MARYLAND GOV. Robert L. Ehrlich Jr. (R) is considering vetoing one of his own bills as part of what seems to be a dual-track fiscal policy: promote tax shelters for the rich and gambling parlors for the poor. While ginning up a frantic summer revival of his push for slot machines to raise revenue, Mr. Ehrlich is disowning legislation he sought earlier this year that would gather as much as $120 million a year now slipping out of state through a tax loophole. Closing the loophole is an overdue move that Comptroller William Donald Schaefer (D) has championed for years; it won General Assembly approval last year -- only to be met with Mr. Ehrlich's veto.
Then in January, Mr. Ehrlich appeared to endorse the efforts of Mr. Schaefer, who had prevailed in the Maryland Court of Appeals; the court denounced the Delaware holding companies instrumental to the tax avoidance as sham operations, "little more than mail drops" for "sheltering income from state taxation." The governor submitted legislation to codify the decision. But by March, Mr. Ehrlich began to back off; he tried to persuade Mr. Schaefer to accept an amnesty arrangement pushed by the Maryland Chamber of Commerce. The legislature passed that plan and the loophole-closing bill.
Now, at the chamber's urging, Mr. Ehrlich reportedly is poised to veto the loophole-closer, claiming that the legislature altered the bill in ways that could create new taxation problems for several large Maryland companies. In a letter to the governor, the chamber said the bill had been "drastically" amended, that some corporations that pay interest expense or royalty expense would end up paying additional taxes on some business transactions. The chamber also argued that interest paid by a Maryland affiliate to a foreign parent company would be nondeductible. Rather than address any such problems that might arise through amendments next year, "we should start over," wrote Kathleen T. Snyder, the chamber's president and chief executive.
Mr. Schaefer, Deputy Comptroller Stephen M. Cordi -- who worked closely on the bill -- and at least one group of small-business owners in Annapolis all reject these arguments, maintaining that the few amendments made were not major and that all but the one involving foreign taxes -- which could be changed if serious problems arise -- actually were "business-friendly."
If Mr. Ehrlich wants a serious reform that would end a tax sham and yield substantial revenue, he should let the bill go on the books.