Settling the Score on Maryland's Business Tax Environment: Comptroller Schaefer is Right

October 25, 2004

In a recent news report, Secretary of Business and Economic Development Aris Melissaratos said that Maryland is "one of the very worst states in the nation in terms of corporate taxation."

In that same report, Comptroller William Donald Schaefer said "Maryland can only be regarded, on the basis of its tax system, as among the most favorable states to set up or operate a multi-state business."

These two opposing statements about Maryland's business tax competitiveness reflect views that are shared in debates about Maryland's corporate tax structure.

Those who wish to reform or bolster Maryland's business taxes point to data that show that businesses are not paying their fair share and that the state could increase business taxes without harming its competitive standing.

Reformers also suggest that aggressive tax avoidance is a significant contributor to Maryland's ongoing revenue shortfall and the inability of the state to adequately fund critical services such as education, health care and public safety.

On the other hand, some business groups contend that Maryland's business taxes are high and that any reforms to close loopholes or increase taxes will lead firms to relocate to other states.

Which is it?

We reviewed several studies--by consulting firms, business groups, and independent analysts. They used many different approaches and measures. And virtually all reached the same conclusion: business taxes in Maryland are among the lowest in the U.S.

In other words, it appears that Comptroller Schaefer is right.

Here are some of the findings:

The Barents Group of KPMG comprehensively examined business taxes in 10 southern and mid-Atlantic states to determine where firms would pay the lowest taxes. Maryland was 10th (lowest) out of the ten states in eight of the ten industries included in the study. Overall, total business taxes here would be 31 percent lower than the 10-state average.

A similar comprehensive study by Federal Reserve Bank of Boston economist Robert Tannenwald found that Maryland had the second-lowest business taxes among 22 states studied.

Additional studies using more simplistic measures consistently rank Maryland as among the lowest business-tax states in the U.S. A 2004 study for the Council on State Taxation, a membership organization of 550 major U.S. corporations, ranked Maryland 50th (lowest) out of 50 on one measure. The highest Maryland ranked on any of the four measures used was 35th out of 50.

Maryland continues to have a revenue shortfall, and policymakers will continue to explore options for balancing the budget that may include revenue increases and budget cuts. Business taxes will likely be a part of that debate.

Policymakers will weigh options against competing priorities. They may or may not choose to close loopholes or increase business taxes. But the debate can be continued on the merits of proposals and clear statements of priorities--not on false assertions about Maryland's business tax environment. MBTPI

Other Recent Maryland Policy Reports on Business Tax Issues:

Two-thirds of Maryland's Largest Corporations Paid NO Corporate Income Tax

Corporate Tax Avoidance 101 and the companion Reader's Guide