Business tax forms.
(Jan. 11, 2016)—Conventional wisdom states that small business is the engine that drives America’s economy. This is certainly true in Maryland. According to the latest U.S. Small Business Administration data there are over 500,000 small businesses in Maryland, and over 80% are single person companies with no employees.
They encompass every industry from the construction trades to scientific, technical and professional services. Over 80% of all Maryland firms exporting goods internationally are small businesses, and they generated almost 30% of all export revenue. It is apparent that helping Maryland’s small businesses succeed is good public policy.
Unfortunately, Maryland has garnered a reputation as one of the least business friendly states. Whether this is true or not is irrelevant. Perception is reality.
Rather than curse the darkness, let’s light a candle to illuminate a fiscally sound path forward that helps people start successful small businesses, and not end up as micro-corporate welfare. Therefore, we should concentrate on assisting the smallest firms—particularly during their formative stage, the first five years when the majority of failures occur.
Many of these failures are the result of negative cash flow, where the upfront expenses overwhelm the business before it can earn enough revenue to stay solvent. My small business investment totaled over $4,000, and I did not become solvent for over six months. Entrepreneurs with less cash, or needing more equipment, space and employees are even more vulnerable.
Personal property tax a good place to begin
A review of the Maryland taxes, fees, and regulatory overhead provides an excellent starting point. Not all taxes and fees are equal, and the personal property taxes looks like an excellent place to begin.
Although there is no state personal property taxes for businesses, each county, municipality, and special taxing unit may collect personal property tax. The State Department of Assessment and Taxation (SDAT) calculates the value of the personal property annually, and local governments collect the revenue.
Every jurisdiction has a different tax rate, from zero for Frederick and Talbot counties to $5.62 per $100 of assessed value for Baltimore City. There are also numerous exemptions that further confuse the situation.
In addition, the SDAT and local government overhead costs to administer personal property taxes are much higher than for income, or sales taxes. Furthermore, all of this business personal property is in addition to the 6% state sales tax. Am I the only small business owner that believes that I am paying double taxes for the same item? Business personal property taxes are a very inefficient and regressive way to fund the government.
Hard to assess how much it will cost
A review of SDAT data makes it very difficult to fully assess how much personal property tax revenue would be lost if there was an exemption for small businesses. Elected officials worry about an erosion of business personal property tax revenues. Any real loss of revenue might lead to cutbacks in critical services and programs.
These issues provide a considerable inertia against any reduction in the personal property tax. Fortunately, this outcome should not happen for the 24 large jurisdictions. The single-person businesses are overwhelmingly limited liability companies (LLCs).
Therefore, all company revenue (net of expenses) is considered to be their personal income for both Federal and Maryland income tax purposes. The personal property tax is a legitimate business expense which is deducted from the business owner’s income. Any reduction in personal property tax revenue would be offset by increased personal income taxes. Baltimore City and Charles County might see some small revenue loss, because their personal property rates are higher than their piggyback income tax rates.
Revenue losses should be negligible
If done properly these losses should be negligible, and increases in business activity should grow the tax revenues to offset them. The small municipalities may feel a significant impact, and their plight should be addressed in any reduction in the personal property tax.
In Governor Hogan’s first General Assembly legislative session, he proposed exempting up to $10,000 of local personal property from taxes. The General Assembly's commission to study Maryland’s business climate will recommend tax changes this month.
I believe that a reasonable compromise can be found that gives small businesses relief from personal property taxes, helps grow Maryland’s economy, and is fair to taxpayers. The General Assembly’s 2016 legislative session begins Wednesday.
I strongly urge the governor and the General Assembly’s leaders to enact legislation that either eliminates, or reduces personal property taxes for Maryland’s smallest and most vulnerable businesses.
William H. Campbell can be reached at whcampbell (at) verizon.net.