Budget News

 By Neil Bergsman

Revenues Continue to Erode
Maryland Comptroller Peter Franchot recently released data on state revenues for the month of May. Proceeds for the month were a whopping 20% below the same month last year.

For the entire fiscal year to date, revenues are down 4.9% from last year. The General Assembly based the budget on estimates calling for ‘only’ a 2.3% decline (Followed by another 1.6% drop next year). So, these results will likely lead to a budget gap of hundreds of millions of dollars.

Budget Cuts are in the Wings

Governor Martin O’Malley is sifting through budget reduction proposals submitted by heads of state agencies. We expect that in July, he will put forward a package of about $200 million in budget cuts for the consideration of the Board of Public Works.

The bulk of state general funds go for education, health care and public safety. The Governor and legislature have cut $2.7 billion in general funds from the budget since 2007. Each round of cuts becomes increasingly difficult because the remaining budgets represent critical services with widespread public support.

Business Tax Study

2007 Special Session legislation set up a commission to study business taxes in Maryland. Governor O’Malley appointed Raymond Wacks of Howard County to chair the group, and it has started to take testimony from experts. At its June meeting, the Commission heard from Michael Mazerov of the Center on Budget and Policy Priorities (and MB&TPI’s national affiliate), Douglas Lindbloom, of the Council on State Taxation (a trade association of 600 major multistate corporations) and Jim Eads, of the Federation of Tax Administrators.

The presenters agreed that Maryland’s overall level of business taxation is not high by national standards.

Eads pointed out that nationally, corporation income taxes constitute a relatively small share of state revenues but a relatively large share of controversy and litigation. He reviewed the recent history of “unitary business taxation.” He also pointed out that nearly every state applies the sales tax to some services, but only Hawaii and New Mexico have broad sales taxes on services.

Mazerov outlined the recent history of corporations’ efforts to minimize state taxes and states’ efforts to protect their tax bases. Mazerov indicated that states have four basic strategies;

1. “Give up.” Texas and Ohio have essentially abandoned their corporation
   profits taxes in favor of a gross receipts tax.
2. “Add on” Kentucky and New Jersey have adopted “add-on” gross receipts
   taxes that operate in addition to profits taxes.
3. Ad-hoc reforms to address individual tax avoidance techniques as they arise. This has been Maryland’s strategy up to this point.
4. Combined reporting. This reform, now used by 23 states, requires states to combine their close affiliates and subsidiaries in the calculation of corporate profits. Six states have adopted combined reporting since 2004.

Lindbloom urges the panel to avoid tax changes that require corporation profits to be figured including their close affiliates and subsidiaries operating nationally, and also argued against single business taxes and sales taxes on services used as inputs by businesses.

The Commission is slated to deliver an interim report in December of 2010 and a final report one year after that.

MB&TPI