Special Session Action: revenues were increased by $267.6 million and budget reductions (shifts and cuts) were made of $227.6 million for a total of $495.2 million which is sufficient to restore the so called “doomsday” budget cuts that would have gone into effect July 1st.

Of the $267.6 million in increased revenues, the increase in the personal income tax amounted to $247.3 million or 92.4% of the revenue increase.

Attached is a chart showing the impact of the personal income tax changes on families by various federal adjusted gross income ranges: (see attached “2012 Special Session Per Inc Tax Impact on Taxpayers”).

General Fund Structural Deficit: this morning there was an interesting article in the Washington Examiner showing projections for the general fund structural deficit for the next 4 budget years (see attached “Wash Examiner 5-15-12 MD faces budget gap for 4 years”). The article contains a chart that indicates the structural deficit for FY 2014 (the budget the Governor will submit in January of 2013) will be $406 million and for FY 2015 it is projected to be $526 million.

Clearly a gap of just $406 million or even $526 million pales in comparison to prior years; however, as stated in the article and confirmed by MAM, the “easy” fixes are over. (See attached “2012 Special Session Projected Structural Deficit” chart.)

The Problem: no one has an accurate crystal ball when it comes to predicting what the Governor and the legislature will do to resolve the remaining general fund structural deficit; however one thing is certain – the Governor must submit a balanced budget in January 2013. To do that he must either make significant cuts, fund shifts, or find new revenues. The likelihood of meaningful fund shifts is decreasing as that well is running dry. The recent experience with the “doomsday” budget cuts suggests cutting the budget to balance it is also not likely to happen. Hence, the new revenue option appears to be a likely course of action.

Plus, what remains unresolved is the issue of transportation funding. The gas tax has not been increased since 1992 and with gasoline prices likely to remain relatively high there appears to be little political will to go that direction. The TTF (transportation trust fund) is running on fumes with an ever increasing backlog of projects on the drawing board. Estimates are that the TTF needs at least $300 million per year in additional revenue to move forward (that’s about equal to 10 cents more per gallon in gas tax).

Revenue Options for Next Year: even if there is a special session to expand gambling in Maryland this summer, those revenues will not be available for the FY 2014 budget the Governor must submit in January. The next election is in 2014 and legislators are leery and weary of casting more votes to increase taxes on their constituents as the election nears.

If the general fund structural deficit for FY 2014 does turn out to be $406 million and transportation funding needs to be increased by at least $300 million, one possible option would be to increase the current 6% sales tax rate to 7%. That increase would generate around $650 million per year thereby eliminating the structural deficit and providing needed funding for transportation. However, the 2014 election may make this option less attractive.

If the alternative course of action is to just deal with the general fund structural deficit (balancing the budget is a Constitutional requirement), then getting to the number of $406 million in FY 2014 and $526 million in FY 2015 is likely to involve a combination of budget cuts and new revenues. Here the crystal ball becomes even more murky. MAM believes that combined reporting may be viewed by many as the silver bullet.

According to the Comptroller, combined reporting would have lost revenue for the State in calendar year 2008 and 2009. The data for 2010 will be available March 1, 2013. Yet the Fiscal Note for the combined reporting bill at the 2012 regular session estimated a revenue gain in FY 2014 of $153 million had combined reporting been enacted for the 2013 calendar year.

The good news is that under normal circumstances enacting combined reporting at the 2013 session would only produce roughly one-third of the annual revenue because it would not become effective until January 1, 2014. Hence it would appear to not be the panacea for the FY 2014 budget woes. The bad news is that there could be an attempt to make it effective retroactively for the 2013 calendar year.

As in the past MAM will be leading the opposition against enactment of combined reporting and the preserving of single factor for manufacturers. Because combined reporting is in the same section of the code as single factor and thereby included in the legislation, we must be certain that nothing happens to the single factor provision as well as defeating combined reporting itself.

Stay tuned for updates as the things unfold.

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

• Special Session Personal Income Tax Exemption Changes
• Special Session Personal Income Tax Rate Bracket Increase

In the House it takes 71 votes out of a total of 141 delegates to pass the legislation; there are 43 republicans who will all vote no; that leaves 98 democrats. When the proposed tax increase legislation passed the House during the regular session there were 81 democrats voting for the measure. However, voting for a tax increase in a special session is different when the primary purpose of coming back in session is to raise taxes.

Enactment of the personal income tax increase along with a number of fund transfers and cost shifting to local government is required to prevent a series of so called “doomsday” budget cuts totaling $512 million as follows:

 The republicans and some democrats are taking the position that the State can live with the cuts and that there is no reason to return to Annapolis to raise taxes. In fact, some county governments have indicated that they would be better off with the “doomsday” cuts versus the alternative of having a portion of the costs of teachers’ pensions shifted to the counties.

On the other hand, Senate President Miller, House Speaker Busch and Gov. O’Malley favor bringing the legislature back to Annapolis to increase taxes thereby avoiding the budget cuts. The Senate appears to have the necessary 24 votes to pass the tax increases, but the House result is less clear as mentioned above.

What is most interesting is that the Governor may have called the May 14th special session without the certainty of knowing the outcome, assuming it is really in doubt as insiders are indicating. Is there a “Plan B” just in case the votes are not there for the personal income tax increase? There has been some discussion of opting for a one percentage point increase in the current 6% sales tax which would yield an estimated $600 million per year. However, most believe increasing the sales tax rate would be equally unpopular with voters.

Of course, all of this relates to the FY 2013 budget that begins July 1, 2012. Regardless of what happens at the special session, that budget will be in balance one way or another. What remains uncertain is how the FY 2014 budget will be balanced – this is the budget the Governor must submit to the General Assembly in mid to late January 2013. If the legislature passes the personal income tax increases that were agreed to by the House and Senate conferees late in the regular session, those changes would result in a revenue increase of less than $300 million leaving a projected “structural deficit” for FY 2014 of around $500 million. Herein lies the problem for the 2013 session – where will the Governor and the legislature turn to raise enough money to balance the FT 2014 budget?

MAM has learned that “combined reporting” is a likely candidate for serious consideration at the 2013 session as a revenue raiser to help close the $500 million budget gap. Some suggest the fiscal estimate for enacting combined reporting could be as much as $200 million per year which appears to be a stretch. Of course, combined reporting or other business tax increase proposals are dependent on what happens next week and perhaps at a second special session that may be held in late July or August to deal with gambling issues. Clearly this is a fluid situation so stay tuned for further details.

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

The following is a recap of the key legislative issues of interest to MAM members. Overall, with the exception of the failure of the R&D tax credit cap increase that fell victim to the final day chaos, MAM had a perfect record!

MAM 2012 Regular Session Wrap Up

The State Budget (FYI)
SB 150 is the 219 page budget bill (read it at your own risk). Before the chaos at the end of the session that triggered $500 million in contingency cuts called the “doomsday budget, the total budget (general funds, special funds, federal funds) equaled $35.6 billion – an increase of $950.9 million or 2.7%.

The general fund budget is what receives the most attention. Before the “doomsday budget” cuts of $500 million, the FY 13 budget was $15.1 billion, up $115 million or 0.8% from FY 12.

A summary of the cuts associated with the “doomsday budget” is attached. Most, if not all of these cuts will be reinstated when the General Assembly returns in special session likely in May. Governor O’Malley has stated that he will not call a special session until legislative leaders arrive at a general consensus over the differences between the House and the Senate.

The root cause of the conflict and what makes this issue so difficult to resolve is that the differences between the House and the Senate do not relate to the budget, but to legislation providing for casino gaming in Maryland and the addition of a 6th gaming facility in Prince George’s County. Senate President Mike Miller wants the bill passed now so it can be on the ballot at the 2012 November election. Otherwise it would have to wait until the 2014 election.

The House of Delegates appears to not have the votes to pass the gaming legislation and hence the standoff.

R&D Tax Credit Cap Increase (Failed)
SB 570 passed the Senate 46-0 with over two weeks remaining in the session. The bill increased the current $6 million annual cap to $18 million. The increase would be effective for the credit certificates issued by DBED in the fall of 2013. However, the bill died at the end of the session in the House Ways & Means Committee when it got caught up in the battle over the State’s operating budget. There appeared to be support for passage of the bill by the House Speaker Mike Busch and Ways & Means Committee leadership; however, all of that changed when the two bodies went to war over casino gaming.

Enactment of this bill is and was a high priority for MAM and we will work during the interim to get the House to agree to pass the bill at the 2013 session. As introduced the bill contained a provision allowing small businesses who qualify for the R&D credit to receive a “refundable” credit if they do not have a tax liability in that year. That provision was removed by the Senate Budget & Taxation Committee. In addition to working with the House to insure passage of the bill, MAM will work with the Senate Budget & Taxation Committee over the interim to alleviate their objections to the refundable credit provisions for small business.

Combined Reporting (Failed)
Once again combined reporting legislation was introduced in both the House and the Senate where it died in committee. In the past the bills have not received a recorded vote in committee; however, this year the Senate Budget and Taxation Committee did do a roll call vote. The motion was for an “unfavorable report” which was adopted 7-6. Of the six Senators voting against the motion (for the bill) two appear to be swing votes.

Once again the defeat of combined reporting was a major priority of MAM and a clear victory.

CAUTION: there is reason to believe that at the 2013 session there will be a major push to enact combined reporting as a revenue raiser. The Fiscal Note this year indicated a general fund increase of $150 million per year. MAM believes the Note to be wrong based on the report from the Comptroller that showed a loss of revenue had combined reporting been in existence in 2009.

At the next regular session (2013), even once the budget issues are resolved this year with a personal income tax increase, there will be a general fund structural deficit balance remaining of around $500 million. State budget analysts have run out of gimmicks, fund balance transfers, and cost shifting to local governments. Politicians are not likely to have the political will to increase taxes such as the personal income tax that was just increased or the sales tax as we will be nearing the 2014 elections. Therefore, corporate taxes are likely to be a target in 2013 and combined reporting will likely be the featured act.

Alternative Minimum Assessment (Failed)
A bill imposing a corporate income tax “Alternative Minimum Assessment” was introduced; a hearing scheduled in the Senate Budget & Taxation Committee that was canceled; and the bill was withdrawn. Like combined reporting, watch out for this in 2013.

Defeat of the Alternative Minimum Assessment was a major priority of MAM and its withdrawal was a clear victory.

Tax Credit Evaluation Act (Passed with amendments)
HB 764 passed with amendments. Initially MAM strongly opposed the bill because it set into motion a scheme whereby many business tax credits, such as the R&D tax credit, would be terminated on a future date; a review and evaluation would be conducted; and legislation would have to be passed to reinstate the credit. MAM testified we would withdraw our opposition if the termination provisions were removed from the bill. That was done and the bill passed with just the review and evaluation procedures. The R&D tax credit will be evaluated in 2020.

Defeat of the termination provisions was a major priority of MAM and the removal of those provisions was a clear victory.

Tax on Impervious Surfaces (Passed with amendments)
HB 987 was enacted after extensive amendments in both the House and the Senate. The bill requires larger counties and municipalities (population in excess of 100,000) in the State to enact local laws to implement a “stormwater management fee” the proceeds of which are to be used to fund stormwater management plans required by the federal government.

The fees are to be levied on the basis of the amount of impervious surfaces on the property. MAM successfully fought to remove language in the bill that required the rate for nonresidential property to be equal to or greater than the residential rate.

MAM also successfully fought for a provision in the bill that the local government shall provide for “offsets” to the fees based on what the property owner is doing to prevent stormwater runoff.

Local governments that fall under the bill are required to implement the fee program by July 1, 2013.

Flush Tax (Bay Restoration Fee) Fee Increase (Passed)
FYI – HB 446 passed with amendments. This was the Governor’s bill to increase the funding for upgrades to wastewater treatment systems. The bill, as amended, doubled the existing fee. MAM did not take a position on the legislation.

Windmills (Failed)
The Governor’s proposal to fund the development of electricity generating windmills off of the coast of Ocean City by imposing a surcharge on all Maryland electricity customers failed in the Senate. As introduced, the bill could have cost manufacturers as much as an additional 3% or more on their electric bills.

MAM opposed the legislation. During the deliberations we were successful in obtaining amendments from the Administration that would have significantly reduced the impact of the legislation on manufacturers and we withdrew our opposition. While the amended bill passed the House, it remained in the Senate Finance Committee when the session ended.

Obtaining the amendments to minimize the impact on manufacturers or the defeat of the legislation was a major victory for MAM.

Water Appropriation and Use Fees (Failed)
SB 635 authorized the Dept. of the Environment (MDE) is impose annual fees for water appropriation and use permits. The bill did not specify the amount of the fees, although it is believed they could be significant for large water users. MAM opposed the bill as introduced. It was amended in the Senate to strip out the fee authorization and substitute a study group consisting of stakeholders. MDE agreed to include MAM in the study group; however, the bill failed in the House. If there is an informal workgroup, MAM will be included anyway.

This represented a major victory for MAM.

Security Clearance & SCIF Tax Credit (Passed)
SB 296 passed with amendments providing companies with a corporate income tax credit of not more than $100,000 per year for expenses associated with administering and processing security clearances. The bill also allows for a tax credit to not exceed $250,000 for the costs associated with constructing or renovating, including equipment costs, a SCIF (Sensitive Compartmented Information Facility).The bill will apply to costs incurred beginning with 2013 thru 2016.

MAM supported the bill and its enactment was another victory.

MD Technology Development Corporation – MD Innovation Initiative (Passed)
FYI – HB 442 passed establishing a coordinating council within the Technology Development Corporation (a quasi government corporation) to facilitate the transfer to the private sector of research performed at the State’s universities.

Health Benefit Exchange (Passed)
FYI – while this was not a MAM issue, there is an interesting aspect to watch. HB 443 is the Governor’s bill establishing a health benefit exchange pursuant to the federal health care reform legislation (Obama Care). The bill passed the legislature. Inside observers believe that should the Supreme Court overturn the federal legislation, Maryland will move forward with its own version, but without the federal funding which could cost the State hundreds of millions of dollars per year. This will be one to watch!

Overall MAM had an excellent session in terms of defeating, or amending, bills that would have had a negative impact on Maryland manufacturers.

The one disappointment was the R&D Tax Credit Program cap increase which passed the Senate 46 to 0, but died in the House when it got caught up in the tug of war between the House and the Senate over the budget and casino gaming. The cap increase from $6 million to $18 was not designed to kick in until late in 2013 so there will be time to revisit the issue at the next session.

Stay tuned for a more detailed analysis of the outcome of the session. Please contact me with any questions or comments.

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

On Thursday, March 23rd the Senate Budget & Taxation Committee voted favorably on SB 570 – a bill that increases the cap on the R&D Tax Credit Program from the existing $6 million per year to $18 million per year. The bill, with the Committee amendments, has passed “second reader” in the Senate and it will receive the final (3rd reader) recorded vote this evening or tomorrow.

The focus now shifts to the House Ways & Means Committee where the crossfile (HB 943) has been heard, but not voted. In all likelihood, the effort will be to just pass the Senate bill.

The one meaningful amendment added by the Senate Budget & Taxation Committee was to remove the small business refundable credit from the bill. If the bill does pass the House and is enacted, this will be a project for next year – getting the small business provision added to the law.

Impervious Surface Fee

The House has passed HB 987 – a bill that has been defeated a few times in recent years. It is moving along with the bill that increases the Bay Restoration Fee or “flush tax.” The bill mandates that local governments with a population in excess of 100,000 impose a tax/fee on impervious surfaces. The proceeds will go to fund stormwater management.

In the past and again this year MAM opposed the impervious surface bill. This year our testimony stressed our opposition with three primary objections: (1) the bill required that the rate for nonresidential properties be equal to or greater than the rate for residential properties; (2) the bill did not specify that there should be an overall cap on the total fee that could be charged to a property owner in a jurisdiction; and (3) there would be exemptions or offsets from the fee for property owners who already are engaged in stormwater management.

The House Environmental Matters Committee took our suggestion to make the base rate the same for all properties and to apply that rate to the amount of impervious surfaces and to provide for offsets. However, they did not add the provision for a cap which appears to be an oversight. If the bill is amended in the Senate we will seek an amendment adding the cap provision. If that is not successful we can come back next year with a separate bill as the local programs are not required to be in place until July 1, 2013.

Stay tuned for further developments on both of these issues and others in Annapolis during the remaining two weeks.

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

Budget Related Tax Increases

The Senate has passed its version of the general fund budget and the House is about to give preliminary approval to its version of the budget. The key difference between the House and Senate and the Governor’s budget proposals is the revenue increase measures. All three proposals feature an increase in the personal income tax; the difference is in both the approach and the amount of increase.

The Governor’s budget proposed $258.5 million in higher revenues with $197 million of that amount coming from his proposal to change the personal income tax law to reduce or eliminate personal exemptions for higher income earners and reducing by 10% or 20% the itemized deductions for that same group of taxpayers.

The Senate budget proposal increased general fund revenues in FY 2013 by $442 million with $416.6 million of that coming from a different approach to increasing the personal income tax. The Senate rejected the Governor’s approach and instead proposed to change the tax rates and brackets for all taxpayers by increasing the rates by .25%.

The House budget plan just released represents a blend of the Governor’s plan and the Senate plan for increasing personal income tax revenues. It raises $191.8 million in income tax increases and roughly another $20 million in other revenues. The House adopted the Senate’s .25% rate hike, but only for taxable incomes in excess of $100,000 (single) and $150,000 (joint). The House also rejected the Governor’s plan to reduce itemized deductions; however, they did propose a modified version of his plan to phase out personal exemptions for upper income taxpayers. The phase out begins at the $100,000/$150,000 income level along with the rate hike. 

The House budget is expected to pass the House by the end of this week and the conference committee will begin meeting early next week.

Combined Reporting Defeated (Victory)

The Senate Budget & Taxation Committee has officially defeated SB 269 – Combined Reporting. The vote was 7 to 6 on the motion for an “unfavorable report.” The bill has died in Committee numerous times; however this is the first time in recent memory when the Committee actually took a recorded vote. The 7 to 6 vote may have been even stronger if it was thought the bill was going to pass. The vote is available on the website at the link above.

Alternative Minimum Assessment Withdrawn (Victory)

The bill imposing an AMA corporate tax was withdrawn by its sponsor from consideration by the Senate Budget & Taxation Committee. It was a rerun of legislation defeated by the Committee in prior years.

Tax Credit Evaluation Act to be Amended (Victory)

HB 764 & SB 739 terminated a number of business tax credits and set up a review and evaluation process and the requirement that legislation be introduced to reinstate the credits based upon the findings of the study. MAM strongly opposed this legislation in 2011 and again this year along with the MD Chamber of Commerce. At the House hearing in mid February 2012 we expressed our firm opposition to the provision in the bill that terminates the credits first, before the review and evaluation. The House sponsor, Delegate Bill Frick (D – Mont. Co.), responded to our objections and offered amendments to remove the termination provisions. At the recent hearing in the Senate Budget & Taxation Committee the Senate sponsor, Senator Rich Madaleno (D – Mont. Co.) offered the same amendments and we withdrew our opposition.

Research & Development Tax Credit – Cap Increase (Pending)

Hearings have been held in both the Senate and the House on legislation backed by MAM to increase the annual funding cap from the current $6 million to $18 million. The Senate Budget & Taxation Committee is expected to vote on the bill any day now. Stay tuned.

Sales Tax on Services (Victory)

HB 1051 was introduced which proposed to apply the State’s 6% sales tax to 30 services. It is likely to die in Committee. Most services covered by the legislation were “consumer” services such as cable television, motor vehicle repair and maintenance, parking facilities, barber or beauty services, and tanning, massage, or physical fitness facility or services. These services alone account for roughly $300 million in revenue. The entire 30 services would raise an estimated $650 million. The list does include “business” services such as management and business consulting and public relations, although the revenue estimate for this category is “unavailable.” Watch out for next year as a structural deficit of around $500 million remains even if the Senate version of the revenue package is enacted. Frankly, policymakers are out of revenue options other than the sales tax on services and enacting combined reporting.

Bay Restoration Fee (Flush Tax) Increase

MAM did not take a position on the legislation sponsored by the Administration because, as introduced, it would result in only a minor impact on MD manufacturers due to the existing $120,000 cap in current law which remains unchanged. However, we were closely monitoring the legislation in hopes that the fee increase would be sufficient to forestall the need to pass the impervious surface fees for local governments to fund stormwater management. Unfortunately, that did not happen (see below).

Impervious Surface Fee for Stormwater Management (Pending)

MAM opposed this legislation in both the Senate and the House and testified that if the legislation were to pass, amendments were required to protect manufacturers operating under NPDES permits or general stormwater management permits. Thus far the House bill (HB 987) is moving and it is on the House floor for debate today or tomorrow. The bill requires counties or municipalities in counties with 100,000 or more in population to impose a stormwater management fee based on impervious surfaces. All jurisdictions currently have this authority but due to local pressure only a few have imposed such a fee. By passing a statewide bill, the State is protecting local elected officials from taking the political heat.

The Committee amendments do not fully address MAM’s concerns and we are working to get the amendments adopted either on the House floor or in the Senate. However, the Committee amendments do require the jurisdiction to provide offsets to the fee for properties with stormwater management facilities on the property paid for by the property owner. The local fee programs are required to begin by July 1, 2013. If MAM’s clarifying amendments are not adopted this year, we will be requesting legislation at the next session.

Electricity – Off Shore Windmills

Governor O’Malley’s proposal(s) to impose a surcharge on all electricity bills to provide a guaranteed income stream for off shore (Ocean City) windmill developers is stalled in both the Senate Finance Committee and the House Economic Matters Committee. While time is running out, the Administration is working hard to breathe life into the legislation. MAM initially opposed the bills (last year as well); however, the Administration offered amendments which we agreed to that would substantially reduce any surcharge to manufacturers. Therefore, should the bills pass, which appears unlikely, there will be minimal impact to MD manufacturers. Also, federal subsidies are drying up for off shore windmill development which likely renders the legislation mute.

Stay tuned for further updates and things are moving rapidly in Annapolis during the last few days of the session.

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

Today the Comptroller released the revised general fund revenue estimates for the remainder of FY 2012 and FY 2013. They are being written down $80m for this year and $50m for next year for a total of $130m.

The revised estimates are just icing on the cake for lawmakers who are already struggling to balance the general fund budget presented to them by Gov. O’Malley. There are strong objections to the Governor’s proposal to return a portion of the teachers’ pension costs to local governments and his proposal to increase the personal income tax for higher income taxpayers by eliminating a portion of the personal exemptions and itemized deductions.

The Senate moves the budget first this year and decisions are currently being made by the Senate Budget & Taxation Committee where they are considering alternative revenue increase options such as an increase of .25% to the personal income tax rate for most taxpayers. That change would raise approximately $600m. However, it appears there may not be sufficient votes (24 needed) in the Senate to adopt such a proposal.

Earlier this week Senate President Miller unveiled what he called a “doomsday budget” consisting solely of budget cuts in an effort to present a stark choice to lawmakers. Increase taxes; adopt massive cuts; or a combination of both. At this stage the outcome is unclear. The budget is expected to be sent to the Senate floor by Monday evening March 12th and debate will begin on Wednesday, March 14th.

Combined Reporting

In the context of the budget, combined reporting has once again surfaced as a revenue option. It looks like it won’t be adopted by the Sen. Budget & Taxation Committee; however, MUCR is expected to be offered on the floor of the Senate via amendment to the budget. If so, the vote will likely to be close.

On the House side combined reporting is also being considered based on what MAM believes to be an incorrect Fiscal Note estimating the revenue gain to be $42.4m in FY 2013 and $152.9 in FY 2014. This estimate is based on 2007 data while more recent estimates for 2008 and 2009 supplied by the Comptroller’s office show combined reporting losing revenue for the State (as much as $80m in 2009). The question is, if combined reporting went into effecting in 2013, will the economy then look more like 2006 and 2007 or 2008 and 2009?

This fluctuation in revenue points to an inherent problem with combined reporting – the increase in volatility of corporate income tax revenues. Why should Maryland adopt a corporate income tax structure that loses money compared to the current structure in times of economic distress?

If combined reporting fails on the Senate floor it is unlikely to be included in the House version of the budget.

R&D Tax Credit

Yesterday (March 6th) the hearing was held on HB 943 – increase in the R&D credit cap from $6m to $18m and a small business refundable credit provision. The hearing on SB 570 (Senate crossfile) will be this Friday, March 9th. The only opposition is internal concern over the fiscal impact. Once the budget issues are resolved the path forward will be clearer for the bills.

Stay tuned for further developments. Things will move quickly now.

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

The quote by Senate President Mike Miller is in reference to the State’s FY 2013 general fund budget and the approach being taken by the Senate Budget & Taxation Committee and perhaps the House Appropriations Committee.

This year the Senate will act first on the budget and it is expected to be on the Senate floor for debate around March 12th. President Miller’s comments reveal the struggle the legislature is having with many of the Governor’s proposals for balancing the general fund budget including his proposed increases in the personal income tax.

One alternative mentioned in the article is to extend the sales tax to services – a proposal that has been kicking around in Annapolis for decades. A bill to do just that has been introduced in the House (HB 1051); however, such a bill has yet to be introduced in the Senate. Senator Ed Kasemeyer, Chair of the Senate Budget & Taxation Committee is a supporter of such an approach. (There is a hearing scheduled on HB 1051 on March 6th in the House Ways & Means Committee.)

Most, but not all, of the services to be taxed under HB 1051 are “consumer services” like haircuts, tanning, shoe repair, etc.; however, included are business services like personnel supply services, management consulting, public relations, and real property management. Stay tuned – this is a fluid situation.

MAM Priority Bills

While we are tracking roughly 70 bills, 8 bills are at the top of our priority list:

• Combined Reporting: SB 269 & HB 941. The hearing is today in the Senate and March 6th in the House. They are identical bills and the same as prior year’s bills. MAM will oppose. Not expected to pass; however, given the situation in Annapolis anything can happen.
• Tax Credit Review & Termination: HB 764 & SB 739. The hearing in the House is on February 28th and March 14th in the Senate. These identical bills are very similar to HB 620 of last year that passed the House and died in the Senate. They set up a system of review, evaluation and termination of most of the State’s business tax credits including the R&D credit. MAM will oppose. This will be a tough fight in the House as the sponsor, Del. Bill Frick, is a ranking member of the Ways & Means Committee and chairs its subcommittee on revenues.
• Impervious Surface Fee/Tax: SB 614 & HB 987. The hearing is in the Senate on February 28th and in the House on March 2nd. The bills are identical and require all counties and municipalities to establish a stormwater management fund and to impose a stormwater fee based on impervious surfaces within a broad framework outlined in the bills. In past years MAM has opposed similar legislation; however, this year it appears the bills are likely to pass. Therefore, MAM is considering offering amendments to minimize the impact on manufacturers. Please provide me with your input on this position.
• R&D Tax Credit Cap Increase: HB 943 & SB 570: The hearing is in the House on March 6th and in the Senate on March 9th. MAM requested these bills to be introduced and will strongly support them. The bills increase the current $6 million annual cap on the R&D credit to $18 million thereby tripling the amount of credit to be received by MAM members.

Stay tuned for further developments on both the budget and the MAM priority bills.

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

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