislation helping to attract data centers to their states. Locally, Pennsylvania has also introduced key legislation to expand existing incentives. Also, within the last five years, no large-scale enterprise data center has located in a state that imposes its full sales tax burden on data center equipment, which underscores the importance of this legislation to states seeking to share in the benefits of the digital economy.
• In Virginia, data centers are a main economic driver, and employment and investment have increased as data center incentives have expanded in the state. According to a 2019 report from Virginia’s Joint Legislative Audit and Review Commission, every $1 million of incentive generated 155 jobs, $26.5 million in state GDP and $14.6 million in personal income. In addition, each dollar of sales tax exemption returned 72 cents to the state, not accounting for the impact to local tax revenue.
• Senate Bill 397 would level the playing field and attract data center business to Maryland, supporting the state’s mission of being a leader in innovation and investment in cyber and information technology.

HB 129/SB 523: Income Tax—Pass-Through Entities–Imposition of Tax

• Many small businesses in Maryland are organized as pass-through entities. Pass-through entities include sole proprietorships, partnerships and S-corporations. These businesses are not subject to the corporate income tax. Instead, owners are taxed under the individual income tax.
• HB 129 and SB 523 would restore a federal income tax deduction to individuals and pass-through entities (PTEs) when they file their federal income tax returns. This legislation would confirm that the state and local tax (SALT) currently remitted to Maryland by PTEs is a tax on the entity, and therefore not subject to the new $10,000 SALT deduction limitation enacted in the Tax Cuts and Jobs Act of 2017 (TCJA).
• The SALT cap impacts individuals and small businesses that are organized as pass-through entities since these businesses pay the income tax related to their business income on the owner’s individual income tax return. The TCJA does not cap the SALT obligations of non-PTE corporations, which gives C-corporations a tax advantage compared to individuals and small businesses.
• The bill clarifies that at the entity-level, SALT is a tax on–and a tax paid by–the PTE itself (and not a tax “paid on behalf of” the owners), thus making the state income tax paid by the entity deductible against business income for federal taxable income purposes.
• The bill is revenue-neutral for the state’s treasury, which means the income from the PTE still flows through to the owner’s individual income tax return.
• Six states have passed similar legislation in response to the SALT cap imposed by TCJA. Most recently, New Jersey enacted a similar statute on January 13, 2020.
• Small businesses are the driving force for job creation and economic expansion in Maryland and make up almost 92 percent of the state’s registered companies. This relatively minor code change would provide federal tax relief for tens of thousands of Maryland’s small business owners, while remaining revenue-neutral to the State.

HB 565: Income Tax–Business and Economic Development Tax Credits–Termination

• On Wednesday, February 12, the House Ways & Means Committee will hold a hearing on HB 565: Income Tax–Business and Economic Development Tax Credits–Termination. The bill calls for the following changes:
  • The Secretary of Commerce may not designate or renew a RISE Zone on or after June 1, 2020.
  • Sunsets the One Maryland Tax Credit as of January 1, 2023
  • Sunsets the Buy Maryland Cybersecurity Tax Credit as of January 1, 2023
  • Sunsets the Small Business Relief Tax Credit as of January 1, 2023
  • Sunsets the Opportunity Zone Enhancement Program as of January 1, 2023
  • Sunsets the Biotechnology Investment Incentive Tax Credit as of January 1, 2023
  • Sunsets the Film Production Activity Tax Credit as of June 30, 2023

• Securing access to capital and financing is critically important for Maryland’s job creators as they look to grow and expand. As a result, the Maryland Chamber of Commerce opposes any effort to modify or eliminate business tax incentives or lending programs that are designed to spur economic growth and investment.

HB 295: Corporate Income Tax–Combined Reporting

• This bill requires affiliated corporations to compute Maryland taxable income using a certain combined reporting method, and requires the comptroller to report by March 1 of each year an estimate of the total additional tax revenue from corporations to be collected in the next fiscal year as a result of the combined reporting method.
• Further, the bill requires the comptroller to distribute certain revenue from corporations to the Blueprint for Maryland’s Future Fund.
• Over the last decade, combined reporting has been exhaustively researched and debated among policymakers in Annapolis and across the state. The prevailing sentiment remains that combined reporting is not an appropriate or accurate method of computing state taxable income or attributing multistate business income to economic activity in Maryland. In fact, a combined reporting system would result in significant and unintended negative consequences for business taxpayers, including competitive disadvantage, undue complexity, and administrative burden, all while resulting in no guaranteed increase to state revenue.

HB 473: Corporate Income Tax—Throwback Rule

• This bill would institute a rule requiring the “throwback” of sales to Maryland for apportionment purposes in corporate income taxes for sales that originate in Maryland but are not taxable in another state.

• The “throwback” rule is a modification of the sales factor of the apportionment calculation for corporate income taxes used by certain states. It requires that sales by a business in a destination state where they are not taxed are thrown back and included in the Maryland sales factor apportionment calculation.
• The Maryland Business Tax Reform Commission, under Governor O’Malley, considered the issue and chose not to recommend its adoption. Part of the reason the commission did not recommend the rule was because it represented a tax on product originators, thereby discouraging investment in Maryland.