Today’s Baltimore Sun contained the following editorial calling for enactment of combined reporting if Senator Ed Kasemeyer’s idea of cutting the corporate income tax rate is pursued. (Sen. Kasemeyer is the Chair of the Senate Budget & Taxation Committee.)
There are a number of reasons why linking combined reporting to a rate cut is a bad idea. First, the Senator’s idea was to phase in the reduction of the corporate tax rate over a number of years by reducing the rate by one-quarter of a percentage point each year. The annual loss in revenue resulting from a 0.25% cut would be around $25 million. Depending upon the details of combined reporting, the estimated revenue gain could be $200 million per year and all at once. (Fortunately, as indicated in the editorial, Sen. Kasemeyer is not a fan of combined reporting and we appreciate his opposition to it.)
Second, a rate cuts applies evenly across industry segments. Combined reporting creates winners and losers (manufacturers as a whole are penalized).
Third, the corporate income tax rate was increased from 7% to 8.25% in 2007. The increase was not phased in and there was not a corresponding increase in deductions or exemptions to offset the increase in the rate.
An Alternative
One way to reduce the effective corporate income tax rate for manufacturers would be to increase the $6 million cap on the R&D tax credit. The credit was enacted in 2000 (MAM led the fight) and the cap remains the same today – at $6 million. At that time Pennsylvania had a similar program and its annual cap was $12 million. Today, the cap in PA is $40 million.
Because of Maryland’s $6 million annual cap, applicants who qualify for the credit receive just over 10 cents on the dollar due to prorating. In other words, it would take an annual cap of $60 million to eliminate prorating and thereby provide full credits to all successful applicants.
While increasing the cap to $60 million is not practical, the Governor and the General Assembly should address the problem by enacting legislation at the 2012 session to increase the cap to $18 million in FY 2013. MAM is working with Sen. Nancy King and other members of the Senate Budget & Taxation Committee to accomplish this objective.
(See Baltimore Sun Editorial below.)
www.baltimoresun.com/news/opinion/editorial/bs-ed-tax-policy-20111128,0,4865858.story
