Here’s a brief look at the major issues facing the General Assembly during the next 60 days: (the 1st two are general and the rest are of specific interest to MAM members)

Gas Tax Increase: there are a variety of proposals to increase the tax ranging from the Governor’s idea to impose the State’s 6% sales tax (an 18 to 21 cent increase per gallon at today’s prices on top of the existing 23.5 cents per gallon tax) to more modest proposals to increase the existing tax by 5 to 15 cents. It is doubtful that there are enough votes in the House to pass any gas tax increase; however, things change rapidly in Annapolis.

Personal Income Tax Increase: Governor O’Malley’s budget proposal includes proposed changes to the personal income tax that would raise $180 million for the State in the first year and $110 for county governments. His proposal makes changes to the definition of taxable income by reducing itemized deductions by 10% for taxpayers with incomes between $100,000 and $250,000 and 20% for incomes in excess of $250,000. Also, the proposal includes reductions in the personal exemption depending on income ranges. 

Since the Governor’s budget was introduced, there have been legislative proposals to reinstate the “millionaire’s tax” that expired at the end of 2010. This adds a higher rate of 6.25% on incomes over $1 million – the current rate is 5.5%. There are alternate proposals to repeal the 1997 10% rate reduction. 

Corporate Income Tax: there are two Senate bills from the past: one to impose combined reporting (SB 269) and the other to impose the alternative minimum assessment (SB 248). In the House there are two bills to reduce the corporate income tax rate (the cost is around $100 million which means they are not likely to pass). 

Tax Credit Review & Termination:  last year HB 620 passed the House and died in the Senate Budget & Taxation Committee. This year the identical bill has been reintroduced in the House and now there is one in the Senate( HB 764 & SB 739). The bills provide that 29 tax credits will be terminated unless legislation is passed following a review and evaluation by the legislature to reinstate them. The process is spread out over a 4 year period beginning in 2013. The R&D tax credit would expire July 1, 2016 unless legislation is enacted at the 2016 session to reinstate it. The current expiration date is 2020 which was established at the 2010 session – a 10 year extension. MAM opposed HB 620 last year and will oppose these bills this year. 

R&D Income Tax Credit – Increase in $6 Million Annual Cap to $18 Million: at MAM’s request legislation has been introduced in the Senate (SB 570) and a companion bill will be introduced shortly in the House to increase the cap from $6 million to $18 million. The existing cap has caused the authorized credits to be prorated resulting in applicants receiving just over 10 cents on the dollar. When the program was established (by MAM) in 2000, the $6 million cap was included. At that time the cap for a similar program in PA was $15 million. Today PA’s cap is $55 million while MD’s cap remains at $6 million.

Energy – Offshore Windmills: Governor O’Malley has reintroduced his proposal to establish offshore electricity generating windmills off of the coast of Ocean City. So that the developers can obtain financing for the construction of the windmills, the legislation provides a guaranteed income stream once they are up and running. Last year the proposals died in committee in both the House and Senate. They are back this year in slightly different form, but basically the same idea (HB 441 & SB 237). This year’s legislation is estimated to the impact Maryland manufacturers up to $375,000 more for electricity beginning as early as 2017 if the windmills are ever built. That estimate assumes an annual electricity consumption of 75 million kWh, which is the cap included in the legislation for manufacturers. The cost is based on a surcharge of 20 cents on 2.5% of electricity consumed up to the cap.

MAM (along with another manufacturing group) is negotiating with the Administration to reduce the surcharge thereby lowering the maximum exposure from $375,000 to around $100,000. The hearing in the Senate is on February 14th. MAM will oppose the legislation unless an agreement can be reached to significantly reduce the costs to manufacturers.

Please provide me with your thoughts regarding our position on the windmill legislation.

Again, thank you for your continued support allowing us to keep up the fight in Annapolis for Maryland manufacturing!

Gene L. Burner
President
Manufacturers’ Alliance of Maryland (MAM)
410-279-1264
gburner@mdmanufacturing.org
www.mdmanufacturing.org

The bill sets up a framework whereby the Public Service Commission (PSC) would solicit applications by wind power developers to build offshore wind power generators. Assuming there are successful applicants, it is estimated that electricity production would begin in 2017. At that time electric users in Maryland would be required to purchase 2.5% of their electricity from offshore wind power generators. Failure to do so would result in a surcharge per kWh of shortfall.

The bill provides for a $2 per month average cap for residential customers. For manufacturers, the bill provides for an annual cap of 75,000,000 kWh beyond which there would be no requirement to purchase the 2.5%. In this case, the estimated penalty for failing to purchase 2.5% up to 75,000,000 kWh would be 20 cents per kWh. (Note: there is a complicated formula for determining the amount of the penalty, but it is believed to be somewhere around 20 cents per kWh.)

MAM members can quickly estimate the impact of this legislation by determining the annual kWh consumption and applying the following formula:

            Annual kWh x 2.5% x .20 = Estimated Annual Cost; or the shortcut formula is:

            Annual kWh x .005 (this is 2.5% x .20) = Estimated Annual Cost

For example, a manufacturer with an annual kWh electricity usage of 75,000,000 (at the cap) would pay an additional $375,000 in the year 2017:

            75,000,000 x .005 = $375,000

Last year MAM opposed the bill along with other business groups and companies including the utilities in the State. It appears this year the utilities may not express opposition. The sole basis for MAM’s opposition was potential increased costs, although the amount of the surcharge in last year’s bill was difficult to determine. We estimated it to be an additional 3% up to the same annual cap of 75,000,000 kWh. That would have resulted in an increase of somewhere around $250,000 vs. this year’s bill at around $375,000.

This year Governor O’Malley is aggressively lobbying for enactment of the bill.

I would appreciate your input on what MAM should do this year as well as what you believe the impact would be to your company using the formula above. Please provide me with your information prior to the hearing on February 14th.

Gene L. Burner
President,
Manufacturers’ Alliance of Maryland
410-279-1264
gburner@mdmanufacturing.org
www.mdmanufacturing.org

Governor O’Malley’s budget includes a proposal to increase Maryland’s personal income tax for “higher” income taxpayers by cutting back on the personal exemptions and itemized deductions. (See attached charts for examples of the impact on various income level taxpayers.) The proposed changes are effective for the 2012 calendar year. They are expected to raise approximately $180 million for the State and another roughly $110 million for local governments for FY 2013. (Note: thus far there appears to be a “cool” reception to these income tax increase proposals.)

The proposed increases were included in an omnibus bill called BRFA (Budget Reconciliation and Financing Act) that goes along with the actual budget. This bill not only contains $250 million in State tax increases, but another $502 million in other revenues, transfers, reductions in mandated spending, cost shifts to local governments, and fund swaps. All of these things require changes to the law and that’s the purpose of BRFA. 

If the budget were to pass as introduced (not likely), the $1.1 billion general fund structural deficit would be reduced to about $400 million for the following budget year.

One lighting rod proposal in the Governor’s FY 2013 budget is a cost shifting measure of $239 million wherein county governments will have to pick up 50% of the cost of teachers pensions. (Note: this proposal is likely to be strongly opposed by county governments.)

Finally, the Governor’s budget proposal (BRFA) includes another tax increase: the imposition of the 6% sales tax on digital downloads. While the estimate in the budget is for just $5 million more per year, some believe it could be more like $50 million as the language is very broad and appears to include the downloading of software in addition to music and eBooks. 

Analysis of Budget Proposals: if the General Assembly decides to not move forward with the personal income tax increases proposed by the Governor, they will have to make up the loss of $180 million to the State and county governments will be short the $110 million in piggyback income tax increases. Further, if the General Assembly decides to not transfer 50% of the costs of teachers’ pensions to county governments, the State will be short another $239 million for a total shortfall of $419 million which brings the projected structural deficit back up to $819 million.

Attachments

• Income Tax – Itemized Deduction Changes Impact on Example Taxpayers
• Income Tax – Personal Exemption Changes Impact on Example Taxpayers

Corporate Tax Increase Bills Introduced to Date

The bill volume to date is very light; however, we do have two old favorites that have been reintroduced in the Senate: SB 248 Alternative Minimum Assessment and SB 269 Combined Reporting. No hearings are scheduled to date. 

Windmill Legislation Introduced

Governor O’Malley has introduced a somewhat different version of last year’s bill to provide funding for the development of a windmill farm off of the coast of Ocean City. SB 237 appears to take a different approach to charging ratepayers by going to the Renewable Portfolio Standard in existing law and making offshore wind power a Tier 1 source. This means electricity suppliers/customers must have at least 2.5% of their electricity from offshore wind power or pay a penalty of 40 cents per kWh of shortfall; however, manufacturers would only pay a penalty of 0.4 cents (existing law for other Tier 1 sources). Plus, there is no penalty for electricity purchased beyond 75,000,000 kWh per year for a single customer.

Bay Restoration Fee (Flush Tax) Increase

SB 240 is the Governor’s bill increasing the BRF (Bay Restoration Fee or flush tax). It is effective July 1, 2012. The bill changes the method of calculation of the fee. According to the Administration the change will result in a doubling of the existing fee.

Analysis of the Bay Restoration Fee Increase: MAM fought hard in opposition to the “Impervious Surface Fee” legislation of prior years. It is believed that the increase in the BRF (flush tax) will forestall pursuit of the impervious surface fee legislation. If that turns out to be the case, I recommend no position on the BRF increase.

Coming Attractions

The legislation to increase the cap on the R&D tax credit program has been drafted and is awaiting introduction in both the House and the Senate. As drafted, the bill will increase the existing $3 million cap to $9 million for the basic 3% credit for ongoing R&D expenditures and it will also increase the existing $3 million cap to $9 million for the 10% credit for new or expanded R&D spending. Both credits are significantly over-subscribed resulting in prorating. The increases, should they pass as introduced, would greatly reduce the extent of the prorating and thereby provide MAM members with an increase in the amount of credits to be claimed.

The bills will also add a new provision allowing “small businesses” to claim the credit even if they do not have a tax liability in that year. This is called a “refundable” credit and it was added to gain support for the legislation. Stay tuned for further developments!

If you have any questions or comments on the issues covered in this Update or on any other matter, please do not hesitate to contact me. Thanks again for your support.

It is estimated that the personal income tax increases along with taxing certain internet sales would generate an additional $300 million per year in State general fund revenues and $111 million in local government piggyback income tax revenues. There is an estimated $1 billion projected general fund shortfall and these increases are intended to help fill that gap.

Also, Governor O’Malley is proposing shifting to county governments roughly $240 million per year in costs for K-12 teachers’ pensions. The State currently pays 100% of those costs while counties pay 100% of the costs for teachers’ social security and Medicare. Under his proposal, the State would pick up 50% of the social security costs for a net savings of $240 million to the State. (Note: the shifting of $240 million in pension costs to local governments may result in property tax increases.)

In addition, the Governor is expected to soon introduce legislation to increase the State’s current 23.5 cents per gallon gasoline tax by as much as 15 cents per gallon.

R&D Tax Credit Cap Increase: Soon legislation will be introduced, at MAM’s request, to increase the cap on the R&D tax credit program from $6 million to $18 million. Sen. Nancy King, who serves on the Sen. Budget & Taxation Committee, will introduce the bill in the Senate. Delegate Kumar Barve, House Majority Leader and ranking member of the House Ways & Means Committee, will introduce the bill in the House.

For those MAM members receiving the R&D tax credit, the annual credit amounts should triple if the cap is increased to $18 million.

Tax Credits & Exemptions Under Attack Again: Delegate Bill Frick (D – Mont. Co.), chair of the Revenue Subcommittee of the House Ways & Means Committee, has promised to reintroduce his bill from last year to repeal a wide range of business tax credits and to subject them to detailed review before legislation could be introduced to reinstate them. At the 2010 session HB 620 passed the House and died late in the session in the Senate Budget & Taxation Committee. The Fiscal & Policy Note for HB 620 outlines the credits and the approach taken under the bill.

MAM was a lead opponent on HB 620 last year and we will strongly oppose a similar bill this year. The basis for our opposition is that many of these credits currently have sunset dates like the R&D credit which is scheduled to expire in 2020. (Its sunset date was extended at the 2010 session and Delegate Frick voted for that extension.) We have no objection to a thorough review of the program at any time; however, we strongly object to terminating the program in 2015 (as called for in HB 620 of last year) instead of the scheduled sunset date of 20/20. This earlier termination will result in uncertainty within the business community as to the stability of the program.

Stay tuned to further developments.

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

The table showing all 50 states is at: http://www.forbes.com/special-report/2011/best-states-11_rank.html.

In 2011 Maryland ranks #19 overall, down from #14 in 2010. (I first started tracking this report in 2006 when Maryland ranked #11 overall.)
The overall #19 ranking is a composite of 6 rankings as follows:

• Business Costs – 42 (most weight given here)
• Labor Supply – 12
• Regulatory Environment – 22
• Economic Climate – 13
• Growth Prospects – 40
• Quality of Life – 9

The components of each of the above rankings can be found at: http://www.forbes.com/sites/kurtbadenhausen/2011/11/22/best-states-for-business-methodology/

Observations

• The most dramatic (and alarming) change from 2010 is in the “Growth Prospects” ranking where Maryland fell from #29 to #40. We were #17 in 2006. Here’s how Forbes defines this ranking:
  
  “The growth prospects category measures job, income and gross state product growth forecasts over the next five years from Moody’s Analytics. Other factors include business opening and closing statistics in each state from the Small Business Administration. We also measured venture capital investments per PricewaterhouseCoopers and the National Venture Capital Association.”
• While Maryland’s ranking in “Business Costs” improved slightly from 2010 – from #49 to #42 – it nevertheless remains too high. In 2006 we were ranked #42. Here’s the Forbes definition of this category:
  
  “Business costs incorporate Moody’s Analytics cost of doing business index which include labor, energy and taxes in our rankings. Moody’s weighs labor the most heavily in its index. We also included a new state tax index from the Tax Foundation that looks at the tax burden on business in each state across different industries. The new study will be released to the public in the coming months. Business costs are the most heavily weighted component in the Forbes Best States for Business.”
• The “Overall” ranking of #19 in 2011 reflects a steady decline for Maryland. In 2006 we were ranked #11. In 2010 we were ranked #14. The decline from 2010 appears to be due primarily to the significant decline in the “Growth Prospects” category.
• Maryland now suffers from a 40’s ranking in two critical categories: “Business Costs” and “Growth Prospects.” This should serve as a guideline for policymakers to identify the areas where improvement is needed and no further harm should be done!

The hearing, scheduled to discuss corporate taxes and job creation, zeroed in on how Maryland needs to become a better place to do business than neighboring Virginia, which panelists said is the state’s only real competition in terms of getting businesses and creating jobs.
» Read more at MarylandReporter.com

It’s a great occasion when a business leases 125,000 square feet in a big industrial park, but the deal signed by Chesapeake Bay Candle represented more than an economic development victory for Anne Arundel County and Maryland; it marked the opening of a manufacturing facility that could have gone elsewhere in the world, but chose Maryland.

That led to not only the hiring of 30 workers in the area (with the hope of adding 70 more within the year), but talk of an uptick in a manufacturing sector that often has been discussed in the past tense in recent years as it lost jobs in droves and often companies, due to the often lower costs of doing business abroad in locales like China, India and Mexico.

While that still happens, its appears that the tables may be turning somewhat; and that some companies are finding out that doing business in the U.S. is the most efficient way for them to go, due to such factors as exchange rates that are evening, high fuel costs and dependable domestic distribution networks.
» Read more in The Business Monthly

The Manufacturers’ Alliance of Maryland president has successfully thwarted annual efforts from the legislature to require combined reporting from firms who do business outside the state. That additional tax burden would hurt state businesses in a time Burner says the state should be working to retain and expand its manufacturing base.
» Read more in the Baltimore Business Journal