I thought there was hope for Maryland. Republican Gov. Larry Hogan seems like a moderate guy compared with most Maryland pols. I had hoped the governor would release a comprehensive tax plan to broaden the base and reduce rates in a state long known for its bad tax policy.
Instead, Hogan has proposed the opposite of sound, comprehensive reform. In fact, he proposed something eerily similar to Start-Up New York, which I have called the worst tax policy development in the history of mankind. Of course, I'm prone to hyperbole at times.
As State Tax Notes reported, Hogan proposed a plan that would exempt "new manufacturers" from the state's otherwise oppressive 8.25 percent corporate income tax if they locate in certain parts of the state. All employees of those manufacturers making less than $65,000 would be exempt from the state's personal income tax. The exemptions would be in effect for 10 years. This is just as bad as the Soviet-style economic planning taking place in Albany.
The new manufacturers would have to open up shop in one of the state's empowerment zones. Right now those zones are in the rural western part of the state, the city of Baltimore, and the lower Eastern Shore. The empowerment zones are identified based on high unemployment. I note that employment levels are reflections of market conditions. High unemployment in Pittsburgh once reflected the fact that it was less expensive to make quality steel overseas.
In any event, Hogan's proposal was part of a bigger tax package that included tax relief for senior citizens and an expansion of the earned income tax credit. Hogan said, "I can't imagine how anybody could vote against these." Well, I'll tell Maryland lawmakers why they should vote against the new manufacturer exemption.
It's simply bad tax policy. The tax system should be built on a broad base and low rates. But Hogan's proposal would narrow the base and prevent any rate lowering -- and Maryland needs rate lowering. The tax system should be fair both horizontally and vertically. This proposal is neither. What does the governor tell "old" manufacturers that aren't getting the break? They already invested in the plant, equipment, and people. Do we shrug? Giving a big company and its employees a complete exemption while making those who work outside the zone pay the full freight is hardly fair.
What's really wrong with this proposal is that it inserts the government into the marketplace. Tax systems should have as little impact on economic decision-making as possible. All taxes affect markets, of course, but we should try to minimize those distortions. Instead, Hogan, like his fellow traveler New York Gov. Andrew Cuomo (D), is actively trying to influence the markets. That rarely, if ever, works.
In this case, the government decides where you should locate -- in the empowerment zone. But what if company management thinks the business should locate outside the zone? A company six inches outside the zone gets no break. How could that possibly be good for Maryland? The government is favoring manufacturing over all other industries, but we are a service-and technology-based economy. If a big financial institution, insurance company, or online retailer wanted to set up shop in Maryland, they wouldn't get the break. What's surprising is that Hogan is ignoring what drives business location decisions. All research indicates that business investment is based primarily on labor costs and market access. Taxes aren't nearly as important.
I don't write this as someone who thinks we should be taxing manufacturers. The way to compete on the tax front is to eliminate inefficient taxes (like those on corporate income), impose broad-based taxes at very low rates, and use the revenue to provide services that businesses need (education and transportation). Then the government should get out of the way.
This post first appeared in State Tax Notes.