Maryland businessman Kurt Zanelotti remembers talking with other business owners last year about who should be the state’s next governor.
“Of the five who were there, three of them said they were going to leave the state within the next three years,” Zanelotti said. In their minds, he said, the state was holding back their companies.
That was before Republican Larry Hogan (R) won the governorship by promising lower taxes and a friendlier stance toward business. His agenda has rekindled a charged debate over how much of a tax burden individuals and businesses can bear.
Tax rates and incentives are a key way for states to market themselves to business owners, said state Sen. Andrew A. Serafini (R-Washington), a member of his chamber’s budget and taxation committee: “How you structure them says something about how your state compares to others.”
The Democratic-controlled General Assembly this year rejected Hogan’s proposal to exempt small businesses from up to $10,000 of the taxes on personal property — equipment, supplies and inventory — levied in most of the state’s cities and counties.
But Democratic lawmakers in 2014 appointed a commission to study the state’s business climate and recommend tax changes — including tweaks on business taxes on corporate income, personal income and property.
The work group, chaired by retired Lockheed Martin chief executive Norman R. Augustine, is one of several commissions established in Annapolis this year to propose changes on a broad range of issues: government regulations, police procedures, standardized testing and the state’s opioid epidemic. Each commission is expected to release its recommendations in December.
Zanelotti is president and chief executive of Beltsville-based Contract Carpet Services, which his father founded 39 years ago. He says he never planned to uproot the family business from Maryland, where he grew up, earned a college degree and raised two daughters.
But echoing a concern voiced by many voters in last year’s gubernatorial election, he said the state’s taxes have become burdensome enough that he would set up shop somewhere else if he were starting the flooring company from scratch.
“It would not be in Maryland,” Zanelotti said. “Maybe next year, after we get some changes.”
Tax analysts have cited Maryland’s property taxes as one of the biggest drags on business development because they extend — at least for companies — to equipment and other items.
The tax rates for personal property vary by jurisdiction, ranging from zero in Frederick County to 5.62 percent in the city of Baltimore. Baltimore’s tax rate on personal property is 50 times higher than the state rate on land.
Many experts say high rates on tangible personal property disproportionately affect start-ups and manufacturers, which are most in need of new machines, furniture and supplies. They say the rates can discourage companies from moving to or expanding within the state.
“That should be the bull’s-eye target for this commission,” Douglas Lindholm, president of the Council on State Taxation, told Augustine’s panel in September.
Maryland’s personal income tax rates also are among the highest in the country, which is a problem for the many small business owners who choose to count their business income as personal earnings, rather than filing a more complicated corporate tax return.
Maryland’s combined state and local taxes on personal income, which range from 2 percent to 6.07 percent, “are by far the most burdensome” compared with neighboring states, according to a recent Moody’s Analytics report for the state panel.
Maryland’s revenue for personal income tax, when measured as a percentage of gross state product, is the third-highest in the country behind New York and Oregon, the report said.
Serafini, one of 14 Republicans in the 47-member Senate, said that lowering personal income tax rates — which were increased under the previous administration in 2007 and 2012, should be a legislative priority.
“It helps small businesses, and it helps individuals and families,” he said. “I’d love to see us do something for the large corporations, but if we fix the regulatory climate first, we can look at the corporate tax later.”
But reducing personal income taxes, which account for 38 percent of all revenue from Maryland’s local and state collections, would have little chance of advancing in either the Senate or the House of Delegates, both of which have strong Democratic majorities.
Some Republican lawmakers said they doubt Hogan will fight hard for tax cuts next year because he is negotiating ways to resolve the state’s looming structural deficit, which, according to the Department of Legislative Services, could reach $1 billion over the next four years.
Hogan’s office declined to discuss specifics about the governor’s legislative proposals for the next session, but spokesman Matt Clark said the administration will focus on holding the line on spending and standing firm against any tax increases.
Hogan has accused Democrats of creating an unfriendly environment for businesses, in part by blocking his proposals and by raising dozens of taxes and fees during the administration of Martin O’Malley (D).
Supporters of the increases have defended the rate raises, saying they allowed record public spending on education and roads while contributing to a drop in crime and a dramatic increase in the number of residents covered by subsidized health care — all during one of the deepest economic recessions in U.S. history.
“Those were difficult decisions to make sure we were in a good position for many years to come, and to make sure we were acting responsibly toward the people we educate,” said Sen. Richard S. Madaleno Jr. (D-Montgomery), vice chairman of the budget and taxation committee.
Critics disagree, saying the approach was unfair and counterproductive.
“To put this on the backs of employers is not the way to make Maryland more business-friendly and grow jobs,” said Matt Palmer, senior vice president for government affairs at the Maryland Chamber of Commerce.
Among the tax increases and fees O’Malley implemented was an increase in the corporate tax rate from 7 percent to 8.25 percent. Moody’s said that rate is not especially onerous compared with the rates in a peer group of states including Georgia, Massachusetts, New Jersey, North Carolina, Pennsylvania and Virginia.
Still, the increase irked Zanelotti, who says he spends time each year figuring out whether it makes more sense for him to file a corporate return or include everything on his personal return.
Other business owners, however, say the change wasn’t substantial enough to deter them from operating in Maryland.
“I would never base my location decision on a 1 percent differential in the corporate tax rate,” said Jim Racheff, chairman and chief executive of DMS International, a management and IT consulting firm based in Silver Spring. “I think that idea has been a little exaggerated over time.”
Racheff said he cares more about income levels, quality of life, educational systems and transit — all areas where Montgomery County ranks fairly well. “I want to know that I’m getting a return on investment,” he said.
Maryland earns mixed grades on some quality-of-life measures. Ernst and Young’s annual report on state taxes consistently ranks it among the top states for providing educational benefits in exchange for a company’s tax dollars. For fiscal 2013 and 2014, Maryland finished first. The state’s educational attainment rate is also among the highest in the nation, with nearly 90 percent of residents over the age of 25 earning at least a high school diploma and about 35 percent earning at least a bachelor’s degree.
On the other hand, Maryland received a C-minus for infrastructure from the American Society of Civil Engineers in its most recent analysis of the state in 2011.
Madaleno said the state can help businesses most by giving them venture capital funding and expanding tax credits for people on the lower end of the income scale, who he says are most likely to spend the money they would be saving in taxes on goods and paying off bills.
Serafini takes a different approach, saying the state should eliminate some of its tax credits and lower income tax rates for corporations and individuals. “Those are ways that we can promote business and, in the end, possibly raise more revenue for the state,” he said.