WASHINGTON POST: Maryland lawmakers seek to raise $1 billion through new business tax

Democratic lawmakers in the Maryland General Assembly are pursuing a 2.5 percent tax on business-to-business services in two identical bills introduced Monday night, a measure aimed at raising more than $1 billion that counters Democratic Gov. Wes Moore’s plans for closing a historic budget deficit.

Three lawmakers familiar with the proposal, which is the legislature’s opening revenue offer in budget negotiations with Moore, said it could allow lawmakers to avoid two major pieces of the governor’s proposed tax reforms: eliminating itemized deductions and implementing combined reporting, which requires multistate parent companies and subsidiaries to report profits together for state tax purposes.

Lawmakers and the Moore administration will continue to debate the budget and potential revenue sources over the next few weeks.

On Tuesday, Senate President Bill Ferguson (D-Baltimore City) said the state’s economy is increasingly made up of services, rather than goods, and the tax would provide long-term, sustainable funding for priorities like public safety, education, health care and transportation.

“We have to have every tool available to evaluate how we balance our budget without destroying our social safety net, and remain competitive,” Ferguson said.

While some lawmakers hope the tax, if passed, would allow the state to forgo parts of the governor’s tax reform plan, Ferguson said that the state is expecting a downward adjustment to its projected revenue later this week due to federal cuts, which may force more tough decisions before the legislative session ends in April.

Ferguson predicted last month that the state will need to find hundreds of millions of dollars in additional cuts on top of the $2 billion recommended by the Moore administration in January.

“We’re going to need more adjustments in the next 35 days to accommodate the horrible impacts of the Trump administration,” he said Tuesday.

Moore’s idea to eliminate itemized deductions would mean tax hikes for most people who make more than $500,000, but it would also raise taxes for significant numbers of middle-income earners. Lawmakers could avoid those income tax increases by scrapping that piece of the governor’s budget.

The business-to-business tax proposed by Democratic leaders who control both chambers of Maryland’s state legislature would apply to services provided by one business to another. For example, if a business owner hires an accountant to file the company’s business taxes, that service would incur a 2.5 percent tax.

The new tax would generate about $1 billion in revenue, said Del. Vanessa Atterbeary (D-Howard), who chairs the Ways and Means Committee.

Combined with $2 billion in cuts proposed by Moore, the tax could balance the budget without raising taxes on income, according to lawmakers, though ongoing cuts to federal jobs and funding could put more strain on the state’s budget.

The business-to-business tax will focus primarily on taxing professional services such as those provided by certified public accountants, lobbyists and consultants. The tax also applies to other services commonly used by businesses such as packaging and labeling, internet technology, design, advertising and public relations, security, and equipment repair.

The bills were introduced by Shelly Hettleman (D-Baltimore County) in the Senate and Majority Leader David Moon (D-Montgomery) in the House. Moon has proposed similar taxes on services in past years.

Republicans in Annapolis said the bill would make the state less competitive.

Members of the GOP have largely embraced Moore’s push in recent weeks to grow the state’s economy by encouraging industries like quantum computing, life sciences and aerospace and defense to set up shop in Maryland, though they have opposed most tax reforms put forward by the Democrats.

“In the Maryland Democrats’ obsession to raise taxes, they have now concocted a new business-to-business sales tax that will make it even more expensive to operate a business in Maryland,” said minority leader Sen. Stephen S. Hershey Jr. (R-Queen Anne’s). “With most of Maryland being an hour or less from the border of another state, many companies will seek out-of-state businesses to provide a variety of services to avoid paying this new tax.”

Maryland faces a budget hole deeper than any seen since the Great Recession. In January, the deficit was projected to be about $3 billion, and federal spending cuts will probably worsen the state’s budget woes.

If Congress cuts federal support to Medicaid or other entitlement programs such as SNAP, that hole could get even deeper.

Moore, a first-term Democrat, proposed an overhaul of the state’s tax system in January, which his administration has argued would simplify the tax code and generate new revenue for the state while simultaneously giving about 6 in 10 Marylanders a tax cut. Still, about 1 in 4 people making between $75,000 and $100,000 and 1 in 3 making $100,001 to $200,000 would have paid more on their tax bills under the governor’s plan.

His tax reform proposal would have eliminated itemized deductions and doubled the standard deduction, among other changes. Moore also recommended discontinuing the state’s inheritance tax, instead expanding the number of people eligible for the estate tax. He suggested lowering the corporate income tax rate but implementing combined reporting to generate even more revenue. His plan also would raise taxes on sports betting, table games and cannabis sales.

“The governor is proud to have introduced a budget that cuts taxes for two-thirds of all Marylanders, lowers the corporate tax rate, and eliminates Maryland’s unique burden as the only state with both an inheritance tax and an estate tax,” said Carter Elliott IV, Moore’s spokesman. “The governor will continue to work with the State Legislature, local leaders, and all partners involved to ensure that we pass a budget that will reform Maryland’s tax code, grow the economy, and invest in Maryland families.”