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Business Balks at Governor's Proposed Tax Changes

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Special Report: Special Session 2007: Budget Crisis

By Kate Prahlad
Capital News Service
Thursday, Sept. 20, 2007

ANNAPOLIS - The "domino effect" of proposed sales and personal income tax hikes would cost jobs in Maryland and make the state less competitive with its neighbors, according to a business-sponsored report released Thursday.

The Ernst & Young study, commissioned by several state and local business organizations, comes as Gov. Martin O'Malley has called for higher sales and income taxes in an effort to close a $1.7 billion state budget shortfall.

The study looked at those taxes as well as tax policy changes that have been discussed in Annapolis.

"Raise the sales tax, and suddenly people are paying more for necessities, have less disposable income, and so they go to the movies and Starbucks less," said Karen Syrylo, a tax consultant for the Maryland Chamber of Commerce. "Then those vendors make less money, have to lower salaries and lose jobs."

Instead of sales and personal income tax increases, and requiring combined reporting for Maryland businesses, the business community supports slot machines and budget cuts to close the deficit.

But a spokesman for the governor said Thursday that the three tax changes already proposed -- a state property tax reduction, a more "progressive" income tax and a one-cent sales tax increase -- will allow 83 percent of Marylanders to pay less in state taxes.

The spokesman, Rick Abbruzzese, also noted that the property tax reduction will heavily benefit businesses.

But businesses would foot 40 percent of the sales tax increase, and would pay almost 80 percent of the new revenues if the tax is expanded to include "professional services," like tanning salons and health clubs, said the report.

The higher tax would drive consumers to shop in Delaware, where there is no sales tax, or over the Internet, and businesses could relocate, draining more money from the state, Syrylo said. The sales tax changes would cost 8,334 jobs in 2012 and as many as 9,274 in 2017, the report said.

Calculating the total impact of all the governor's proposed tax changes will have to wait until the big picture is available, said Ron Wineholt, vice president of government affairs for the state chamber.

"But my back-of-the-envelope figure is somewhere around half a billion in new taxes for the business community," Wineholt said.

Business groups said the sales and property tax increases would hit small businesses hardest.

Only about 3,000 of the 150,000 businesses registered in Maryland have more than 100 employees, Syrylo said. The rest are partnerships, limited liability companies, or proprieties, for example, that would pay the personal income tax on earnings, not the corporate tax. All would be hit with the sales tax increase.

"Small businesses must often use outside services for things like preparing taxes and computer services, and don't have people to do that in-house like big corporations," Syrylo said. "So now they're paying more for that."

Jane Redicker, president of the Greater Silver Spring Chamber of Commerce, said businesses are not just large corporations.

"Those working families? They run small businesses," she said. "The administration is not putting a human face on it."

Which leaves small businesses bracing for the special session that O'Malley has said he hopes to call to enact tax changes, said Ginanne Italiano, president of the Greater Bethesda-Chevy Chase Chamber of Commerce.

"Small businesses are really struggling to make ends meet and keep payrolls up, and now are faced with this session," she said. "We call it hugging the cash register."

Copyright 2007 University of Maryland Philip Merrill College of Journalism

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