A proposal to extend indefinitely the 6.25 percent state income tax bracket on high wage earners and impose a system of mandatory unitary combined reporting for corporate income taxes will be heard by the House Appropriations Committee today. The legislation is being pushed as a way to fund state employee and teacher pensions. Maryland Chamber Vice President of Government Affairs Ron Wineholt will testify in opposition to the bill, HB 10.
The Chamber opposed the “Millionaires’ Tax” when it was enacted during the 2007 special session and we have opposed mandatory unitary combined reporting for a number of years.
The Millionaires’ Tax
Enacted during the 2007 special session, the higher income tax bracket on high wage earners is set to sunset this year. The tax has failed to make its estimated yield, as the number of individuals filing with $1 million of income dropped by 30 percent in tax year 2008.
This tax falls disproportionately on small business owners, who need to reinvest funds into their companies to create jobs. Tens of thousand of small businesses in Maryland are flow-through entities, such as S-Corporations and Limited Liability Companies. These types of businesses don’t file corporate income tax returns. The tax on business income is paid on the personal income tax return of the business owners. Flow-through business owners pay individual income tax on all of the business’s net earnings, even the earnings the business owner reinvests in the business.
“This tax should be allowed to lapse, as promised, so that Maryland can better compete for and retain jobs,” Wineholt said.
Current law requires corporations doing business in the state to be taxed based on their payroll, property and sales in Maryland. Combined reporting arbitrarily assigns income to Maryland for all members of a corporate unitary group – even for those corporate entities having no presence in the state.
States that have adopted combined reporting have found that it results in massive shifts of tax liability between businesses, with many paying more taxes and many paying less. It is important to analyze the winners and losers of such a tax change and the impact on Maryland’s economy. That’s what the Governor and General Assembly had in mind during the 2007 special session when they created the Maryland Business Tax Reform Commission to study potential changes to Maryland’s business tax structure, including the merits of combined reporting. The Commission has worked diligently for the past year and will provide recommendations in December of 2010.
“We know from preliminary data that combined reporting would cause massive shifts in tax liability between businesses, with 2,418 businesses paying more in taxes and 1,906 businesses paying less,” Wineholt said. “The fact that many businesses pay less in taxes demonstrates that the tax change is not a ‘loophole closer.’ The Commission should be allowed to evaluate another year of tax data and report back this December without having this issue prejudged by the General Assembly.”
State Employee Pensions
The Maryland Chamber believes that state employee and teacher pension funding is a serious problem, but the tax levies in this bill are ill-timed and ill-advised. The Maryland Chamber encourages the state to explore options for transitioning away from the unsustainable cost of defined benefit pensions.
“Employers should not be asked to fund a level of pension and benefits for public employees that they cannot afford to provide to their own employees,” Wineholt said. “Most private employers long ago ended defined benefit pension plans, instituting defined contribution plans.”