Maryland Gov. Robert L. Ehrlich Jr. is considering a plan to reopen a large corporate tax loophole the General Assembly closed over his objections this year, according to state tax officials.
A draft proposal to dial back the new tax policy triggered an angry reaction from Comptroller William Donald Schaefer (D), usually a close ally of the Republican governor. Schaefer, who said the change already has brought in an additional $59.5 million, fired off a terse letter calling the proposal costly and "ill-conceived."
"Loophole-creating legislation of the kind now being offered for your consideration would . . . do nothing but make our present fiscal situation worse," Schaefer wrote in the Sept. 28 letter, which his office made public yesterday. "I believe the citizens of this state, your administration, and you personally would be well-served if this ill-conceived proposal never saw the light of day."
The so-called Delaware holding company loophole was used by a wide range of large corporations, such as Toys R Us and the Gap, to move assets out of state -- most often to Delaware -- so they would be taxed at a more friendly rate.
Schaefer successfully fought the tax shelter in court and then joined a range of advocacy groups in pushing for legislation that would eliminate it outright.
Ehrlich initially supported the change, even putting his own clout behind the bill, but later threatened to veto it, saying the legislature had overreached and was hurting companies that had never attempted to use the loophole.
In May, the governor ended weeks of speculation about his possible veto, instead allowing the legislation to become law without his signature. But the process left him dissatisfied. And that is why the Department of Business and Economic Development began work on a new bill, top Ehrlich aides said yesterday.
"He felt there was more work to be done," said Budget Secretary James C. DiPaula. "He thought it was imperfect legislation and we needed to have a collaborative effort to revise it."
Karen Syrylo, a tax consultant for the Maryland Chamber of Commerce, said representatives from a number of large corporations have held a series of meetings with top Ehrlich aides to help draft the new bill. She said she sat in on only one of the meetings.
"The governor's people wanted to hear directly from the corporations why the bill was hurting them," Syrylo said. "The governor is keeping his promise that he made when he let that bill become law. He said there were lots of unintended consequences and he would seek amendments to remove them."
The new proposal remains in draft form. And Economic Development Secretary Aris Melissaratos said yesterday it in no way is intended to reopen any tax loopholes.
"The law went beyond our initial intent and created some additional hurdles for corporations that we believe are unfair," Melissaratos said. "We want to make sure Maryland corporations pay appropriate tax, but not more than in other states, because we want to continue to be competitive."
Schaefer had a different view of the proposed revision, saying it bends way too far to favor businesses. It would "emasculate" the loophole-closing provisions, he wrote. He was not alone in that assessment. Tom Hucker, the director of the advocacy group Progressive Maryland, said he was "bewildered" by Ehrlich's proposal.
"It's a declaration of war on honest taxpayers," Hucker said.
Hucker said his group already was dismayed by the compromise that enabled the loophole to be closed but forgave corporations who exploited it from having to repay $88 million in back taxes.
In a handwritten note at the bottom of his letter, Schaefer told Ehrlich he plans to fight the proposal. And that threat alone seemed to be getting a reaction yesterday from Ehrlich aides.
"We're certainly not going to pick a public fight with the comptroller," Melissaratos said.