Gov. Harry Hughes culminated a week of meetings with business and General Assembly leaders today by announcing that he will support legislative efforts to prevent Maryland corporations from getting two additional tax breaks that would be granted automatically under new federal tax laws.
The decision is certain to be unpopular with the business community, which Hughes has courted throughout his three-year tenure. But it will please the labor and consumer groups that were incensed that businesses might get new tax deductions while social services were being cut.
Business leaders who met with the governor stressed that one of the tax breaks, which would allow corporations to speed up their deductions on equipment that depreciates, is necessary to ensure continued investment in the state.
To soften the blow to business, Hughes said the state should wait until the end of this year to break from the federal laws on depreciation. He emphasized that in the interim, state officials will look into alternates to complete "decoupling," the jargon used when a state decides to vary its tax structure from federal law.
Hughes, caught in a tug-of-war between business leaders and members of the legislature who favor fewer corporate tax write-offs, justified his decision by saying it was "an action to protect the revenues of the state in the future."
Although he could not provide estimates of how much money would be saved by prohibiting the new tax deductions, the Citizens for Tax Justice, a coalition of public interest groups, has estimated that the state could lose $300 million to $400 million in revenues over the next five years if it follows the federal tax pattern. A portion of the revenues collected from corporations is funneled into transportation projects, which Hughes has sought to bolster by asking for a 4.5-cent per gallon increase in the gasoline tax paid by motorists during the next two years.
The second corporate tax deduction opposed by the governor, called "safe harbor leasing," accounts for approximately 25 percent of the corporate taxes paid in the state. Hughes said he will support decoupling from that federal law retroactively, a decision that could add some $12 million to the state budget.
Safe harbor leasing allows companies to take advantage of investment tax credits and depreciation deductions by entering into lease agreements with other companies.
The business community here had not been vocal on the issue.