Md. Budget Crisis: O'Malley Announces Plan to Close Corporate Tax Loopholes, Raise $94 Million

By KENNETH R. FLETCHER, Capital News Service

BALTIMORE - Gov. Martin O'Malley laid out a plan last Friday, September 21, to collect as much $94 million in new taxes by closing two corporate tax loopholes, the latest installment in his plan to eliminate the state's $1.7 billion deficit.

Under O'Malley's plan, however, only about $39 million would go toward the state deficit, with as much as $55 million of the new money going to local jurisdictions, said a spokesman for the governor.

The governor defended the changes by referring to a state comptroller's report that showed that slightly more than half of the 150 largest corporations in Maryland did not pay state corporate income tax in 2004-2005.

"Businesses that benefit from our state's services must be willing to invest in those services with their tax dollars," O'Malley said.

His plan would prohibit the use of combined reporting, which lets companies avoid Maryland taxes by shifting profits to subsidiaries in other states. O'Malley also wants to stop the use of controlling interest, which lets businesses escape the 2 percent transfer tax when they sell a property by classifying the property itself as a business.

Critics quickly attacked the plan, saying it could make Maryland less attractive to businesses.

"These are national corporations with facilities all around the country. If taxes are increased they have the option to move to another state," said Ronald Wineholt, vice president of government affairs at the Maryland Chamber of Commerce.

Some Republican lawmakers also expressed opposition to the plan, which will likely be debated if the governor calls a special legislative session this fall as he has said he wants to do.

"When the economy is uncertain . . . raising taxes is the last thing you want to do in the business community," said Delegate Christopher Shank, R-Washington. "It sends the wrong message to people who want to invest in Maryland and create jobs."

Republican lawmakers added that the small amount of revenue generated by combined reporting would not be worth the paperwork involved to keep track of multistate corporations.

"It's incredibly complex," Shank said. "The juice isn't worth the squeeze."

Sen. David Brinkley, R-Frederick, said the governor's plan is "another one of the items on the menu that the progressives want to go after business, but does nothing to solve the state's deficit."

But O'Malley and Democratic lawmakers said the plan equalizes Maryland taxes.

"We shouldn't ask working and middle-class people to tighten their belts unless the corporations step forward to pay their share," said Sen. Paul Pinsky, D-Prince George's. "It's a no-brainer."

Pinsky challenged the claim that closing corporate tax loopholes would drive businesses to other states. He said those most affected would be corporations that are not leaving the state, like Wal-Mart, while small Maryland businesses will not suffer under the plan.

"The chamber doesn't want it because they don't want their companies to pay up," Pinsky said.

With the city skyline as a backdrop Friday, O'Malley gestured to the towering Alex Brown Building behind him. He said that when the building was sold last year by a Philadelphia company for $120 million it avoided paying $2.4 million in transfer and recordation taxes with controlling interest.

"It's not good public policy to allow Alex Brown to pay nothing in transfer tax and have mom and dad buy a row house and pay $4,000," O'Malley said. "It's not fair. It's not right."

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