Legislature Passes Another Stealth Tax on Consumers Awaits Governor’s Veto

By Andrew Langer

When it comes to taxes, Maryland’s Democrats have never been known for either their honesty or intellectual consistency. It was just over two months ago that the Maryland Democratic Party took a look at the analysis done by Comptroller Peter Franchot’s office of the recent round of federal tax reform efforts , and declared, despite all evidence to the contrary (and the conclusions of the Comptroller’s office itself), that the changes to federal tax law would hurt Maryanders.

In fact, it was just days later, over the issues of fairness, that Maryland’s Attorney General, Brian Frosh, had his office join a lawsuit against the federal government challenging the tax reform package as hurting high-tax states like Maryland.

So, given the concern that Maryland’s Democrats claim to show for how taxes might hurt the state’s working families, or the importance of tax fairness between the states, one might be surprised to discover a new legislative package that passed last week and is awaiting final disposition by the Governor… a tax bill that will both hurt working Marylanders while at the same time being violative of those principles of fairness. The bill, SB 1090, changes the way non-Maryland companies doing business within the state calculate their tax liability—from a three-pronged calculation (property, payroll, and sales) to what they call a “single sales factor” calculation, taxing only the sales within a state.

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The three-factor method was, for many years, considered the gold standard for out-of-state corporation tax calculation. In fact, the US Supreme Court called it the “benchmark” against which other formulas for such calculations ought to be measured. Nevertheless, in recent years, there has been a movement (especially in states under Democrat control) to shift the formula from the three-factor method to the single sales factor.

It is a way for a state to raise taxes on those who do business within a state but who are not incorporated within that state, so that the state can gain more revenue without directly hurting the state’s residents or the businesses incorporated wholly within the state.

The problem with that reasoning is two-fold. First, as we know, corporate taxes aren’t really paid by corporations… they’re paid by consumers. And there are serious constitutional implications for creating tax structures that treat businesses disparately.

Let’s start with the constitutional implications—while the Supreme Court has ruled that states have “wide authority” to figure out how to tax out-of-state companies, those formulas have to be fairly apportioned—limited to the net income that is, as the high court said, “fairly attributable” to what that business’ activity is within a particular state.

Cara Griffith, writing for Forbes in 2014, wrote: “The problem with single-sales-factor apportionment is that it is questionable whether the formula presents an accurate depiction of a company’s activity in a state. A strong argument can be made that the sales factor is a poor indicator of a company’s activity and should be minimized and that property and payroll would be better indicators.”

The problem is amplified from a fairness perspective if such treatment is limited only to companies that are based out-of-state.

From a consumer perspective, the problem is that companies inevitably pass tax increases onto consumers. And keep in mind—consumers aren’t just individual consumers, consumers are also those Maryland-based companies that buy products from companies based out of state.

So this hurts working families in two ways as well: working families are the least-able to handle price increases on goods that are necessary (consider, for instance, working families in Maryland’s border counties who might be hit harder with increased prices for foodstuffs produced just outside of the state but sold within Maryland); but also small businesses that have their ability to hire impacted by increased prices for the products they sell.

Marylanders already pay some of the highest taxes in the country. They saw a tremendous amount of relief, $1700 on average, from the federal tax reform bill passed late last year. Maryland’s Democrats claim that they want a tax system that is fair to all and benefits the state’s working families especially. SB 1090 does not do that… and should be vetoed by Governor Hogan.

Andrew Langer is President of the Institute for Liberty and a RedMaryland Contributor

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