Towson University’s Outreach Blog

Dr. Daraius Irani

It is often said that first impressions last for a lifetime.  In the past, many believed that Maryland had the motto “If you can dream it, we can tax it” as its tax policy while also being surrounded by states that had the perception of lower taxes and perhaps a more business-friendly climate.  Unfortunately many individuals believe that Maryland still abides by this motto.  This may actually be more perception than reality.

Admittedly, recent actions by Maryland’s government have done little to dispel the notion that Maryland is a high-tax state with the increase in sales tax and the millionaire’s income tax rate as well as the proposed tax on computer services.  This even crossed political lines with the so-called flush tax enacted by Maryland’s former Republican governor.

While many pundits recommend lower taxes to state policy makers, many feel this is a far too simplistic approach.  According to the Tax Foundation, an ideal tax policy should yield a tax system that is simple, transparent, stable, neutral to business activity and pro-growth.  In this tax system, tax payers would ultimately base their decisions on the economic merits of their transactions and not on the tax implications.

Many institutes publish lists and articles that rank states according to their tax climate, effective tax rates and the burden of government as a means to gauge a state’s tax system and business climate.  Such studies often show conflicting statistics because they rarely compare “apples to apples”.

• According to the Tax Foundation’s “2010 State Business Tax Climate,” Maryland ranks 45^th worst in the nation in terms of its business tax climate, as compared to 25^th in fiscal year 2006.
• However, in a 2010 Ernst and Young report “Total State and Local Business Taxes,” Maryland was ranked 11^th in the nation when considering the total effective business tax rate.
• Moreover, over the period 2005 to 2009, only 17.5 percent of the change in taxes was borne by businesses in Maryland as compared to a national average of 46.7 percent.  In fact, in only one other state was this share lower.

As you can see, measurements and analyses are not without their own shortcomings and detractors.  Some food for thought,

1. These analyses do not account for the possibility that high taxes may also result in high levels of public services. For instance, there is a high degree of correlation with Maryland’s number one public school ranking in the US with its purportedly high tax rate.
2. Many other states rely on fees rather than taxes. For example, while South Carolina is a fairly low income tax state, it relies heavily on user fees to finance the state expenditures.

While all of these indices and measurements provide valuable information, they still do not provide the answer to the question of whether Maryland is a high tax state.  To determine the answer, perhaps the more fundamental question of whether the current tax policy in Maryland meets the standard of an ideal tax system should be examined.

So, while this blog did not answer the question of whether Maryland is a high tax state or not, it did illustrate one fact: that the analysis of state tax policy should not be based upon changing the relative rankings, but supporting a tax policy that favors no one, is easy to understand and encourages business to grow and engage in transactions for their economic merits and not their tax implications.