Politicians usually realize the importance of attracting business to an area, and keeping existing businesses from moving. There are two ways in which they can develop policy towards those ends.
One way is through targeted subsidies and other bribes to firms. An example would be the tax incentives offered by Montgomery County to Westfield, to subsidize Costco’s arrival in Wheaton Plaza. Another (on a grander scale, though no different) is the $200 million that Maryland gave to Art Modell to bring the Browns from Cleveland to Baltimore (on top of building the stadium for Modell).
Another way is to develop a set of policies that make an area a friendly place to do business. Good, well-designed and fair tax systems are simple, transparent, don’t require large resources to comply, don’t skew towards particularly favored enterprises, and minimize the impediments to growth and prosperity.
What’s the difference between the two strategies? And why do both the State of Maryland and Montgomery County prefer the first strategy?
The first strategy is general, and aims to provide a good climate for all business. But that doesn’t gain very many brownie points, or rack up debts and favors that politicians can draw on later. When something benefits the population in general, no one business gains enough that a politician can show up at the door with hat in hand. However, the first strategy gains the politician just that. By helping out Westfield, MoCo councilmembers can count on campaign donations and other favors from the corporation. For the most part, politicians don’t gain from advancing the general public good (as much as I hate using that nebulous and overused term). They do gain from granting favors to individual actors, who then enter into a mutually advantageous backscratching relationship with the pols.
Maryland devotes a nice chunk of the budget to the Department of Business and Economic Development, devoted to handing out this kind of corporate welfare to favored businesses. When it comes to creating a favorable business climate (syn) however, the state government doesn’t do so well (for the reasons outlined above). In fact, it does pretty lousy.
A report issued by economist Kail Padgitt at the Tax Foundation concluded that the Maryland fits in the ten worst business tax climates in the nation. (Sixth from the bottom, actually). The report doesn’t look at an overall business climate (a pretty complicated assessment, one would think, covering transportation and other infrastructure, real estate costs, education, etc.), but rather just the tax aspect of the business climate.
The ranking is hardly incontrovertible, but is methodical and fairly applied across the 50 states. It evaluates the business climate tax index by a weighted ranking of five tax factors. Here’s how Maryland is ranked in comparison with Virginia (since those states competes for businesses):
MD VA PA
Corporate Tax 14 4 38
Individual Income Tax 49 17 14
Sales Tax 11 8 28
Unemployment Insur Tax 47 29 42
Property Tax 40 25 44
Overall Ranking 44 12 26
To his credit, Padgitt cites critiques of the annual Business Tax Climate Index report, but also notes several academic studies that demonstrate that the index tends to correlate well with economic growth in the state.
It is likely that tax policy is helping to steer some businesses (and jobs) away from Maryland into border states. Without discounting other factors that are part of business location decisions, we have seen several cases in the past few years where businesses considered – and rejected – Montgomery County as a location for operations. It would seem that if we want to improve the employment situation in Maryland, the General Assembly is going to have to take a hard look at the the areas where we do most poorly in comparison to other states – the individual income tax, the unemployment insurance tax, and the state property tax.