Archive - Budget and Taxes

New Study Confirms Maryland Is a Low-Tax State for Manufacturers

A recent study by the Barents Group of the consulting firm KPMG finds that Maryland taxes manufacturing firms at lower rates overall than most nearby states. This finding confirms the results of other, similar studies published in past years. The studies consistently find that a typical manufacturer contemplating expansion is likely to pay lower taxes if it locates in Maryland than it would pay in most comparison states.

The Barents study used a variety of sources of data to compile asset and operating cost information for "representative firms" in each of 10 manufacturing industries. It calculated the income, sales, property, and other taxes levied on those firms if they built a new plant in each of 10 states - Florida, Georgia, Kentucky, Maryland, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia.

The results, summarized in Table 1, were striking.

• Maryland's average business tax burden on the 10 industries was the lowest among the 10 states studied. At 6.09 percent of profits, total Maryland taxes were 31 percent lower than the 10-state average.

• In nearly every individual industry studied -- eight of 10 -- a typical manufacturing firm was estimated to pay lower taxes in Maryland than in any of the other states. The exceptions were for a meat producer, where a typical firm would pay lower taxes in Maryland than in all but one other state (Kentucky), and for a paper mill, which typically was estimated to pay lower taxes in Maryland than in all but two other states (Kentucky and Pennsylvania).(1)

Other Studies Yield Similar Results

The Barents study is consistent with other analyses.

• A 1996 study by Federal Reserve Bank of Boston senior economist Robert Tannenwald found that Maryland had the second-lowest business taxes among 22 major manufacturing states. The states included in the study were the New England states plus most of the other major industrial states in the country. The study found that among the 22 states, only Alabama levied lower taxes than Maryland on those manufacturers.(2)

• A 1993 study by S.H. Brooks Co., Inc., overseen by Tannenwald as director of a tax study commission in Massachusetts, found that Maryland had the second-lowest business taxes among 11 states studied.(3)

See Table 2. Each of these studies avoided some of the errors that have plagued other studies of business tax climate. They include all business taxes that affect directly a business's bottom line -- income tax paid on corporate profits, sales tax on business purchases, property taxes paid on business assets or inventory, and other taxes. They use industry data derived from such sources as the IRS Corporation Source Book and other sources to generate truly representative firms. They include both state and local taxes; for local taxes, they either use a measure of average local taxes statewide or they use a representative local jurisdiction chosen for the proximity of its tax levels to the statewide average. They also take into account the interaction of taxes -- for example, the deductibility of state corporate taxes from federal taxable income. They include most of the major tax breaks that states provide to businesses, such as research and development tax credits, that are intended to promote economic development.(4) And they project tax liability out over future decades, based on current tax law, to simulate the long-term consequences of an investment in each state.

These studies' assessment of Maryland business taxes do not appear tainted by self-interest. The Barents Group and Brooks Co. studies were commissioned by public bodies outside of Maryland that presumably had no stake in either exaggerating or minimizing Maryland's level of taxation. Tannenwald is widely recognized as one of the nation's leading experts on fiscal issues.(5)

Maryland Business Taxes: Low Sales Tax, Low Property Tax, Low Corporate Income Tax

The Barents Group study identifies some of the elements of Maryland's tax code that result in low tax burdens for manufacturers. According to the study, Maryland levies lower corporate income taxes, lower property taxes, and lower sales taxes than most of the other states in the region.

• As in every other state in the region, businesses in Maryland pay state corporate income taxes on their profits. Maryland's top corporate income tax rate is about average. Unlike seven of the 10 states in the Barents study, however, Maryland does not levy a franchise tax on their assets or net worth. Maryland's lack of a franchise tax, combined with its moderate corporate income tax rate and other features of its corporate tax code, leads to a ranking of sixth among the 10 states.

• Maryland's sales tax rate of 5 percent is the second-lowest among the 10 states studied. Moreover, Maryland exempts many business purchases that are taxed in other states, including purchases of manufacturing machinery, telecommunications services, and data processing services. Maryland's sales tax, Barents finds, is the lowest among the 10 states.

• Maryland exempts inventories, motor vehicles, and intangibles from its local property tax base. Barents calculates that Maryland's property tax burden on businesses is the third-lowest among the 10 states studied.

Manufacturing firms are not the only businesses with low taxes. For instance, a 1997 study by Charles Swenson of the University of Southern California found that, for all types of businesses, Maryland's aggregate business taxes as a share of total business income was the nation's 15th lowest.(6)

Table 1.
Effective Business Tax Rates by Type of Tax, 10-Industry Average

Source: Barents Group. Calculations are based on tax law in effect as of 1997.
Maryland Budget & Tax Policy Institute

Taxes Are a Small Part of Overall Business Climate

These studies do not tell us everything we need to know about taxes or about the business climate in Maryland. For example, these studies do not take into account household taxes, such as the personal income tax, the sales tax on household purchases, or property taxes levied on homes and apartments. (As it happens, Maryland's overall level of taxation - as measured by total tax revenue as a share of the economy - is well below the national average.(7))

Nor do these studies tell us anything about other aspects of Maryland's economic climate that typically affect the location decisions of businesses, such as the quality of public and private services, the availability of qualified workers, the costs of goods, services, and property, or the proximity of suppliers and markets. Both anecdotal and statistical evidence show that these other factors are far more important than business tax climate in determining where a firm locates. For instance, Tannenwald notes: "While tax characteristics may affect a state's competitiveness, policymakers should view with caution claims that changes in tax policy will dramatically improve their state's economy. Enhancing public services valued by businesses may be a more effective economic development strategy."(8) Tannenwald and other economists note that if a tax cut is financed with cuts in public services, the result can be an overall decline in a state's business climate. (9)

Table 2.
Studies of Business Tax Competitiveness Including Maryland

Sources: Barents Group; Federal Reserve Bank of Boston.
Maryland Budget & Tax Policy Institute.

Notes.

1. Nancy Cook, Gang Shao, and Andrew Phillips, "Analysis of State and Local Business Tax Systems," State Tax Notes, September 8, 1999. The study was commissioned by the Hampton Roads (Va.) Planning District.

2. Robert Tannenwald, "Business Tax Climate: How Should It Be Measured and How Important Is It?" State Tax Notes, May 13, 1996, pp. 1459-71.

3. Ibid.

4. The studies exclude special tax breaks other forms of assistance that state and local officials may award on a case-by-case basis; in general, these tax breaks account for a relatively small share of all tax breaks for businesses.

5. One limitation of these studies is that all three focus on manufacturing firms rather than other types of businesses that may consider relocation. Efforts to identify comparable studies that focus on non-manufacturing firms and include Maryland were unsuccessful. However, since Maryland so consistently ranks as a low-tax state, it is likely that other types of businesses would find Maryland's business tax climate appealing as well.

6. Actually, the study counted Maryland and the District of Columbia as a single entity; had they been separated, the ranking might well have been lower. Charles W. Swenson, "Does Your State Overtax Business Income?" State Tax Notes, November 3, 1997.

7. Nick Johnson and Steve Bartolomei-Hill, Chartbook on Taxes in Maryland, Maryland Budget & Tax Policy Institute, July 1999.

8. Tannenwald, p. 1459.

9. For a discussion, see Timothy J. Bartik, Growing State Economies: How Taxes and Public Services Affect Private-Sector Performance, Economic Policy Institute, 1996