Md. Weighs Tax Breaks for Its Wealthiest
By Scott Wilson
One bill would cut taxes for a company that posted $26 billion in revenue last year. Another would help Maryland millionaires keep more profits after selling large blocks of stock and other assets. And a third would give tax breaks to Baltimore's biggest developers, including a bakery mogul who once supplied all the McDonald's hamburger buns on the East Coast.
As millions of Marylanders are filling out tax returns, state lawmakers are considering at least three specific tax cuts that would benefit the state's richest residents and corporations. The legislation is the product of a feverish national competition among states for name-brand companies and economic development, and it comes at a time when the General Assembly is eager to change Maryland's image as a high-tax state.
The atmosphere has given companies such as Marriott International Inc. and even wealthy individuals enormous leverage in the political arena. Their cause has become fodder for national talk radio shows and proposals on Capitol Hill. But in State House hallways, the debate has been muted, even as the public begins to speak out.
"We didn't elect 188 legislators and all these county people to be venture capitalists," said William Skinner, president of the Maryland Taxpayers Association, who says companies receiving public money should issue stock to state residents. "They have my address. Where are my shares?"
Maryland has chafed for years at comparisons of its tax policies with those of other states, particularly Virginia, which offers lower income and sales tax rates. Those favoring the proposed tax cuts, including some of the most powerful lawmakers in Annapolis, say the measures would preserve jobs, generate new business and keep more money in state for social programs and private philanthropy.
"Tax credits are among the best economic development tools there are," said Richard C. Mike Lewin, the state's secretary of Business and Economic Development and architect of the Marriott package.
But opponents say the measures undermine the tax code by allowing rich businesses and individuals to negotiate customized tax breaks. State fiscal analysts have declined to estimate how much each could cost Maryland in lost revenue, although taken together they could reduce the tax base by more than $100 million a year.
"If you add up these concessions, you find that states are damaging their revenue structure and putting pressure on middle- and lower-income families who are already pretty heavily taxed," said William A. Galston, a professor at the University of Maryland at College Park and a former domestic policy adviser to President Clinton. "The big picture in the longer term has got to be one of creating a more overall attractive climate to do business."
The three tax measures this year have been requested by some of the state's most powerful business leaders John C. Erickson, who owns Senior Campus Living LLC; J.W. "Bill" Marriott Jr., chairman of the hotel and hospitality company; and John Paterakis Sr., owner of H&S Bakery and 20 acres of prime real estate along Baltimore's Inner Harbor.
The most publicized bill would expand property tax credits to keep Marriott from moving its Montgomery County headquarters to Virginia. The measure is a key component of the rich incentive package announced earlier this month, a public investment that state officials say will be recouped within three years by preserving the $20 million that the company contributes annually to the tax base. The company will add 700 new jobs over the next five years as a part of the agreement.
The bill would triple the size of a tax credit Marriott is allowed to claim by lowering the number of new jobs the company needs to create to qualify. Under the bill, Marriott would save $23.9 million over 12 years in property tax payments. The legislation has support from the governor and legislative leaders in both chambers. Last week, House lawmakers took no more than five minutes to discuss the bill during a public hearing.
But even supporters of the bill, including Montgomery County Executive Douglas M. Duncan (D), say the piecemeal approach to preserving businesses needs to be replaced by a more comprehensive strategy to make the state more attractive. Many lawmakers believe Marriott held the state hostage for an incentive package worth as much as $73 million, including road work, and fear other businesses will seek similar deals.
"The state has been much more focused on putting packages together on a case-by-case basis," Duncan said. "It's that big-picture sense of direction that has been lacking."
Another bill, sponsored by State Sen. Barbara A. Hoffman (D-Baltimore) at Erickson's request, would cap the amount of tax paid by people who make more than $1.3 million a year through the sale of stock or an out-of-state business. About 750 Maryland residents have the wealth to qualify for the measure, which would limit state and county capital gains payments to $104,000 regardless of the size of the profits.
Rush Limbaugh, the conservative radio commentator, talked approvingly about the proposal on his show recently. Arnold Koonin, a partner with the accounting firm PriceWaterhouseCoopers LLP in Washington, testified that an individual could save $800,000 on a $10 million capital gain by leaving Maryland for a state like Florida that does not tax those proceeds.
Two years ago, Erickson did exactly that to save several millions dollars after restructuring his vast real estate portfolio. Now Erickson, a philanthropist with his own foundation, has told lawmakers that he would consider returning to Maryland if the bill passes bringing more charitable giving with him.
"Maryland loses over and over because of its tax policy," Erickson said.
A third bill would give property tax exemptions to developers who build projects worth at least $10 million in downtown Baltimore. One of the biggest beneficiaries would be John Paterakis Sr., who plans to build a $138 million hotel project on his 20 acres on the Inner Harbor. The exemption could mean more than $4 million in tax savings.
Last year, the Baltimore Circuit Court invalidated a $3 million public incentive for the project because it violated regulations that tax breaks be extended only to property owned by the government. Paterakis had agreed to sell the property to the city for $10 with the caveat that he could buy the land back at any time for $10. A judge ruled the agreement did not amount to city ownership.
John C. Murphy, the attorney for a coalition of neighborhood groups fighting the Paterakis project, said he fears the General Assembly will grant the same tax breaks the courts ruled invalid.
"This is Baltimore's Gold Coast, and the fact that we are giving away these taxes is unfathomable," said Murphy, who predicts an overall loss in tax revenue of as much as $16 million.
But Murphy acknowledges that he "has no votes in Annapolis" to defeat the bill, backed by Baltimore Mayor Kurt L. Schmoke (D) and sponsored by Del. Howard P. Rawlings (D-Baltimore), the powerful chairman of the House Appropriations Committee.
In testimony last week, Schmoke said: "Other cities utilize [property tax credits] and other tax incentives to attract business. We should not be competing with one hand tied behind our back."
Such deals prompted one federal lawmaker to introduce a bill that would impose a federal excise tax on companies that receive public money in the form of grants or tax credits. The bill failed last year, but the sponsor, Rep. David Minge (D-Minn.), cited the Marriott case during a recent national economic development conference to explain why he was reintroducing it this year.
"We ought to be competing on the basis of which states have the best tax structure, regulatory climate and other economic measures," Minge said.
Public policy experts say competition for business and wealthy residents should be more regulated, and they point to regional agreements between states to share fisheries and other natural resources as a model of what could be done.
But many business leaders say such cooperation between states when it comes to economic development is unreasonable. In the meantime, they say, state governments will continue to treat taxpayers differently based on how important they are to the tax base.
"The overwhelming number of corporations are not unique like Marriott, and the overwhelming number of individuals are not unique like John Erickson," said Champe McCulloch, president of the Maryland Chamber of Commerce. "You have to keep your eye on what your overall goal should be, and sometimes you have to be flexible."
© Copyright 1999 The Washington Post Company